Trustmark Corporation (TRMK) Q4 2021 Earnings Report, Transcript and Summary

00:03 Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation this morning, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. 00:28 It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark.

00:36 Good morning. I'd like to remind everyone that a copy of our fourth quarter earnings release as well as the slide presentation that will be discussed on the call this morning is available on the Investor Relations section of our website at trustmark.com. 00:49 During the course of our call this morning management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission. 01:15 At this time, I'd like to introduce Duane Dewey, President, and CEO of Trustmark Corporation.

01:21 Thank you, Joey and good morning, everyone. Thank you for joining us. With me this morning are Tom Owens, our Chief Financial Officer; Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer. 01:38 Trustmark had a solid fourth quarter and strong performance overall in 2021, reflecting balance sheet growth, excellent credit quality, and record results in our Insurance and Wealth Management businesses. Our mortgage banking business continues to perform well with total production of $2.8 billion in mortgage loans during the year, although the gain on sale margins continue to be under pressure. 02:04 We will continue to navigate the challenging low interest rate environment. We remain committed to positioning the company for continued long-term success. With that said, our balance sheet is well-positioned for rising interest rate. 02:20 Turning to Slide 3, let's review our financial highlights. Trustmark reported net income of $26.2 million or $0.42 per diluted share for the fourth quarter. For the year Trustmark's net income totaled $147.4 million, representing diluted earnings per share of $2.34. At December 31, loans held for investment totaled $10.2 billion, an increase of $72.9 million linked quarter and $423.3 million or 4.3% from the prior year. 02:50 Deposits totaled $15.1 billion, an increase of $164.3 million from the prior quarter and $1 billion or 7.4% year-over-year. Investment securities totaled $3.6 billion, a linked quarter increase of $128.9 million and a year-over-year increase of $1.1 billion or 41.6%. 03:26 Net interest income excluding interest and fees on PPP loans totaled $100.8 million in the fourth quarter, an increase of $1.2 million or 1.2% linked quarter. Non-interest income totaled $50.8 million and represented 34.1% of total revenue in the fourth quarter. 03:49 Insurance revenue in 2021 totaled $48.5 million, reflecting a 7.4% increase from the prior year, while wealth management revenue totaled $35.2 million up 11.5% year-over-year. Mortgage loan production totaled $590.7 million in the fourth quarter, down seasonally 16.7% linked quarter. 04:15 Adjusted non-interest expense in 2021 totaled $471.3 million, a 3.5% increase from the prior year. In the fourth quarter, adjusted non-interest expense totaled $118.2 million, a 1.3% increase linked quarter. Credit quality continue to remain solid for 2021 as non-performing assets declined 10.1% from the prior year and recoveries exceeded charge-offs by $3.7 million. 04:52 We also maintained strong capital levels with Tier 1 capital of 11.29% and a total risk-based capital of 13.55%. The Board declared a quarterly cash dividend of $0.23 per share payable March 15 to shareholders of record on March 1st. In the fourth quarter, Trustmark repurchased $27.1 million or approximately 816,000 shares of common stock. And for the full year, we repurchased $61.8 million or approximately 1.9 million shares of common stock. 05:31 At this time, Barry Harvey will provide color on loan growth and credit quality.

05:38 Thank you, Duane. Turning to Slide 4, loans held for investment excluding PPP loans totaled as Duane indicated $10.2 billion as of December 31. That's a $73 million increase from the prior quarter and an increase of $423 million or 4.3% year-over-year. We're extremely excited about the growth in Q4 occurring in almost all loan categories other than CRE. And as you know for us CRE has continued to experience some significant scheduled and unscheduled payoffs. 06:17 Loan production for all portfolios, especially CRE has been extremely strong and bodes well for future loan growth. We anticipate mid-single digit loan growth during 2022. Our loan portfolio continues to remain well-diversified based on both product type and geography. 06:39 Moving to Slide 5. Trustmark CRE portfolio is 65% existing, 35% construction land development with 92% being vertical. Our construction land development book is 77% construction, the Bank's owner-occupied portfolio has a nice mix between real estate types as well as industries. 07:05 Turning to Slide 6. The Bank's commercial portfolio is well diversified across numerous industry segments with no single category exceeding 14%. 07:16 Looking at Slide 7 now. We have a minimum exposure as you can see to restaurants and energy. Trustmark has never been in the high risk C&I lending business. And currently, we have one customer loan with $10 million outstanding. The Bank has always underwritten both hotels and retail CRE in a conservative manner. 07:40 Moving to Slide 8. Our allowance for credit losses decreased $4.6 million from the prior quarter. The negative provisioning was primarily due to improvements in credit quality and the economic forecast. At December 31, 2021, the allowance for credit losses on loans held for investments totaled $99.5 million. 08:07 Looking at Slide 9, we continue to post solid credit quality metrics. The allowance for credit losses represents 0.97% of total loans held for investment and 501% of non-performing loans excluding individually evaluated loans. Net charge-offs totaled 101,000 for the fourth quarter. For 2021, recoveries exceeded charge-offs by $3.7 million. Non-performing assets declined $5.2 million linked quarter and $7.5 million from this time last year. Duane?

08:49 Thank you, Barry. Now turning to the liability side of the balance sheet. I'd like to ask Tom Owens to discuss our deposit base, and net interest margin.

08:59 Thanks, Duane and good morning, everyone. Looking at Slide 10. Deposits totaled $15.1 billion at December 31, a $164 million increase linked quarter and $1 billion increase year-over-year. We continue to have good growth during the quarter as well as for the full year, which was driven primarily by personal account activity, with personal deposit balances up by over $700 million year-over-year. Our cost of interest-bearing deposits declined 1 basis point from the prior quarter to total 13 basis points. And we continue to maintain a favorable deposit mix with 32% of balances in non-interest bearing deposits. 09:43 Turning to revenue on Slide 11. Net interest income FTE was unchanged linked quarter, totaling $101.2 million, which resulted in a net interest margin of 2.53%, representing a linked quarter decline of 4 basis points. Interest and fees on PPP loans totaled $397,000, which was a decrease of $1.1 million linked quarter. The decline in PPP interest and fees was a significant driver of the linked-quarter decline in net interest margin. 10:20 Core net interest income FTE was $100.9 million, which was an increase of $1 million linked quarter, driven primarily by the increase in average investment securities balances. Net interest margin excluding PPP loans in Fed Reserves was 2.82%, a decline of 8 basis points linked quarter, which was significantly influenced by the $431 million linked quarter increase in average securities balances. 10:51 Turning to Slide 12. The balance sheet remains well positioned for higher interest rates with substantial asset sensitivity driven by loan portfolio mix with 51% variable rate coupon, securities portfolio duration of 3.9 years, and cash and due balance of $2.3 billion. The 64% of the securities portfolio in Agency MBS is backed primarily by 15 year collateral, which generate substantial cash flow for reinvestment and limits extension risk in a rising interest rate environment. 11:29 Year one increase in NII to immediate interest rate shocks is about 10% for a 100 basis point shock, about 20% for 200 basis point shock, and about 30% for a 300 basis points shock. With the benefit in years two and beyond increasing as the balance sheet continues to reprice. 11:52 Turning to Slide 13. Non-interest income for the fourth quarter totaled $50.8 million, a $3.4 million linked quarter decrease and a $52.7 million decrease year-over-year. The linked quarter and year-over-year decreases are primarily attributable to lower mortgage banking revenue. Insurance and wealth management both had record years with insurance revenue up 7.4% and wealth management revenue up 11.3%. 12:27 Service charges on deposit accounts increased by $455,000 linked quarter, continuing to rebound from the low of the first quarter as the economy continues to normalize from the pandemic. And for the quarter, non-interest income represented 34% of Trustmark's revenue continuing to demonstrate a well-diversified revenue stream. 12:51 Looking at Slide 14, mortgage banking revenue totaled $11.6 million in the fourth quarter and $63.8 million for the full year, which were declines of $2.4 million and $62.1 million respectively. Mortgage loan production remained strong at $590 million in the fourth quarter and $2.8 billion for the full year, which was down 6.1% from the record level of 2020. 13:21 Retail production remained strong in the fourth quarter, representing 79% of volume or $468 million. Loans sold in the secondary market represented 68% of production, while loans held on balance sheet represented 32%. Gain on sale margin declined by about 6% linked quarter from 252 basis points in the third quarter to 246 basis points in the fourth quarter. 13:50 And now, I'll ask Tom Chambers to cover non-interest expense and capital management.

13:56 Thank you, Tom. Turning to Slide 15. You will see our detail of our non-interest expenses broken out between adjusted, other and total. Adjusted non-interest expense was $118.2 million in the fourth quarter, an increase of $1.6 million linked quarter. For 2021 adjusted non-interest expense totaled $471.3 million, an increase of 3.5% from the prior year. 14:24 Salary and employee benefits expense in the fourth quarter totaled $68.3 million. Excluding $5.6 million in charges associated with the voluntary early retirement program in the prior quarter, salary and employee benefits expense declined $754,000 or 1.1% linked quarter. For 2021, the voluntary early retirement program salary and benefit savings totaled approximately $1.3 million, which was in line with our prior guidance. 14:56 As noted on line 16, Trustmark remains well-positioned from a capital perspective. During the fourth quarter, we repurchased $27.1 million or approximately 816,000 shares of Trustmark stock. During 2021 we repurchased $61.8 million or approximately 1.9 million shares. As previously announced, our Board authorized a stock repurchase program effective January 1, 2022 under which $100 million of Trustmark shares may be acquired through December 31, 2022. 15:36 Our share repurchase program may take place through open market or private transactions depending on market conditions and at management's discretion. Our capital ratios remain solid with a common equity Tier 1 ratio of 11.29% and a total risk based capital ratio of 13.55% at December 31. As Duane mentioned, the Board declared a quarterly cash dividend of $0.23 per share payable March 15 to shareholders of record on March 1. Duane?

16:09 Thank you, Tom. Now let's look at Slide 17, and that's our outlook commentary. From a balance sheet perspective, we are expecting loans held for investment to grow mid-single digits for the full year 2022. Our security balances are targeted at 20% to 25% of earning assets subject to changes in market conditions. Deposit balances are expected to grow low-single digits for the full year. 16:44 We're expecting net interest income, excluding PPP loan interest and fees to grow mid-single digits, driven by mid-single digit earning asset growth. Our outlook reflects three Fed rate hikes of 25 basis points each occurring in March, June, and September and conservative through the cycle deposit betas. 17:08 Based on current economic outlook, our total provision for credit losses including unfunded commitments is expected to be modest, net charge-offs requiring additional reserving are expected to be nominal based on the current outlook. From a non-interest income perspective, we expect service charges and bank card fees to continue rebounding from depressed levels as the economy continues to emerge from the pandemic. 17:37 Mortgage banking revenue is expected to continue trending lower driven by reduced volume and a lower gain on sale margin. Wealth management and insurance revenue are both expected to grow mid-single digits for the full year '22. Adjusted non-interest expense is expected to remain flat for the full year, subject to the impact of commissions in our mortgage insurance and wealth management businesses. 18:06 We will continue to work on initiatives including market optimization, technology enhancements and vendor management initiatives to identify further process improvement and expense reduction opportunities. While considering expenses, it is important to note, we'll continue to invest in technology to meet the growing needs of our customer base as well as remain competitive in associate compensation. We'll also continue a disciplined approach to capital deployment with a preference for organic loan growth, potential M&A and then opportunistic share repurchases. 18:47 So with that, I'm hopeful our discussion of our fourth quarter financial results and outlook commentary has been helpful and insightful. And at this time, operator, we'd be glad to answer any questions that may be out there.

19:03 Yeah. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Graham Dick from Piper Sandler. Please go ahead.

19:38 Hi, everyone. Good morning.

19:40 Good morning, Graham.

19:43 So just wanted to start with the loan growth guide. Can you all just talk a little bit about the puts and takes in that mid-single-digit outlook. And then, I was also curious to know if this guidance included your retaining mortgage production on balance sheet. And like to what extent if it does? Yeah. That will be helpful. Thank you.

20:05 Hi, Graham. This is Barry. I'll be glad to address your questions. I guess starting with the last one first. We do intend to continue to portfolio mortgages, assuming the economic environment remains similar to what we've experienced in 2021. We continue to like the mix of the 15 year less paper and then along with some of the 10 year hybrid ARMs. In fact we like duration and today we like the WACC, we're putting on the books for those products. As far as the growth of the portfolio as a whole, we are very excited about the mix that you saw in Q4. 20:50 We did have growth as I mentioned previously in all categories with the exception of CRE and a little bit on the -- and the owner occupied category, that's very encouraging. That's a result of a lot of hard work and some additional resources we brought on board who are finding some other C&I opportunities. We continue to focus on the CRE side, production there is very strong. We just have continue to face those scheduled and unscheduled headwinds of payoffs. But if that begins to diminish and to any degree then you'll see a lot more volume coming on there, that's not baked into what our mid-single digit forecast would guide to. So I think in all the other categories outside of CRE, we expect to see the momentum that we had in Q4 throughout 2022 and we're very excited about the diversification that's bringing about.

21:44 Okay. I think that's great to hear.

21:45 Hey, Graham. This is Tom Owens. And I would just add, as Barry mentioned, we do like the retention of the 15 year mortgages and the hybrid ARMs, we do like the trade-off there between the duration and the economics we gained by maintaining the loans as compared to selling them. And really consider that as a proxy for growth in the securities portfolio. And so, again it is shorter duration stuff and it doesn't result in a really a meaningful increase in concentration in residential mortgage in the loan portfolio.

22:28 And just -- this is Barry, just to add to Tom's comment, I think from a standpoint of deepening in the relationship, a lot of times with customers that mortgage is the first product to have with Trustmark. And we saw that in acquisitions we've had in the past, where we had a pretty good sized book for example in Alabama, that we were servicing long before we entered the state through an acquisition. So it is a good first product in the wallet with the customers that we can build upon.

22:55 Right. So just to be clear that the mortgage retention, I guess would be additive to that mid-single digit growth or is it…

23:06 The mortgage retention as we experienced in '21, we'll continue to experience that in 2022 or maybe even a little more. And that will be -- and that is baked into our mid-single digit loan growth at this time.

23:18 Okay. Thank you, guys. And then also, I guess just on asset sensitivity, you guys obviously screen as pretty asset sensitive, in large part, due to just the amount of liquidity you will have on the balance sheet and your deposit base. But I was just trying to get some more color on what you guys are expecting in terms of loan or deposit betas. I know you said conservative just now on the call. But if you can like, I guess, maybe compare to the last cycle or just maybe give a little color on what your outlook might be?

23:47 Yeah. So great question, Graham. As Duane indicated in his prepared comments, we do use what we deem to be appropriately conservative through the cycle deposit betas. So through the cycle meaning something on the order of magnitude of 50%. So there is a lot of differing opinions in the industry in terms of what the effective data might be for the industry, for the first 50 basis points, 100 basis points as Fed tightening for that versus the next 100, versus the next 100. You asked about our experience historically. So the 50% through the cycle beta is based on analysis over the last several interest rate cycles. And so, if you think about the last rising -- Fed tightening cycle we topped out with the Fed funds rate at about 2.5%, so arguably that was sort of a mini cycle. 24:57 And in terms of our effective interest bearing deposit betas in that mini cycle topped out at about 35%. And if you look at the first 100 basis points of that tightening cycle, we were at about 20%. So hopefully that helps to mention for you sort of what the range could be. And as it relates to the loan beta in the last cycle for the first 100 basis points was also in that same neighborhood of 20% to 25%. So depending on your view of what industry betas will be the Fed -- what the market pricing right now is essentially Fed tightening each quarter, each of their quarterly meetings March, June, September, December. And so, depending on what you think of how the industry betas will come to pass, there is potentially some upside there relative to through the cycle betas. 26:04 I'd also add though, there is, in my mind there is potentially risk there, right. I mean, it's been quite some time since the Fed found itself in the position of 7% consumer price index which continues to accelerate. So I think the actual path of monetary policy this year is highly uncertain.

26:30 That's great. Thank you, Tom. And just I guess a quick one here. But obviously, there's been a lot of press recently on NSF and some of the larger regional banks in the Southeast have eliminated them altogether recently. Do you guys have anything similar plan here or are you expecting it be might -- might be a little while until you feel any meaningful pressure to take action.

26:56 I'll take that one. And as you know, Graham, we're closely monitoring everything related to overdrafts and the issues that are presented with that. We as a company, we have been very proactive over time, starting even back in the 2011 kind of time period, but over time proactively putting in place numerous programs, adjustments, alerts, all sorts of things to keep our customers aware of overdraft issues and opportunities to limit and adjust. And so we've been in our view very proactive on that front. As we move forward obviously, we're going to continue to monitor both the regulatory guidance as well as competitive issues and competitive positions moving forward and we'll adjust accordingly. 27:57 I would note our overdraft revenue dating back a number of years has declined very dramatically as a result of some of these proactive efforts. And so, we do maybe expect a little bit of an uptick as economic activity comes back, but nowhere near the historic levels we attained in the past.

28:21 Okay. Awesome. That's it from me guys. Thank you.

28:26 And the next question will be from Catherine Mealor from KBW. Please go ahead.

28:33 Thanks. Good morning.

28:35 Good morning, Catherine.

28:38 One follow-up to the margin discussion. You mentioned that you've got 51% variable rate loans. Are any impact from floors on that, can you just remind us how much of that actually reprices immediately once we start to see Fed hikes?

28:51 Hi. Good morning, Catherine. This is Tom.

28:53 Good morning.

28:54 Yeah. It's about $800 million in round numbers that are where the floor is activated by about 60 basis points in round numbers. So that puts you in the neighborhood of about $5 million in terms of run-rate benefit that is currently accruing to our interest income that would be -- that we would not get the benefit of -- for that first 60 basis points of shock or so, or Fed tightening or so. And that is reflected in our interest rate risk numbers that we publish.

29:32 Okay. Great. And then where on average was new loan yields from in the growth this quarter?

29:40 Sorry, could you repeat that, Catherine?

29:44 Excuse me, my voice went off for a minute. So your loan yields today are 3.56%, where on average is new production coming on relative to that level?

29:55 So see, Barry agrees with me here. But I believe the right answer here is about 15 basis points or so differential. If you look at the weighted average coupon of loans paying down, versus the weighted average coupon of loans funding, if that's your question, here, recent run rate has been about a 15 basis point differential, not 15 basis points of compression, that sound about right, Barry?

30:27 That's correct, Tom.

30:29 Yeah.

30:30 On a blended basis.

30:32 Yeah.

30:33 Okay. Great. And then maybe just one big picture question. I mean you're highly asset sensitive and you've got some nice efficiency initiatives guiding for a flat expense base this year. So feels like we've got some significant positive operating leverage ahead of us for the next couple of years. Have you thought about just big picture profitability target? And where you think it's appropriate that in about may be a better rate environment and with an expense savings where you think your ROE -- ROA and ROE should eventually be getting towards?

31:14 Well, I'll start on that Catherine. Obviously, in this environment of low interest rates, which hopefully for the industries perspective it is about to change here beginning in March, our return on tangible equity has dropped into the high-single digits. And so, certainly, we would expect through the combination of higher interest rates and efficiency initiative as well as growth initiative, we've been investing for growth. And so that our return on tangible common equity would return to the double-digits.

31:59 And Catherine, I wouldn't add a whole lot to that, we haven't given any particular or really presented any particular guidance out there in terms of target, return on tangible equity or any of that at this point, but as you noted and as Tom just expressed, I mean, we're focused on both sides of the equation in terms of really trying to manage and at least flatten if not reduce expenses across the cycle, but at the same time continue to invest in technology and some growth initiatives. We did actually in the fourth quarter open an Atlanta LPO, we're in process of staffing that location up at this point in time as well as several other technology and digital related initiatives to impact growth. So we're actually focused on controlling and managing and hopefully, really may be some reduced expenses here moving forward, while also trying to focus on new growth initiatives across the organization. So I hope that's helpful and that in turn should return us back to a normalized return on tangible equity.

33:22 Great. Thank you for the time and very helpful. Thanks.

33:28 [Operator Instructions] The next question will be from Michael Rose from Raymond James. Please go ahead.

33:42 Hi. Good morning. This is Carl Doirin on for Michael Rose.

33:46 Good morning, Carl.

33:47 So question on the -- good morning. So, question on the securities portfolio. Obviously, you guys do it this quarter again. And recently raised these range from -- to 20% to 25%. So I guess my question would be, so what will cause that balance to go to the upper end of the range given where rates are going?

34:11 Hi, Carl. So, good morning. This is Tom and thank you for the question. So, yeah, we have been operating within a target range of 20% to 25% of earning assets, last couple of quarters we've been at about 22% of earning assets. Our earning assets are about $15.4 billion. And so if you think about if we were to go to the high end of the range in 25% that's incremental growth of just north of $500 million. I think it is likely that we will continue to increase the size of the portfolio both as earning assets grow. And I do think we will creep higher in that range.

35:02 Terrific. Thank you. And I guess one other one for me, the pace of buybacks obviously increased this quarter versus 3Q. And you recently announced a new $100 million program for this year. How aggressively are you trying to be moving forward and buying back shares?

35:22 I'll start and others can add here, Carl. This is Duane. I -- we were fairly aggressive in 2021 with the buyback program. We have a very disciplined approach to that process and internally very controlled process and we felt opportunistic in 2021. We'll continue in 2022 to be opportunistic depending on, of course, what the market does and as things move forward with the economic changes with overall reset in the equity markets et cetera. I would expect however 2022 to be at least at this point, we're thinking we'll be a little less aggressive than we were in '21. So probably considerably less aggressive. But we'll see how things turn out. Tom, anything to add to that?

36:28 Well, I would just add, Carl, I mean, if you look at our history, we're not sort of set it and forget it in terms of an equal pace of deployment each quarter. And so, yeah, we were very proactive in the fourth quarter, but our history is, you have quarters like that where, as Duane said, we are opportunistic. And when we see the opportunity, we seize it. There are quarters where we deploy very little. And so you shouldn't be surprised by that going forward.

37:02 All right. Thank you and that's all from me.

37:06 And the next question is a follow-up question from Graham Dick from Piper Sandler. Please go ahead.

37:14 Hey, guys. Just a quick one here on the securities portfolio. I'm just wondering about the yield on the taxable securities book. I think it was 122 basis points this past quarter. Do you guys see this as maybe a trough and it can improve from here or just kind of wondering what the outlook might be there?

37:33 So, Graham, not sure I fully understood the question. Is the question relating to our securities portfolio yield and do we see upside from here?

37:46 Yes. Correct.

37:48 Yeah. And I would say the answer is, yes. For a couple of reasons, first of all, obviously reinvestment opportunities, reinvestment yields currently are above our fourth quarter yield. And then the other thing is, we are starting to see the early signs of slowdown in prepayments speeds in the underlying mortgage collateral. And of course, that's been a big factor in the decline in our securities yield is the accelerated amortization of premium. And so, with higher rates that seem, all indications from the Fed are that, rates are headed higher here, we should have the wind at our back in terms of higher securities yields as we go throughout the course of 2022.

38:41 Awesome. Thanks Tom.

38:42 Yeah.

38:45 Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Duane Dewey for any closing remarks.

38:55 Well, thank you all for joining us this morning. And we look forward to connecting again at the end of the first quarter in April. And so, we hope that all of you have a great rest of the week and we'll talk to you then.

39:12 Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.