Trustmark Corporation (NASDAQ:TRMK) Q4 2024 Earnings Call Transcript
Trustmark Corporation (NASDAQ:TRMK) Q4 2024 Earnings Call Transcript January 24, 2024
Trustmark Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark.
Joey Rein: 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 our call this morning, are available on the Investor Relations section of our website at trustmark.com. During the course of our call, management may make forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995, and we would like to caution you that these forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties, which are outlined in our earnings release, as well as our filings with the Securities and Exchange Commission. At this time, I'd like to introduce Duane Dewey, President and CEO of Trustmark.
Duane Dewey: Thank you, Joey and good morning, everyone. Thank you for joining us this morning. With me are Tom Owens, our Chief Financial Officer; Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer. We at Trustmark are very pleased with our full year and fourth quarter performance in a tumultuous and challenging operating environment. Trustmark's performance reflected a very strong year in net income after tax in fact a record year in that regard. We showed solid loan production and credit quality as well as continued deposit growth. Trustmark reported a fourth quarter net income of $36.1 million, representing diluted earnings per share of $0.59. For the full-year 2023, Trustmark’s net income totaled $165.5 million, which represented diluted earnings per share of $2.70.
Let's review our financial highlights in a little more detail by turning to Slide three. Loans held-for-investment increased $140.3 million or 1.1% linked quarter, and $746.5 million or 6.1% year-over-year. During the fourth quarter, deposits grew $467.8 million or 3.1% linked quarter and $1.1 billion or 7.8% year-over-year. Net interest income totaled $140 million in the fourth quarter, which resulted in a net interest margin of 3.25%. For the year, net interest income totaled $566.3 million, up 11.7% from the prior year and resulted in a net interest margin of 3.32%, up 15 basis points from the prior year. Non-interest income in the fourth quarter totaled $49.8 million, an increase of 10.3% year-over-year. For the year ended 2023, non-interest income totaled $207 million and represented 27.2% of total revenue.
Revenue for the year totaled $759.8 million, an increase of 8.6% from the prior year. Adjusted non-interest expense in the fourth quarter totaled $134.8 million. For the year, adjusted non-interest expense totaled $527.9 million, an increase of 5.9% from the prior year. Our credit quality remains solid, net charge-offs during the fourth quarter totaled $2.2 million, representing 7 basis points of average loans. For 2023, net charge-offs totaled $8.2 million and represented 6 basis points of average loans. The provision for credit losses for loans held-for-investment was $7.6 million in the fourth quarter and for the full-year 2023 was $27.3 million. We continue to maintain strong capital levels with common equity Tier 1 ratio of 10.04%, and a total risk-based capital ratio of 12.29%.
The board declared a quarterly cash dividend of $0.23 per share, payable on March 15 to shareholders for record as of March 1. At this time, I'd like to ask Barry Harvey to provide some color on our loan growth and credit quality.
Barry Harvey : Thank you, Duane, and I'll be glad too. Turning to Slide 4. Loans held-for-investments totaled $13 billion as of 12/31. That's an increase, as Duane mentioned, of $140 million for the quarter. Loan growth during Q4 came from commercial lending and the equipment finance, our equipment finance line of business, as well as our real estate secured loans. We expect loan growth of mid-single digits during 2024. As you can see, our loan portfolio remains well diversified, both by product type as well as by geography. Looking onto Slide 5, Trustmark’s CRE portfolio is 94% vertical with 70% being in the existing category and 30% in the construction land and development category. Our construction land development portfolio is 79% construction.
Trustmark's office portfolio, as you can see, it's very modest at $298 million outstanding, which represents only 2% of the overall loan book. The portfolio is comprised of credits with high quality tenants, low lease turnover, strong occupancy levels, and low leverage. The credit metrics on this portfolio remain extremely strong. Looking onto Slide 6, the bank’s commercial loan portfolio is well diversified, as you can see, across numerous industries with no single category exceeding 13%. On Slide 7, our provision for credit losses for loans-held-for-investment was $7.6 million during the fourth quarter, which was attributable to loan growth, net adjustments to the qualitative factors and changes in the macroeconomic forecast. The provision for credit losses for off balance sheet credit exposure was a negative 888,000 during the quarter.
At 12/31, the allowance for loan losses for loans-held-for-investment was $139 million. Looking to Slide 8, we continue to post solid credit quality metrics, the allowance for credit losses represents 1.08% of the loans-held-for-investment and 249% of non-accruals, excluding those loans that are individually analyzed. In the fourth quarter, net charge-offs totaled $2.2 million or 0.07% of average loans. Both non-accrual and non-performing assets remain at reasonable levels. Duane?
Duane Dewey : Thank you, Barry. I'd like to ask Tom Owens to now focus on deposits and the income statement.
Tom Owens : Thanks, Duane. Good morning, everyone. Turning to deposits on Slide 9. We finished up the year with another good quarter, which continued to show the strength of our deposit base, emitted an environment that remains exceptionally competitive. Deposits totaled $15.6 billion at year end, a linked quarter increase of $468 million or 3.1% and a year-over-year increase of $1.1 billion or 7.8%. Deposit growth excluding brokered deposits was also strong, up $616 million or 4.3% linked quarter and $556 million or 3.8% year-over-year. With a pretty strong reversal of public fund balances, which grew by $463 million during the fourth quarter after having declined by $373 million during the third quarter. We also had good growth in personal balances linked quarter, which were up $276 million, offsetting decreases in non-personal balances of $121 million and brokered balances of $151 million.
Regarding mix, time deposits declined by $22 million linked quarter with non-brokered CDs up $128 million and brokerage CDs down $149 million. As of year-end, our promotional time deposit book declined by $44 million linked quarter, totaling $1.2 billion with a weighted average rate paid of 4.75% and the weighted average remaining term continued to shorten to about three months. Our broker deposit book declined by $149 million linked quarter, totaling $579 million with an all-in weighted average rate paid of about 5.46%, and the weighted average remaining term also shortened to about three months as of December 31. Also, regarding mix, noninterest-bearing DDA balances declined $123 million linked quarter or 3.7% and noninterest-bearing DDA represented about 21% of the deposit base as of December 31.
Our cost of interest-bearing deposits increased by 28 basis points from the prior quarter to 2.67%. That linked quarter increase was down from the prior quarter increase of 43 basis points during the third quarter. Turning to Slide 10, Trustmark continues to maintain a stable, granular and low exposure deposit base. During the fourth quarter, we had an average of about 465,000 personal and non-personal deposit accounts, excluding collateralized public fund accounts with an average balance of about $27,000. As of December 31, 64% of our deposits were insured and 14% were collateralized, meaning that our mix of deposits that are uninsured and uncollateralized was essentially unchanged linked quarter at 22%. We maintained substantial secured borrowing capacity, which stood at $6.2 billion at December 31, representing 181% coverage of uninsured and uncollateralized deposit.
Our fourth quarter total deposit cost of 2.1% represented a linked quarter increase of 26 basis points and a cumulative beta cycle-to-date of 38%. Our forecast for the first quarter is for an increase in deposit cost to 2.19%, which would represent a cycle-to-date beta of 42%. Turning to revenue on Slide 11. Net interest income, FTE, decreased $1.9 million linked quarter, totaling $140 million, which resulted in a net interest margin of 3.25%. Net interest margin decreased by 4 basis points linked quarter as the 10 basis points of accretion due to asset rate and volume was more than offset by the 14 basis points of dilution due to liability rate and volume. On Slide 12. Our interest rate risk profile remained essentially unchanged as of December 31 with substantial asset sensitivity driven by loan portfolio mix with 50% variable rate coupon.
During the fourth quarter, we entered into $75 million notional of forward-starting swaps, which brought the swap portfolio notional at quarter end to $1.05 billion, with a weighted average maturity of 2.8 years and a weighted average received fixed rate of 3.18%. We also entered into $50 million notional of forward-starting floors, which brought the floor portfolio notional at quarter end to $75 million, with a weighted average maturity of four years and a weighted average SOFR rate of 3.58%. The cashflow hedging program substantially reduces our adverse asset sensitivity to a potential downward shock in interest rates. Turning to Slide 13. Non-interest income for the fourth quarter totaled $49.8 million, a $2.4 million linked quarter decrease, and for the full year totaled $206.9 million, a $1.8 million increase from the prior year.
The linked quarter decrease was driven primarily by a normal seasonal decline of $2.1 million in insurance commissions. The full-year increase was driven by increases of $3.8 million or 7.2% in insurance commissions, and $1.3 million or 3% increase in service charges on deposit accounts. Those increases were offset somewhat by decreases of $2.7 million in bank card and other fees, which was primarily a decline in customer derivative revenue, and $2.1 million decline in mortgage banking as both businesses face significant headwinds from the interest rate environment. For the quarter, non-interest income represented 26.7% of total revenue, continuing to demonstrate a well-diversified revenue strand. Turning to mortgage banking on Slide 14, revenue totaled $5.5 million in the fourth quarter, bringing full-year revenue to $26.2 million, which is a decline of $2.1 million.
The full-year decline was driven by increased negative net hedge effectiveness of $2.2 million, resulting from the difficult hedging environment, which prevailed during 2023. While full-year increases in mortgage servicing income and change in fair value of servicing assets from runoff, offset the decline in gain on sale of loans. Mortgage loan production totaled of $1.5 billion in 2023, a decrease of 31.6% from the prior year. Retail production mix remains strong in the fourth quarter, representing 75% of volume or about $204 million. Loans sold in the secondary market represented 85% of production, while loans held on balance sheet represented 15%. Gain on sale margin remained under pressure in the fourth quarter decreasing by 11 basis points forward to 110 basis points.
And now I'll ask Tom Chambers to cover non-interest expense and capital management.
Tom Chambers : Thank you, Tom. Turning to Slide 15, you'll see a detail of our total non-interest expense. During the fourth quarter, adjusted non-interest expense totaled a $134.7 million, a linked quarter increase of $700,000 or 0.5%, mainly driven by an increase in FDIC assessment expense of $1.1 million, which is included in other expense. All other non-interest expense line items remain relatively unchanged on a linked quarter basis. As noted on Slide 16, Trustmark remains well positioned from a capital perspective. As Duane previously mentioned, our capital ratios remain solid with a common equity Tier 1 ratio of 10.04%, a linked quarter increase of 15 basis points, and a total risk-based capital ratio of 12.29%, a linked quarter increase of 18 basis points.
Trustmark did not repurchase any of its common shares during 2023. As previously announced, Trustmark's Board of Directors authorized a stock repurchase program effective January 1, 2024 through December 31, 2024, under which $50 million of Trustmark’s outstanding shares may be acquired. Although we continue to have a share repurchase program in place, our priority for capital deployment continues to be through organic lending. Back to you, Duane.
Duane Dewey : Thank you, Tom. Let's take a look now at our commentary outward -- outlook for commentary slide on Slide 17. First, let's look at the balance sheet. We're expecting loans to grow mid-single digits in 2024, while deposits are expected to grow low to mid-single digits. Securities balances are expected to decline by high-single digits based on non-reinvestment of portfolio cash flows, which of course are subject to changes in market interest rates. Moving on to the income statement, we're expecting net interest income to decline low-single digits in ‘24, reflecting continued earning asset growth and stabilizing deposit costs, resulting in full-year net interest margin of approximately 3.2% based on market implied forward interest rates.
For credit, the total provision for credit losses, including unfunded commitments is dependent upon future loan growth, the current macroeconomic forecast and credit quality trends. Net charge-offs requiring additional reserving are expected to be nominal based on the current economic outlook. From a non-interest income perspective, non-interest income is expected to grow mid-single digits, which reflects some modest improvement in mortgage, continued growth in insurance, and some improvement in the wealth management business. For the last couple years, we've talked about our fit-to-grow initiatives across the company in which we've invested in both growth initiatives, mostly in additional production talent, as well as in technology and other key areas of the company.
To that end, in 2024, we will begin to see efficiencies from those efforts, along with other heightened cost containment initiatives, so that adjusted non-interest expense is expected to increase low-single digits full year 2024. This is always subject to the impact of commissions in our commission-based businesses. Finally, we'll continue a disciplined approach to capital deployment with a preference for organic loan growth and potential M&A. We will continue to maintain a strong capital base to implement corporate priorities and initiatives. I'd like to now, at this time, open the floor up to questions.
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