Trustmark Corporation (TRMK) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's Second Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark. Please go ahead, sir.

Good morning. I'd like to remind everyone that our second quarter earnings release and the presentation that will be discussed on the call this morning are available on the Investor Relations section of our website at trustmark.com. During our call, 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 in our other filings with the Securities and Exchange Commission. At this time, I'd like to introduce Duane Dewey, President and CEO of Trustmark.

Thank you, Joey, and good morning, everyone. Thank you for joining us this morning. As you know, our long-time CFO, Tom Owens, was named Chief Operating Officer during the second quarter, and Joe Bond joined us as Chief Financial Officer. Both are with me this morning. Also with me are Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer. Our presentation this morning will provide a summary of our performance and discuss forward guidance before moving to your questions. We continue to make significant progress in accomplishing our strategic initiatives in the second quarter. Loan production remained solid and deposit growth continued at attractive rates, which was reflected in our expanded net [ interest ] margin. Years of planning culminated in the second quarter with the successful conversion of our core deposit and related systems to state-of-the-art platforms, which will allow us to enhance the customer experience and operate more efficiently. This was a tremendous effort, and I'm extremely pleased with the commitment and dedication of our associates to make this transition as seamless as possible for our customers. Now turning to Slide 3, financial highlights. Our second quarter results reflect continued momentum across the organization with strong financial performance supported by loan and deposit growth, expanded net interest income, improved credit quality and continued investment in technology. Reported net income totaled $63.5 million, representing diluted earnings per share of $1.08. Results in the quarter included 2 nonroutine transactions that collectively increased net income by $6.9 million or $0.11 per diluted share. During the quarter, we sold a portfolio of mortgage loans that were primarily payments delinquent and/or nonaccrual totaling $73.8 million. The reserve on the portfolio exceeded the credit discount, which resulted in an increase in net income of $3.2 million. The sale drove $47.1 million overall reduction in nonperforming loans and reduced the risk profile of our 1 to 4 family portfolio. We also exchanged Visa shares during the quarter, resulting in a gain of $3.7 million net of taxes. Excluding these 2 nonroutine transactions, operating net income totaled $56.7 million, representing diluted earnings per share of $0.97. From a balance sheet perspective, loans held for investment increased $35.1 million or 0.3% during the quarter and $448.2 million or 3.3% year-over-year. Excluding the mortgage loan sale, loans held for investment increased $108.9 million or 0.8% linked quarter and $522 million or 3.9% year-over-year. Barry will elaborate as needed, but I want to mention we had $643 million of new originations in the second quarter and $456 million in line draws. This strong production was offset in part by $318 million in CRE prepayments and $334 million in payoffs. Deposits expanded $358.7 million or 2.3% linked quarter and $955.4 million or 6.3% year-over-year. The cost of total deposits declined 4 basis points linked quarter to 1.59%, reflecting the continued strength of our attractive low-cost deposit base. Revenue generation remained solid during the quarter. Total revenue expanded $5.3 million or 2.6% linked quarter to $208.2 million. Net interest income on a fully tax equivalent basis increased $5 million or 3.1% linked quarter, producing a net interest margin of 3.84%, up 3 basis points from the prior quarter. Expense management continues to be a focus of the organization. Noninterest expense increased $1.5 million or 1.2% linked quarter to $133.7 million. Salaries and employee benefits expense declined $1.3 million or 1.7% linked quarter, while services and fees increased $1.8 million or 6.5% linked quarter, primarily reflecting data processing expense and professional fees related to the core deposit conversion and data center migration. From a credit perspective, credit quality improved meaningfully during the quarter. Nonperforming assets declined 47.3% to represent 0.39% of the loans held for investment. Net charge-offs totaled $7.5 million for the second quarter. Excluding the mortgage loan sale, net charge-offs totaled $1.2 million and represented 0.03% of average loans. The net provision for credit losses was $6 million in the second quarter, excluding the $9.2 million release in the provision related to the mortgage sale. Capital levels remain strong, and we continue to execute our share repurchase program. During the first 6 months of '26, we repurchased $40.9 million or approximately 952,000 shares of common stock, including $21.1 million or approximately 475,000 shares in the second quarter. The Board also declared a quarterly cash dividend of $0.25 per share payable September 15 to shareholders of record on September 1, '26. Now let's focus on our '26 full year expectations, which are shown on Slide 15. As we look ahead, we are affirming our previously provided guidance for all full year '26 categories. We continue to expect loans held for investment to increase in the mid-single digits and deposits, excluding brokered deposits to increase in the mid-single digits as well. Securities balances are expected to remain stable. From a net interest income perspective, we continue to expect the net interest margin to be in the range of 3.80% to 3.85% for the full year '26. Net interest income is expected to increase in the mid-single digits compared to '25. From a credit perspective, we expect total provision for credit losses, including off-balance sheet credit exposure to normalize, probably more in line with the first quarter than the second quarter. This expectation is consistent with our continued focus on disciplined credit risk management and the improvement in asset quality metrics we reported in the second quarter. Noninterest income is expected to increase in the mid-single digits for the full year '26. Noninterest expense is also expected to increase mid-single digits, reflecting continued investment in the business while maintaining our focus on expense discipline. Consistent with our prior messaging, we will continue our disciplined approach to capital deployment with a preference for organic loan growth, potential market expansion, M&A or other general corporate purposes depending on market conditions. So with that, we'll now move in to our questions.

[Operator Instructions] And our first question today will come from Michael Rose with Raymond James.

I wanted to start on the loan growth side. Obviously, really good production this quarter, but still a bunch of paydowns as well. If I exclude the loan sale, it looks like you guys were kind of tracking below the guide for the year. So, I guess if you can just walk us through the comfort level of the, what would appear to be a kind of ramp in net loan growth in the back half of the year? Does that assume production continues to increase? Or does it assume that payoffs slow? Or is it a combination of both?

And Michael, this is Barry. And one piece of context as it relates to Q2 as well, as you mentioned, we had -- we reported $35 million worth of growth, add back in the mortgage sale, that puts us at $108 million. We also had $71 million worth of substandard credits that we pushed out of the bank. And so, from my perspective, I kind of like to think of those 3 credits getting pushed out of the bank as part of something that is not necessarily reoccurring, desired, but not necessarily reoccurring. So that puts us starting off about $179 million worth of growth for the quarter, Q2. And then when you're looking into 3 and 4, we still see very strong pipelines. Production has been real steady for us and -- from quarter-to-quarter. And the payoffs, that's always the tricky part. we're seeing less payoffs than we have maturities each quarter from that CRE book. But also, we are seeing unexpected payoffs unrelated to what is scheduled to mature and leave us and the two kind of balance themselves out. So, we do expect to see to meet the obligation of the mid-single-digit loan growth for the year. We do expect, hopefully, 3 and 4 will be a little less bumpy without the mortgage sale, et cetera. But we do expect to be at that mid-single-digit level for loan growth. And like I said, we do have $71 million worth of 3 substandard payoffs that happened this quarter that we don't expect to see those every quarter. We'd love to see substandard leave the bank, but we don't get that normally every quarter. So, with that in mind, I do think the quarter looks a little better than just $35 million plus the mortgage sale get you to $108 million. I think we're probably closer to $179 million, $180 million.

That's very helpful context, Barry. I appreciate it. And that leads into the kind of the margin question. Was there any prepayment fees or anything like that, that impacted this quarter's margin because at 3.84%, you guys are kind of bumping up against the high end of the target. So just trying to balance the puts and takes as we think about the margin over the next couple of quarters.

So, Michael, this is Tom Owens. I'll start, and then I'll turn it over to Joe regarding guidance on the margin. We -- to your question directly, is there any impact from accelerated prepayment fees or anything like that? I don't believe there's a material impact from that. Although you want to weigh in, Joe?

Thanks, Tom. Yes. So, we're reaffirming our guidance of 3.80% to 3.85%. Margin is 3.84%. We do expect near-term margin pressure from deposit funding decisions. We were, as previously announced in market with some promotional campaigns, and that has increased deposit costs. We've also seen strong pricing competition within our markets, and we have responded accordingly. With the margin, we're expecting repricing of fixed rate loans and investment securities to partially offset some of that margin pressure and using the forward curve that we have, there is a rate increase and that will flow through the margin more so in the last quarter of the year. So initially, we're expecting margin pressure in the next -- this quarter. And then subsequently, we expect that to reverse, which will put us in our mid-guidance range that we have communicated.

So, sticking with the 3.80% to 3.85%, Michael.

Okay. Helpful. And then maybe just one follow-up to that. If -- I assume you're assuming a rate hike in December, so there wouldn't be much Q4 benefit or full year benefit if we didn't get it correct.

No. Actually, our forward curve has a rate increase in the month of September. So, there will be more of a benefit in the month of -- in the fourth quarter versus the third quarter.

Okay. Any idea on what that benefit might be just roughly?

We're talking in terms of margin, we're looking at a few -- a couple of basis points of margin pressure in the third quarter due to the deposit pricing. And then we expect a couple of basis points of margin improvement, pulling us pretty close to the levels that we are right now.

And our next question will come from Gary Tenner with D.A. Davidson.

Could you remind us that $643 million of new production, just how that compares to the first quarter production?

This is Barry. And it's very similar. We're pretty much in line with that as well as the additional funding on the revolvers is very much in line with the first quarter as well. We are very pleased to see some upticks at least from year-end in the utilization. The bank as a whole with all revolvers, that would be including HELOCs on the consumer side are about at 40% utilization. But I will say on the C&I side, the revolvers utilization has moved up from 32% at the year-end, moved to 37%. Now we're at 38% as of the end of the second quarter. So, we are very pleased to see that utilization. A lot of activity going on in quite a few of our markets, and I think a lot of our customers, especially on the construction side, are benefiting from that additional business.

Appreciate that. And then as it relates to kind of back half of the year, obviously, a positive outlook for loan growth, and you talked about kind of an adjusted second quarter number, if you will. A lot of banks have had kind of really strong second quarters, but have been more cautious, it seems like for the back half of the year. It doesn't feel like that's where you guys are.

A lot of ours, as I mentioned, it's not so much about production and because the pipelines are very good today for us, and our production has been steady from quarter-to-quarter. It's more about the payoffs and what we see in terms of the scheduled payoffs extending out and then how much do we see of unanticipated payoffs coming, both of which are coming from the CRE book specifically. And so that phenomenon will play itself out. We'll just have to wait and see. But it's not about the engine and the engine working and running hard. That's happening. It's about whether or not we have some more departures than we expect based upon the percent of the maturities that have been leaving us. And then, of course, what we can't see, which is the unexpected, we'll have -- we'll see some of those leave as we do each quarter. That's going to generate or result in our growth strong or weak more so than the production. The production is there and very predictable.

Got it. I appreciate that color. And then just vis-a-vis the buyback, I think last quarter, you talked about $70 million of kind of being the low end of what you'd expect for the year. Any changes to the kind of back half of the year outlook on the buyback?

I would say probably closer to in line with where we've been in the first 2 quarters. That's been right around $20 million per quarter. We continue to see that into the future. But again, it depends a little bit on what's going on in the market or any other activities that we have. But I would expect that up to equal to where we've been in the first 2 quarters.

And our next question will come from Catherine Mealor with KBW.

So, you're now past your big conversion, which I know is a big lift. I just wanted to see if you could give us an update on some efficiencies or benefits that you're going to have now that that's behind you. Any upcoming tech or AI investments that you're making and what impact any of that may have on the expense outlook?

And Catherine, this is Barry. I'll start and Duane may want to chime in as well. From the standpoint of the conversion, I think moving to a supportive environment as opposed to a self-supported environment, it's going to allow us over time to reposition a lot of the jobs that supported our previous deposit system as it did with our previous loan system. And we're going to be shifting some of those jobs into different roles. And then there may be an opportunity to, over time, not have some of the positions. So, the application type positions where we were actually doing all the maintenance to the system previously, now that we're running an FIS solution on payment, deposits, teller, sales platform, image system. From that standpoint, we're going to need to determine what our needs are once we're fully settled in, which we will be later this year. And the same is going to be true on the frontline side. We did staff up during the second quarter to make -- first quarter and second quarter to make sure we had as many people manning the station, if you will, waiting on customers, making sure that we were able to do everything we needed to do during the conversion window. Those things, there's a lot of attrition in that area of the bank already. So, if we see that we don't need quite what we staffed up to, to make sure we had more than adequate number of resources in the branches, if that begins to move down, which it can because, like I said, it's a lot of turnover in those positions, then we may be able to decide that we don't need quite as much as we staffed up to, that would be an efficiency gain as well. And then as far as being able to go in and make adjustments to the system, do things we need to do probably to drive more business, there's definitely opportunity for us to go into and establish a different pricing mechanisms, whether it be on the deposit side to possibly have some -- offer some products and offer some services that we've not been able to previously. Kind of hard to quantify the value of that today, but we do definitely know that we've been holding off on making some changes on our deposit system that we felt like would be advantageous for us, whether it be getting more customers or getting at a better price. We'll be able to do that now that we have moved to a vendor support solution. So, we're very excited about that. Duane, is there any comments you want to add to that?

Yes, I would -- yes, I'd like to add. We can't overemphasize how significant that core conversion is for us. And we've talked to many of the analysts out there. That was a 45-year-old core that we were operating that for the last 20-plus years were self-supported. It was a major lift. It was pretty much all hands on deck across the organization. Every depository customer, every commercial customer, every consumer was impacted by the change. Therefore, our staffs were entirely focused on the process of conversion, post-conversion interaction with top clients and all that. So, to have a solid overall financial quarter in the midst of that, we're extremely pleased. And like I said, really, really couldn't be prouder of our associates for dealing with that process. So, we can't underemphasize that or overemphasize that. So, to put some meat on the bone, we added roughly 50 to 55 new associates throughout our retail system to handle and fully staff our branch locations for customer interaction. That was an increase in FTEs for the quarter. So now over time, that will trend back downward. And I think at the end of the day, maybe anywhere from 10 to 15 would be permanent. So, we'll see some reduction right off the bat in that regard across the system. Then secondly, post core conversion, there's a 3 month or -- we're right now normalized or pretty much normalized throughout our company. So, there's been a settling, as Barry mentioned, a settling in since then of the whole process and new ways of doing business. So now we have settled in, we made a comprehensive presentation to our Board yesterday on our AI efforts. Our Chief Information Officer, Chris Davidson, made an outstanding presentation. We have plans that we see will create efficiencies in the future. It's a little early to start to pin numbers and give forecast in terms of real positive impact of that. But we do see tremendous impact across the organization. And now with that transition and conversion behind us can really turn our attention to that -- those efficiency gains, Catherine, that you're hoping to see.

Yes, that's great. Okay. Awesome. I know that was a really big deal for you. Also I'm glad you gave your time. And then my follow-up was maybe just on that, now that you've got the conversion behind you. I know M&A has been something that you've been thinking about. Any kind of update on that? And especially now that the conversion is behind you, I assume that, that is M&A outlook is maybe an easier lift. But kind of curious how you're thinking about M&A.