Q2 2024 Trustmark Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's second quarter earnings Conference call. At this time, all participants are in a listen only mode.
Along the presentation. This morning, there will be a question and answer session.
To ask a question you May press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two.
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.
Speaker Change: To remind everyone that a copy of our second quarter earnings release as well as the slide presentation that will be discussed on our call. This morning is available on the Investor Relations section of our website at Trustmark Dot com during the 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 our other filings with Securities and Exchange Commission at this time I'd like to introduce Duane Dewey President and CEO of Trustmark Corporation.
Thank you Joey and good morning, everyone. Thank you for joining US. This morning with me are Tom <unk>, Our Chief Financial Officer, Barry Harvey, Our Chief credit and operations Officer, and Tom Chambers, Chief Accounting Officer.
Yeah.
The second quarter was a very active quarter and productive trust.
Speaker Change: Trustmark. So we have a lot to share with you. This morning on multiple fronts.
During the quarter, we completed significant actions to increase earnings enhance our profitability profile reduce risk and strengthen capital flexibility.
We had four significant non routine items.
On slide three.
First we completed the previously announced sale of fish Brown box for one shot.
Capitalizing on attractive multiples of five point times revenue five nine times revenues and 28 times net income.
We recognized an after tax gain on sale of $171 $2 billion.
Speaker Change: Second we sold $1 6 billion of HFF securities with an average yield of 136%.
Generating a loss of $182 8 million.
Speaker Change: We then purchased $1 4 billion a year fast securities with an average yield of 485%, which significantly will significantly boost our net interest margin enhanced our profitability profile.
All lines will provide some additional color on this restructuring process that took place in late may and throughout much of June.
Third we proactively reduced the risk profile of our one to four family mortgage portfolio.
During the quarter, we sold mortgage loans that were three payments or more delinquent and millwork non accrual at the time up selection totaling $56 2 million.
Speaker Change: Mortgage loan sale resulted in an after tax loss of $10 $1 billion.
Speaker Change: Net sale drove a $54 $1 million reduction in nonperforming loans.
Finally, we exchanged our visa class B, one shares for be two chairs and class C common stock.
Change of class C shares resulted in a $6 million after tax gain during the quarter.
Okay.
Speaker Change: With all of the moving parts during the quarter, we develop slide four illustrates the strength of the quarter and provide additional details.
The first column reflects reported earnings in the second quarter of 73 8 million or earnings of $1 20 per diluted share.
The next column reflects that we recognized $171 2 million or $2.70 per diluted share on the sale of the agency.
During the two months of the quarter, we all think agency recognized $3 2 million and net income.
Speaker Change: Backing out the discontinued operations essentially it and what the agency does.
Restructuring of the securities portfolio, the mortgage loan sale and the visa share exchange adjusted earnings from continuing operations in the second quarter was $45 million or <unk> 66 cents per diluted share.
Performance in the second quarter also compares favorably to net income from continuing operations in the prior quarter, which is shown on the right side of the chart.
Speaker Change: We've.
Just the non routine transactions during the quarter now lets turn to slide five for a recap of the strong fundamental accomplishments during the quarter.
Speaker Change: Loans held for investment increased $98 million linked quarter net of the mortgage sale and $541 million year over year.
Deposit growth exceeded loan growth, increasing $124 million linked quarter and $549 million from the prior year.
A significant contributor.
Computer to our performance in the quarter, what's the growth in net interest income, which increased $8 million or 6% linked quarter to $144 million.
The net interest margin expanded 17 basis points during the quarter and 3.38%.
Revenue from continuing operations increased four 1% linked quarter and non interest income from continuing operations represented 21, 3% of total revenues.
Diligent expense management continues to be a focus of the organization and non interest expense declined one 1% linked quarter.
Speaker Change: Given the more long sale key takeaways crop and claims nonaccrual loans declining, 55% and net charge offs, excluding the mortgage loan sales totaled $3 million, representing nine basis points of average loans.
The allowance for credit losses represented 118% of loans held for investment and 840% non accrual loans, excluding individually analysed loans at June 30, yes.
Trustmark has capital ratios expanded meaningfully during the quarter as tangible equity to tangible assets increased to 105 basis points to 852%, while CET one ratio expanded 80 basis points to 10, nine 2% and total risk based.
Capital, our expanded 87 basis points to 13.29%.
The second quarter was fundamentally strong and the actions taken during the quarter, which were designed to enhance our profitability profile going forward.
Turning to slide six we expect loans held for investment and deposits to grow high single digits for the full year 2024.
Speaker Change: Securities balances are expected to remain stable as we reinvest cash flows.
Speaker Change: We anticipate net interest income to increase low single digits in 2024, reflecting continuing asset growth stabilizing deposit costs and accretion from balance sheet repositioning, resulting in full year 2024, net interest margin of approximately three 4% based on.
The market implied forward interest rates.
We expect the net interest margin to be in the range of $3 55 to $3 60 in the second half of 'twenty 'twenty four.
Speaker Change: From a credit perspective, the provision for credit losses, including unfunded commitments is dependent upon credit quality trends.
Macroeconomic forecast and future loan growth.
Net charge offs from continuing operations are expected to remain below the industry average based on the current economic outlook.
Noninterest income from continuing operations in the second half of 'twenty four is expected to increase low single digits compared to the first half of 'twenty four.
Likewise noninterest expense from continuing operations is also expected to increase low single digits in the second half of the year when compared to the first half of 2024.
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.
Parkinson's is depending on market conditions.
We also continue to tune the SaaS the board of Directors approved 2024, a share repurchase program as the market and balance sheet dictate.
At this time, Barry Harvey is going to provide some color on our loan portfolio and credit quality.
Robert Barry Harvey: Thank you Duane I'll be glad to turning to slide seven loans held for investments totaled $13 2 billion as of June 30th that's an increases, though I mentioned of 97 million for the quarter loan growth. During Q2 came from commercial real estate and the equipment finance.
Speaker Change: On a business, we expect loan growth of low single digits for 2024 as you can see.
Speaker Change: Our loan portfolio remains diversified both.
From a product standpoint, as well as a geography.
Looking onto slide eight Trustmark CRE portfolio is 94% of article, which symptom that process and the existing category and 31% and construction land development.
Construction land development portfolio is 82% construction.
Construction.
Truck box office portfolio as you can see is very modest at 279 million outstanding which represents only 2% of our overall loan book.
Speaker Change: The portfolio was comprised of credit Suisse.
Quality tenants.
Low lease turnover strong occupancy levels and low leverage.
On to slide nine the bank's commercial portfolio is well diversified as you can see across numerous industries with no single category exceeding 15%.
Looking at Slide 10, our provision for credit losses for loans held for investment was $23 3 million during the second quarter.
In the mortgage loan sale the provision for credit losses for loans held for investment was $14 7 million.
Speaker Change: Which was driven.
Speaker Change: But two parts one loan growth as well as risk rate migration the provision for credit losses for off balance sheet credit exposure was a negative $3 6 million, which resulted primarily from a decline in unbilled.
Speaker Change: CRE commitments.
At June 30, the allowance for credit losses for loans held for investment was 155 million.
Looking on slide 11, we continue to post solid credit quality metrics.
Speaker Change: The allowance for credit losses represents 118% of loans held for investment at 840% of non accruals. Excluding those that are individually have laws.
In the second quarter net charge offs totaled $11 6 million.
Excluding the previously referenced mortgage loan sale net charge offs totaled 3 million part nine basis points of average loans.
Both non accruals and nonperforming assets decreased significantly during the quarter as a result of the mortgage loan sale Duane.
Tom: Okay. Thanks, Barry now Tom I once won't cover deposits net interest margin and non interest income.
Thanks, Dwayne and good morning, everyone turning to deposits on slide 12.
We had another good quarter, which continued to show the strength of our deposit base deposits totaled $15 5 billion at June 30.
Our linked quarter increase of 124 million or eight tenths of 1%.
And a year over year increase of 549 million or three 7%.
The linked quarter increase was driven by growth of $114 million and noninterest bearing DDA balances, which remains at 20% of our deposit base.
Time deposits also increased by $90 million linked quarter, driven by 77 million of growth in personal C. D and 13 million of growth from brokerage seafoods.
As of June 30th our promotional and exception priced hard time deposit book totaled $1 5 billion with a weighted average rate paid of $4 98, and a weighted average remaining term of about five months.
Our broker deposit book totaled 600 billion at an all in weighted average rates paid.
Which remained at about 5.43% and weighted average remaining term remains at about three months as of June 30th.
Our cost of interest bearing deposits increased by one basis point from the prior quarter to 275%.
From the seven basis point linked quarter increase in the second quarter.
Turning to slide 13, Trustmark continues to maintain a stable granular low exposure deposit base.
During the first quarter, we had an average of about 460000 personal and non personal deposit accounts, excluding excluding collateralize public fund accounts with an average balance per account of about $27000.
As of June 30th 64% of our deposits were insured and 14% were collateralized, meaning that our mix of deposits that are uninsured uncollateralized was essentially unchanged linked quarter at 22%.
We continue to maintain substantial secured borrowing capacity, which stood at $6 $1 billion at June 30th representing 179% coverage of uninsured and non collateralized deposits.
Our second quarter total deposit cost was unchanged linked quarter at 2.18%, which continues to represent a peak seemed a little beta cycle to date of 40%.
The favorable variance to prior guidance was driven by pricing actions, we've taken during the first quarter, which gave us a running start toward a lower deposit costs in the second quarter.
Deposit cost pass however continued to increase monthly in a frame of reference for that.
Guy to 2.27% of third quarter, which would bring the cycle of big data to 44% deposit cost is approximately 2.25% paid in July.
Turning our attention to revenue on slide 14, net interest income FTE increased $8 $1 million linked quarter.
Totaling $144 $3 million, which resulted in a net interest margin of 3.38%.
Net interest margin increased by 717 basis points linked quarter, driven by 13 basis points of accretion on the loan.
On rate and volume.
And five basis points of accretion from the securities portfolio restructuring.
Tom: With respect to the loan rate accretion loan fees normalize during the second quarter from the unusual drop we had experienced during the first quarter.
Absent the linked quarter volatility in loan fees loan yields continue to trend higher by mid single digit basis points each quarter.
As Lynn indicated we anticipate net interest margin of 3.55% to 3.60% in the second half of 2024 with the increase driven by the securities portfolio restructuring, which was completed during June resulting in an anticipated securities portfolio yield.
Lynn: Approximately three 5% going forward.
Lynn: We were pleased with the execution of the securities portfolio restructuring in what was a challenging interest rate environment, and we did achieve our objectives with the restructuring of extending effective duration from about three seven years to about four two years.
We adjusted mix to achieve more consistent ladder of cash flows over time, while also improving the stability of cash flows to changes in interest rates, while picking up approximately 350 basis points of yield between securities purchased and securities sold.
Turning to slide 15, our interest rate risk profile remained essentially unchanged to June 30, yes.
We continue to have substantial asset sensitivity driven by loan portfolio mix with 51% variable rate coupons.
Lynn: During the second quarter, we entered into a $60 million notional of forward starting interest rate swaps, which brought the swap portfolio notional at quarter end to $1.165 billion with a weighted average maturity of three years and a weighted average received fixed rate of 3.23%.
Lynn: We also entered into 30 million notional of forward starting floors brought four portfolio notional at quarter end to $150 million with a weighted average maturity of four three years at a weighted average sell through rate of 368 SaaS.
Lynn: The cash flow hedging program substantially reduces our adverse asset sensitivity to potential downward shock in interest rates.
Lynn: Turning to slide 16, noninterest income noninterest income from adjusted continuing operations totaled $38 $2 million in the second quarter, a $1 $1 million linked quarter decrease in approximately $400000 year over year increase.
Lynn: The linked quarter decrease was driven by a $3 $4 million increase in negative net hedge ineffectiveness, which was driven by a higher assumed discount rate applied to mortgage servicing cash flows in the asset valuation methodology.
Excluding the increase in negative net hedging effectiveness linked quarter increase in total noninterest income would have been $2 $3 million or five 8% and year over year increase would have been $3 $6 million or nine 4%.
Lynn: And now I'll ask Tom Chambers to cover noninterest expense and capital management.
Thanks, Tom turning to slide 17, we will see a detail of our total non interest expense during.
During the second quarter noninterest expense continued to decline and totaled $118 $3 million for linked quarter decrease of $1 $3 million or one 1%. This decline was mainly driven by a decrease in salary and benefits $600000, resulting in reduced compensation.
Expense and a seasonal decline in payroll taxes offset by increased commission expense driven by increased revenue.
Other expense decreased by $900000, resulting from lower operational losses during the quarter.
Turning to slide 18, Trustmark remains well positioned from a capital perspective.
As Dwayne previously mentioned our capital ratios remained solid with Congress equity tier one ratio of 10, 92% linked quarter increase of 80 basis points.
Total risk based capital ratio of 13, 29%.
Our linked quarter increase from 87 basis points.
Lynn: Although we currently have a $50 million share repurchase program in place.
For capital deployment continues to be focused on organic Linda.
Lynn: As Dwayne indicated we will continue to evaluate share repurchase program as a market and our capital levels dictate.
Back to you John.
Great. Thanks, Tom.
A very very busy quarter for us here, so well now open the floor up for questions that you may have.
Speaker Change: We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.
Is there any time your question has been addressed.
Like to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Speaker Change: [noise] and the first question will come from Catherine Mealor with <unk>. Please go ahead.
Catherine Fitzhugh Summerson Mealor: Thanks, Good morning.
Catherine.
Let's start on some of the guidance that you provided which is really helpful. Just to look at it.
You know on continuing operations, and then kind of a growth rate to the back half of the year. So thank you for how you laid that out.
With expenses.
You take the first half of the year and then grow that at a low single digit pace I'm getting kind of a run rate in the back half of the year around kind of 122 and $23 million a quarter, which is a little bit higher than the first half just want to make sure that that's around what youre thinking and where some of that growth is coming from.
Yeah.
Catherine I'll start Tom Chambers can.
I'll continue on but yeah, well I think I think general some of the things that occur in the first quarter and second quarter.
You know we will not continue into the second half of the year. So we do think we'll get a little bit of grass comparing first half to second half and it is in the very low single digit range, Tom can elaborate a little more but yeah, I think you're about right with your numbers Tom Yes.
Yes, so duane. Thank you I believe the biggest driver of the increase in the second half of the year as we changed our merit increase structure, we used to have merit increases yet.
In March of the year, and we delayed that this year to hit in July. So the first half of the year did not have merit increases in it and our salaries in the second half of your wheel. So that'll be the biggest but it still keeps it in that low very low single digit range yes.
Okay, great perfect.
Speaker Change: He also was made.
Speaker Change: It made perfect sense, I'm actually not going to ask a margin question. This quarter. So the tomo minutes, you're off the hook this quarter for me.
My second question is on the theory is it looks like you sold the M P A's than Delta reserve.
It looks like you put a lot of that in your CRE Reserve just curious if that's just from pure conservatism or was there any negative migration in special mentioned or classified within your commercial real estate portfolio that drove that.
Hey, Catherine this is Barry I'll close.
Speaker Change: Good morning.
For the first thought process as it was.
As it relates to the selling of the mortgage book that we did was.
That's most all of that 30 year paper and.
Once it gets into that category of non accrual and there's a hot roll rate from great times down and more it's kind of sticky and harder and harder to remove and we saw it in today's environment, where it's still there's still attractive it'd be a good time to go ahead and give ourselves some additional room as it relates to as it relates to NPL.
As an M P as I as it relates to the second part of your question is.
Regarding the risk rate migration is driving some of the provisioning that that is correct. I mean, we we like all banks on the CRE side.
Or are beginning to see some risk rating migration as it relates to predominantly special mentioned and occasionally there are some that's.
We're gonna be sub standard we don't really see this as anything other than a cycle at this stage that were flowing through but of course, you know when you have the rate increases we have coming out of what was put on the books in the second half of two really really all of 'twenty three and then most all of 'twenty two if not all of them.
To.
That population its going to be more challenged just because it was made at the lowest rates.
Low freight environment, and then now it's functioning because all of our for our variable rate debt I'm referencing it's functioning and there's always been focusing at a higher rate environment. So there is more stress all of the category of lending not just for Trustmark, but anybody who was booking those type of CRE loans during that window of time.
Better now beginning to.
H C O and in many cases, beginning to stabilize there is the need to continue to support those projects by the sponsor about the guarantors by the borrowers in order to give them a little bit more time to to fully stabilize. It's also a function of most construction projects for quite a while.
Very seldom do they finish on time, so they need a little more time to fully stabilize and sometimes it's six months, sometimes 12 months. So it's all of those factors that are going into making sure were staying on top of our credits, making sure we're grading them appropriately at all times.
I wouldn't call. It conservatism I would just say that where we're very focused on making sure that we're looking at as much of the book as often as we can to make sure. The grades are right at all times, which would lead you to believe the ACO is accurate at all times as well.
Okay. That's great you have the balances and increase in them.
In criticized or classified.
Speaker Change: We don't we don't report those that are earnings traditionally that we'll be there of course, there will be on the call report.
Okay. That's great we can wait for that and so it seems like the the loss content, perhaps is still.
Arguably low on these projects that you're more just migrating them to special mention.
Speaker Change: There needs to be supported from the guarantor, just because of the project delay.
Yeah, that's correct. That's a correct assessment Catherine I'll, we don't we don't see or we you know this quarter charge offs were 3 million when you exclude the mortgage sale, which is obviously one time that's versus 4 million last quarter. So and we don't really see a trend developing there that I was concerned we don't see a trend develop.
And our M P as our Npls of concern, but we do want to make sure. The grading is correct on all of our credits and we would expect.
Those to a cycle like especially if we've got any type of rate reductions second half of this year or next year, obviously those would be some welcome relief in terms of trying to make those debt service coverage ratio requirements.
Great. Thank you very much for the color there.
Again, if you have a question. Please press Star then one our next question will come from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning.
Hi, Good morning, I wanted to ask Hey, I wanted to ask about the guide on deposit costs for the third quarter, I guess I'm little surprised.
That it's you know the guide is that much higher just given the success on the noninterest bearing in front of the second quarter.
Speaker Change: Generally moderated moderating deposit cost increases.
And the industry. Overall, so you you had alluded to some actions you took to set yourself up better for lower rates I'm curious kind of what impact that's having on the on the third quarter outlook.
Speaker Change: Good morning, Gary This is Tom Owens so.
Gary: Good question.
Coming into 'twenty 'twenty four.
Early in the first quarter, we began to take some actions to try and rationalize our deposit costs, particularly as it related to our maturing promotional Cds.
As well as some rates on non maturity products.
Gary: And what we found.
I don't want to say that was experimental right, but I think all banks at this point are focused on their deposit base and what the opportunities are to try and rationalize cost and so we did try some of that in the first quarter and what we found as we were driving more deposit mix change and more departure.
Got it.
Disintermediation than we would've liked.
Gary: So we got into approximately mid March and we really sort of pivoted away from that and so that's what I mean by the actions we had taken in the first quarter, which set us up for <unk>.
Good running start so to speak towards beating on the guide that we put out there for the second quarter, but at the same time knowing that.
Those deposit costs would continue to March higher.
Going forward and that's what we've seen.
So you know I would really encourage you in <unk>.
Analysts and investors to think in terms of whether we're talking about loan yields or deposit cost.
Think in terms of mid single digit increases on a normalized basis, we had a sort of a hiccup in terms of our loan yields in the first quarter on a linked quarter basis, which was the result of sort.
Sort of an unusual decrease in game.
Fees that normalized for us here in the second quarter right and so you saw what is seemingly a disproportionately large increase on a linked quarter basis and loan yield in the second quarter that was normalization and our guide.
In terms of deposit cost for the quarter.
<unk> is also normalization we're in relative equilibrium at this point on a month over month basis and on a linked quarter basis in terms of the increase in loan yield versus the increase in deposit cost.
Okay.
Thanks, a lot for those folks there I guess.
Speaker Change: If I were to boil down to thinking that the third quarter outlook on deposit cost is almost is basically then normalize and you kind of skipped over the second quarter from a repricing perspective is that kind of what that was.
Speaker Change: That's exactly right Gary and that's why in my prepared comments I gave you the reference point of month to date deposit cost here in July of 2.25%.
Alright, I appreciate that and then if I.
I could ask a follow up.
Just on capital.
You've talked.
About kind of the.
Priorities of organic growth et cetera, but pushing an 11% CET one ratio.
Speaker Change: I Wonder if you could.
Talk about capital are really more from an M&A perspective, you know kind of where things are.
In terms of conversations has there been any sort of increase in conversations in your in your footprint and activity levels.
Speaker Change: Okay.
Yeah.
It relates to M&A I mean first of all yes. There are there aren't more there's a little more activity out there are things, we're hearing about and and things.
Things that are being presented to us as opportunities et cetera. So we are seeing some increased activity there.
And in our minds I think we wanted to get through this quarter with a lot of noise.
Speaker Change: And activity in all the different one time deals kind of let the let the dust settle and then you know really moving into 2025 more thinking about the M&A space and a little more with a little more.
Our focus in and the like but at the end of the day I do believe there is a little more activity or at least a lot of different discussions and thought processes going on across the across our marketplace.
Okay.
Yeah.
This concludes our question and answer session.
I'd like to turn the conference back over to Mr. Duane Dewey for any closing remarks. Please go ahead Sir.
Thank you again for joining us. This morning are very very busy quarter for us and we're very excited about the second half of 2024, and we look forward to.
Our third quarter call.
In October so look forward to catching up then thank you.
Speaker Change: The conference has now concluded thank.
Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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