Trustmark Corporation

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. Following 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 Rain, Director of Corporate Strategy at Trustmark. Please go ahead, sir.

Good morning. I'd like 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.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 the Securities and Exchange Commission. At this time, I'd like to introduce Dwayne 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 Owens, our Chief Financial Officer, Barry Harvey, our Chief Credit and Operations Officer, and Tom Chambers, our Chief Accounting Officer. The second quarter was a very active quarter and productive for 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 as outlined on slide three. First, we completed the previously announced sale of Fisher-Brown Boxer Insurance, capitalizing on attractive multiples of 5.9 times revenue and 28 times net income. We recognized an after-tax gain on sale of $171.2 million. Second, we sold 1.6 billion of AFF securities with an average yield of 1.36%, generating a loss of $182.8 million. We then purchased $1.4 billion of AFF securities with an average yield of 4.85%, which will significantly boost our net interest margin and enhance our profitability profile. 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 or non-accrual at the time of selection, totaling $56.2 million. The mortgage loan sale resulted in an after-tax loss of $10.1 million, and this sale drove a $54.1 million reduction in non-performing loans. Finally, we exchanged our Visa Class B1 shares for B2 shares and Class C common stock. The exchange of Class C shares resulted in a $6 million after-tax gain during the quarter. With all the moving parts during the quarter, we developed slide four to illustrate 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 owned the agency, we recognized $3.2 million in net income. Backing out the discontinued operations associated with the agency, the restructuring of the AFS securities portfolio, the mortgage loan sale, and the Visa share exchange, adjusted earnings from continuing operations in the second quarter was $40.5 million. or 66 cents per diluted share. Our 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. We've discussed the non-grouping transactions during the quarter. Now let's turn to slide five for a recap of the strong fundamental accomplishments during the quarter. Loan sales for investment increased $98 million linked quarter net of the mortgage sale and $541 million year-over-year. The public growth exceeded loan growth, increasing $124 million linked quarter and $549 million from the prior year. A significant contributor to our performance in the quarter was 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 to 3.38%. Revenue from continuing operations increased 4.1% linked quarter, and non-interest income from continuing operations represented 21.3% of total revenue. Diligent expense management continues to be a focus of the organization, and non-interest expense declined 1.1% linked quarter. Given the mortgage loan sale, key takeaways include non-accrual loans declining 55% and net charge-offs excluding the mortgage loan sale totaled $3 million, representing nine basis points of average loans. The allowance for credit losses represented 1.18% of loans held for investment and 840% of non-accrual loans, excluding individually analyzed loans at June 30th. Trustmark's capital ratios expanded meaningfully during the quarter as tangible equity to tangible assets increased 105 basis points to 8.52%, while CET1 ratio expanded 80 basis points to 10.92%, and total risk-based capital expanded 87 basis points to 13.29%. The second quarter was fundamentally strong, and the actions taken during the quarter were designed to enhance our profitability profile going forward. Turning to slide single digits for the full year 2024. Securities balances are expected to remain stable as we reinvest cash flows. 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 3.4% based on the market implied forward interest rates. We expect the net interest margin to be in the range of 355 to 360 in the second half of 2024. From a credit perspective, the provision for credit losses, including unfunded commitments, is dependent upon credit quality trends, current 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. Non-interest income from continuing operations in the second half of 24 is expected to increase low single digits compared to the first half of 24. Likewise, non-interest 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 purposes depending on market conditions. We also continue to assess the Board of Directors approved 2024 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.