Prepared remarks
Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation 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 Q&A session. And as a reminder, this call is being recorded. It is now my pleasure to introduce Joey Rein, Director of Corporate Strategy at Trustmark. Please go ahead, sir.
Good morning. I would 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 would 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 longtime 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 am 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 two non-routine 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 three 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 a $47.1 million overall reduction in nonperforming loans and reduced the risk profile of our one-to-four family portfolio. We also exchanged Visa shares during the quarter resulting in a gain of $3.7 million net of taxes. Excluding these two non-routine 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 million or 3.3% year-over-year. Excluding the mortgage loan sale, loans held for investment increased $109 million or 0.8% linked-quarter and $555 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 $359 million or 2.3% linked-quarter and $955 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. Non-interest expense increased $1.5 million or 1.2% linked-quarter to $134 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 six months of 2026, 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, 2026.
Now let's focus on our full-year expectations, which are shown on slide 15. As we look ahead, we are affirming our previously provided guidance for all full-year 2026 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 2026. Net interest income is expected to increase in the mid-single digits compared to 2025. 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.
Non-interest income is expected to increase in the mid-single digits for the full-year 2026. Non-interest expense is also expected to increase in the 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 will now move to questions.
Questions and answers
And ladies and gentlemen, we will now begin the Q&A session. And our first question today will come from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions. Wanted to start on the loan growth side. Obviously, really good production this quarter, but still a bunch of pay downs 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 can you walk us through the comfort level of what would appear to be a ramp in net loan 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? Thanks.
Michael, this is Barry. One piece of context as it relates to Q2 as well: we reported $35 million of growth. Add back in the mortgage sale, that puts us at $108 million. We also had $71 million of substandard credits that we pushed out of the bank. From my perspective, I like to think of those three credits getting pushed out of the bank as something that is not necessarily recurring—desired, but not necessarily recurring. That puts us starting off about $179 million of growth for the quarter. When you are looking into Q3 and Q4, we still see very strong pipelines. Production has been real steady for us quarter to quarter. The payoffs are always the tricky part. We are seeing fewer payoffs than we have maturities each quarter on that CRE book, but we are also seeing unexpected payoffs unrelated to scheduled maturities. The two tend to balance themselves out. So we do expect to meet the mid-single-digit loan growth guidance for the year.
We do expect Q3 and Q4 will hopefully be a little less bumpy without the mortgage sale. As I said, we had $71 million of three substandard payoffs this quarter that we do not expect every quarter. We would like to see substandard loans work through the bank, but we cannot count on that each quarter. With that in mind, I think the quarter looks a little better than just $35 million; add the mortgage sale and you get the $108 million. I think we are probably close to $179 million to $180 million.
That is very helpful context, Barry. I appreciate it. And that leads into the margin question. Was there any prepayment fees or anything like that that impacted this quarter's margin because the 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. Thanks.
Michael, this is Tom Owens. To your question directly, is there any impact from accelerated prepayment fees or anything like that? I do not believe there is a material impact from that. Joe, do you want to weigh in?
Thanks, Tom. Yes. We are reaffirming our guidance, 3.80% to 3.85%. Margin is 3.84% this quarter. We do expect near-term margin pressure from deposit funding decisions. We were, as previously announced, in the market with some promotional campaigns, and that has increased deposit costs. We have also seen strong pricing competition within our markets, and we have responded accordingly. We expect repricing of fixed-rate loans and investment securities to partially offset some of that margin pressure. Using the forward curve we have, there is a rate increase that will flow through the margin more so in the last quarter of the year. So initially, we are expecting margin pressure in the near term and then subsequently expect that to reverse, which will put us in the mid-guidance range we have communicated.
Okay, helpful. And then maybe just one follow-up to that. I assume you are assuming a rate hike in December, so there would not be much Q4 benefit or full-year benefit if we did not 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 fourth quarter versus the third quarter.
Okay. Any idea on what that benefit might be just roughly?
In terms of margin, we are looking at a few 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 we are at right now.
Okay. I will step back. Thanks for all the color.
And our next question will come from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good morning.
Morning, Gary.
Could you remind us on the $643 million of new production, how that compares to the first quarter production?
This is Barry. It is very similar. We are pretty much in line with the first quarter as well as the additional funding on revolvers. We are pleased to see some upticks from year-end. Utilization across all revolvers, including HELOCs on the consumer side, is right at 40% utilization. On the C&I side, revolver utilization has moved up from 32% at year-end to 37%, and we are at 38% as of the end of the second quarter. We are pleased to see that utilization. There is a lot of activity in quite a few of our markets, and a lot of our customers, especially on the construction side, are benefiting from that additional business.
Appreciate that. And then as it relates to the back half of the year, obviously you have a positive outlook for loan growth and you talked about kind of an adjusted second quarter number. Many banks have had strong second quarters but have been more cautious for the back half of the year. It does not feel like that is where you guys are. Could you expand on that?
A lot of our situation is not about production because the pipelines are very good and production has been steady. It is more about payoffs and what we see in scheduled payoffs extending out, and then how much unanticipated payoffs we see coming from the CRE book. That phenomenon will play out, and the payoffs will generate our growth—strong or weak—more so than production. Production is there and very predictable.
Got it. I appreciate that color. And then just vis-à-vis the buyback, I think last quarter you talked about $70 million being the low end of what you would expect for the year. Any changes to the back half outlook on the buyback?
I would say probably in line with where we have been in the first two quarters. That has been right around $20 million per quarter. We continue to see that into the future. Again, it depends a bit on market conditions or any other activities that we have, but I would expect it to be equal to where we have been the first two quarters.
Okay, great. Thank you.
And our next question will come from Catherine Mealor with KBW. Please go ahead.
Thanks. Good morning.
Morning, Catherine.
You are now past your big conversion, which I know was a big lift. I wanted to see if you could give us an update on some efficiencies or benefits you will have now that it is behind you, and any upcoming tech or AI investments you are making and what impact any of that may have on the expense outlook? Thanks.
Catherine, I will start and Duane may want to chime in. From the standpoint of the conversion, moving to a supported environment as opposed to a self-supported environment will allow us over time to reposition many jobs that supported our previous deposit system as we did with our previous loan system. We will be shifting some of those jobs into different roles and there may be an opportunity over time to reduce certain positions that were application maintenance roles for the prior systems. We are running a vendor-supported solution for deposits, teller, sales platform, and image systems. We will evaluate needs as we fully settle in later this year. On the frontline side, we staffed up during the second quarter to ensure branches were fully staffed during the conversion window. There has been attrition in that area, so if we find we do not need the temporary staffing levels, that would be an efficiency gain. We also will be able to make adjustments to the system and potentially introduce different pricing mechanisms on deposits or offer some products and services we could not offer previously. It is hard to quantify the value today, but there is definite opportunity. Duane, any comments?
We cannot underemphasize how significant that core conversion was. We had a 45-year-old core that for the last 20-plus years was self-supported. It was a major lift—pretty much all-hands-on-deck across the organization. Every depository, commercial, and consumer customer was impacted. Post-conversion interaction with clients required our staff to be fully focused on the process. To have a solid financial quarter in the midst of that is something I am extremely proud of. We added roughly 50 to 55 new associates throughout our retail system to fully staff branch locations during the conversion. That increased FTEs for the quarter; over time that will trend down. I think ultimately maybe 10 to 15 of those will be permanent. Post-conversion, there is a three-month period of settling in, and we are pretty much normalized across the company now. We made a comprehensive presentation to our board yesterday on our AI efforts. Our Chief Information Officer, George Chambers, made an outstanding presentation. We have plans that we believe will create efficiencies in the future. It is a little early to quantify the positive impact, but with the transition behind us, we can now turn our attention to those efficiency gains.
That is great. Thank you for that. Now that the conversion is behind you, any update on M&A? I assume M&A outlook is an easier lift — how are you thinking about M&A?
It is fairly similar to what we have guided before, but we had some trepidation previously with the conversion upcoming. We are now fully considering options. We see a lot of interest and discussion across size ranges. We would love to participate in M&A but remain disciplined and focused on transactions that add value and make our company better. We are evaluating small, medium, and large opportunities and looking at every opportunity to improve the company.
Great. Thank you.
And our next question will come from Feddie Strickland with Hovde Group. Please go ahead.
Hey, good morning, gentlemen. Just to touch on deposit growth: I mean, we see that step down a little bit in the back half of the year given the affirmation of the guide and a really strong run rate this quarter. Could we maybe see the higher end of what can be considered mid-single-digit growth for the year?
Hi, Feddie. We are managing deposit growth in relation to loan activity to align the two. We have deposit campaigns in place right now, but we are not trying to achieve a much higher pace of growth. We are maintaining guidance in mid-single digits and expect that for the remainder of the year. I would also note competition and pricing have been higher than expected, so we may increase deposit costs in some cases. That could manage growth but also improve margin at the bottom line, helping our margin outlook. We are balancing appropriate deposit growth, associated costs, and margin impact.
Understood. That is helpful. Just wanted to ask on credit: seeing NPAs down by nearly half following the loan sale—does that impact forward expectations for charge-offs? Should we expect mid-teens rather than low 20s given the step down in nonaccruals?
Yes. I do think the reduction in NPAs and NPLs has the potential to reduce actual losses going forward. In terms of provisioning, we were thinking the second half of the year would be more like somewhere between the first quarter and the second quarter when you exclude the mortgage sale. I think that remains a fair expectation. Regarding charge-offs, lower nonaccruals should result in fewer charge-offs going forward, although our charge-offs have already been relatively muted.
Okay. One last one: from a big-picture economic growth perspective, there seems to be a good bit of new investment across the Gulf South. Can you talk about what you are seeing on the ground and expectations for household income and economic growth potential there?
Feddie, economic activity in Mississippi is off the charts relative to historic levels, partly due to multiple data center builds across the state. There is other manufacturing supporting initiatives from battery manufacturing to automotive—Nissan, Toyota—and timber and shipping on the coast. These areas are experiencing investment and activity at levels not seen before in Mississippi. That activity spills over into Louisiana and Alabama; we bank numerous commercial relationships in those states. All of this is positive for economic activity. I have attended various presentations with government and private sector leaders, and ongoing data center construction and related projects still look very positive. From Trustmark's perspective, we are as positive about Southeastern U.S. economic activity as we have been in a very long time; it is very dynamic.
To add, that positivity is reflected in our line utilization, especially on the revolving C&I side. We are also seeing more activity from the municipal side as these projects require funding, so there is good activity there as well.
Understood. Really helpful perspective. I appreciate it. I will step back. Thank you.
And our next question will come from Stephen Scouten with Piper Sandler. Please go ahead.
Yes. Thanks. Good morning. Couple of quick follow-ups. In terms of the NIM conversation, it sounded like you thought you could expand the NIM even with some deposit cost increases. Could the implication be that loan yields would trend higher from here, maybe a couple of basis points a quarter on new production? Within that, what were you seeing this quarter in terms of new production yields?
Stephen, my comment about deposit costs increasing and the potential benefit to margin referred to pulling deposits on balance sheet that may have associated fee income and changing the geography of funding where the cost might be higher. That cost can still be lower than other sources of funding and therefore improve margin at the bottom line. Regarding weighted average booking for the quarter, it was about 6.28%, which is about 55 basis points higher than the average for the portfolio as a whole. That is a positive when comparing new bookings to the average portfolio yield.
Got it. Very helpful. And then just last thing: any updated numbers on hiring done during the quarter? I know that has been active over the last two or three quarters. Any meaningful activity on the hiring front from a production standpoint?
In the second quarter we were focused on the core conversion, and that meant adding personnel primarily in the branch system—about 50 new associates to handle customer interaction. That increase slowed hiring of production talent in Q2, but we are ramping back up now into the second half of the year, focused on building commercial and other production categories, mortgage and other areas where we see opportunity. Q2 was really all-hands-on-deck on the conversion.
That makes sense. Great. Thanks for the color. I appreciate it.
And our next question will come from Christopher Marinac with Brean Capital Research. Please go ahead.
Hey, thanks. Good morning. I had a similar question that was already answered about net charge-offs changing. Barry, I'm curious if CECL rules allow you to revisit lifetime losses? Or was that already done in the reserve release we had this quarter?
Right, Christopher. Every quarter we update our historical averages to recalibrate probability of default and loss-given-default. As we encounter lower charge-offs moving forward, that will potentially result in a lower provisioning requirement. It is an ongoing process, and we may see further relief in future quarters. The mortgage sale loss impacts the mortgage book itself. To provide context, the discount we took two years ago on a similar mortgage sale was 29 cents; the discount this time was 19 cents. Previously we were provisioning around 23 cents for those loans; on a go-forward basis that portion is now closer to 13 cents. So for the mortgages that meet this criteria, our effective provisioning has decreased, which should help provisioning going forward for similar loans.
Great, Barry. Thanks for that. Just a question on deposits: given the success this quarter, is there a lower bound on the loan-to-deposit ratio where you do not want it to get below a certain level?
This is Tom Owens. Historically, 85% has probably been at the bottom end. You have heard us say we intend to maintain the loan-to-deposit ratio below 90%. We are kind of midway between 85% and 90% now, so 85% is a practical lower bound.
Sounds good, Tom. Thanks for sharing and thanks for having us this morning.
And this will conclude our Q&A session. I would like to turn the conference back over to Mr. Duane Dewey for any closing remarks.
Thank you again for joining us on our second quarter call. We look forward to connecting again after the third quarter. Hope everybody has a great rest of the week and we will talk to you then.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.