Earnings Call Transcript - TRMK Q1 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation this morning, there will be an opportunity to ask questions. 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.

Joey Rein, Director of Corporate Strategy

Good morning. I'd like to remind everyone that our first quarter earnings release and 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 our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and we'd 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'll turn the call over to Duane Dewey, President and CEO of Trustmark.

Duane Dewey, President and CEO

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. Trustmark reported solid performance in the first quarter, building upon our momentum from 2024. As you may have seen, we experienced continued loan growth, stable credit quality, expanded fee income, and lower non-interest expense in the first quarter. I would like to note that we are adjusting our presentation format this quarter. I will first provide a summary of our performance, discuss our forward guidance, and then move to questions. This will reduce the time spent on our comments and allow more time for your questions. We understand this is a popular day in the earnings release cycle, and we want to allow as much time as possible to address questions you may have after reviewing our release and related deck. Now turning to Slide 3, the financial highlights slide. Please note, all information presented here is from continuing operations. From the balance sheet perspective, loans held for investment increased $151 million or 1.2% linked quarter. Our growth was diversified and reflected increases in CRE, other commercial loans and leases, and one to four family mortgage loans. Our deposit base remains stable. During the quarter, our cost of total deposits decreased 15 basis points to 1.83%. Trustmark reported net income in the first quarter of $53.6 million, representing fully diluted EPS of $0.88 per share. This level of earnings resulted in a return on average assets of 1.19% and a return on average tangible equity of 13.13%. This performance reflects solid net interest income of $155 million, which produced a net interest margin of 3.75%. Non-interest income totaled approximately $43 million, up 4% linked quarter as growth in mortgage banking, wealth management, and other income was offset in part by seasonal declines in bank card and other fees and service charges on deposit accounts. We are very pleased with our continued expense management efforts. Non-interest expense declined $419,000 linked quarter, which follows a full year decline in 2024. Salaries and employee benefits, service and fees, and other expenses were all lower linked quarter. Credit quality remained stable. Net charge-offs totaled $1.4 million, representing 4 basis points of average loans in the first quarter. The net provision for credit losses was $5.3 million, and the allowance for credit losses expanded 4 basis points to 1.2% of loans held for investment, again a very solid credit profile. From a capital management perspective, each of our capital ratios increased during the quarter. The CET1 ratio expanded to 11.63%, while our risk-based capital ratio increased 13 basis points to 14.1%. During the quarter, we've repurchased $15 million of Trustmark common stock and have a remaining repurchase authority of $85 million for the remainder of this year. This program continues to be subject to market conditions and management discretion. Tangible book value per share was $27.78 at March 31st, up 4.1% during the quarter and 26.1% year-over-year. The Board also declared a quarterly cash dividend of $0.24 per share, payable June 15th to shareholders of record on June 1st. Now let's focus on our forward-looking guidance for the year, which is on Page 15 of the deck. As you can see, we are affirming our previously provided full year 2025 expectations across the board. Although we are intently monitoring the impact of tariffs and other administrative policies on our customer base, interest rates and credit-related issues, we feel it is early in the process and we have not yet seen an immediate impact. We expect loans held for investments to increase low single-digits for the full year 2025 and deposits excluding broker deposits to increase low single-digits as well. Securities balances are expected to remain stable as we continue to reinvest cash flows. We anticipate the net interest margin will be in the range of $3.75 to $3.85 for the full year, while we expect net interest income to increase mid to high single-digits in 2025. From a credit perspective, the provision for credit losses including unfunded commitments is expected to remain stable. Non-interest income from adjusted continuing operations for the full year 2025 is expected to increase mid-single digits, while non-interest expense from adjusted continuing operations is expected to increase mid-single digits as well. 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. As noted earlier, we do have remaining availability in our Board authorized share repurchase program that we will consider opportunistically. So, with that, I would like to now open the floor up to questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And the first question will come from Will Jones with KBW. Please go ahead.

Will Jones, Analyst

I wanted to start just with loan growth. Either Barry or Duane, if you could just maybe walk us through some of the growth trends you saw this quarter and how the paydown story kind of played out for the quarter? And then, just with respect to the growth guidance for the remainder of the year, obviously, a fairly volatile environment out there. Duane, could you just give us a pulse for just boots on the ground? What you're hearing from clients? And anecdotally, just whether you've seen any change or definitive change in any client behavior just with regards to the tariffs and some of the uncertainty out there? That would be great. Thank you.

Barry Harvey, Chief Credit and Operations Officer

This is Barry. I'll begin and then Duane will add his thoughts. As we discussed before, while we anticipate significant maturing commercial real estate loans in 2025 due to strong production in 2021 and 2022, we expect this to be primarily a second-half issue. We believe we've done a great job connecting with our customers and ensuring they're aware of the two one-year extension options available for projects that are performing well. Many have expressed their intention to take this option for several reasons. One reason is the current uncertainty around interest rates and whether it might be more beneficial for them to wait and incur carrying costs for a year to see if the rates improve, allowing them the chance to sell the project at a better cap rate or move it to the private market at a favorable rate. Thus, the loan growth observed in the first quarter was anticipated from our viewpoint, and we expect the payoff scenario to develop as the year progresses. We have a forecast of $5.3 billion for our commercial real estate book, which has shown that many of our clients with maturing CRE credits in 2025 plan to extend to 2026. This trend has continued through December 31st, and based on our ongoing quarterly forecasting, we do not expect any changes in this trend from our current surveys. We are pleased with this situation, and we are also looking for opportunities to compete for existing funded business where we can, while ensuring our ongoing projects are performing as expected and addressing any issues that arise. Briefly regarding the market, Duane can provide more details. Disruption often leads to pauses in plans, and unfortunately, much of the growth we expect in 2025 will come from existing CRE projects that will continue to fund. We haven't heard serious concerns from clients about pausing future projects, although there may be less active support from sponsors until market disruptions settle. However, we believe those sponsors will return, as the returns on these projects should be significantly better than what they can find in a risk-free environment, with much depending on interest rates. Duane, I'll hand it over to you now.

Duane Dewey, President and CEO

Yes. As we approach the end of the first quarter, our pipelines are as strong as we've seen in a long time across various sectors, including commercial and industrial, commercial real estate, and equipment finance, as well as some small business areas. The feedback from our officers and customers indicates solid pipelines and strong plans in place. That strength remains intact. Since April 2, we’ve conducted some polling within our business units and interacted directly with customers. For the first time, we are detecting increased uncertainty. Some customers are expressing a desire to hold off for a while and wait to see how things unfold. This sentiment hasn’t yet impacted our pipeline reports significantly, but we may see a slowdown in new origination volume that we were expecting. While it’s not dramatic and hasn’t been fully realized yet, it’s still early in the process. A few positive updates or changes in media tone can quickly shift perceptions. We’re observing this volatility; however, as indicated in our forecast, we are still projecting low single-digit growth for the year.

Will Jones, Analyst

Yes. That's great. I really appreciate that thorough answer Duane on that. Maybe, Tom, just a quick one for you. I certainly appreciate the margin range you put out there, the 3.75% to 3.85%. We're kind of sitting at the low end today. And I know you generally guide off of the forward curve. I was just hoping you could help us maybe sensitize that margin a bit. I know there's various thoughts and considerations for how rates may ultimately play out this year, but if we do wind up in a scenario with a higher level of cuts, could you just help us walk through maybe what happens to the margin in that scenario?

Tom Owens, Chief Financial Officer

Sure, Will. Happy to. So, several points I'd make there. First of all, with respect to the one basis point linked-quarter decline in net interest margin, we experienced a normal seasonal linked-quarter decline in loan fees, which was worth about 3 basis points of NIM. So, on a normalized linked-quarter basis rather than a one basis point decline, that would have been a two basis point increase, which is consistent with the guidance that we put out there and the commentary we have provided. We continue to believe going forward that we will experience low single-digit linked quarter increases in net interest margin. As we have discussed in the past, the primary driver there is the ongoing repricing of the fixed-rate loan book and the HTM securities. With respect to your question about market implied forward interest rates, in our current forecast, we have three Fed rate cuts consistent with market implied forwards, one in June, one in September, and then one in December. Of course, the one in December is not so consequential to our 2025 net interest margin. I think our objectives there, Will, and we're confident we can achieve it. If you look at, for example Slide 9 on the deposit base and you look at the cumulative beta that we've driven through the first quarter of 39% and through the second quarter, we're forecasting five basis point linked quarter decline in deposit costs and a cumulative beta of 35%. Our objective, assuming that we do end up with, and it's a big assumption, June and September rate cuts would be to continue to maintain that cumulative beta in the mid-30s, which would allow us to continue to have that low single digits linked-quarter NIM accretion.

Will Jones, Analyst

Okay, Tom. That's super helpful. So, if I hear you right, really if we adjust for some of those seasonal declines on loan fees, margin really could have looked closer to 3.77%, 3.78%. And then just based on forward rates, you would still expect to see maybe a little bit grinding higher of that margin as we move to the balance of the year?

Tom Owens, Chief Financial Officer

Correct, Will. That's right.

Operator, Operator

Our next question will come from Tim Mitchell from Raymond James. Please go ahead.

Tim Mitchell, Analyst

Good morning, everyone. Thank you for taking questions. I want to start on credit, the NPA ratio and the reserve both were up linked to quarter. The increase in NPAs was modest. But just given the reserve build, is there anything you're seeing that's worth calling out or is that more so just a function of all the uncertainty out in the environment and maybe shifting some of your key factors and see some inputs and such, any color would be great?

Barry Harvey, Chief Credit and Operations Officer

Sure. And this is Barry. As it relates to the ACL and the uptick in coverage, our funded reserve provision was $8.1 million for the quarter and that resulted in, and the net of that, of course, was $5.3 million. That drove up the coverage to the $126 million that we reported. We did see a reduction in the unfunded commitments, and that was probably the biggest part of what drove the release on the liability side. There was really, the quarter was pretty much as we expected. The loan growth of the $152 million that drove some of that provisioning. And then, we also had an uptick in the qualitative portion of our provision. A little bit of that was just the changing in risk ratings and then there was a little bit of that, where we were migrating to some of our own probability defaults, where historically we had used some third-party data or peer data, and we've accumulated enough information to move to our own probability defaults and leverage that, and that drove off the qualitative portion of our provision a little bit. But I think on the whole, the provision kind of came in where we expected it to. Obviously, the funded portion is closer in line to maybe where the market saw it, and then the unfunded release kind of brought us down a little bit below where the consensus of the analysts were.

Tim Mitchell, Analyst

Great. Makes sense. And then on expenses, just given the decline this quarter, could you remind us of any impact, timing impacts from merit or any investments you're undertaking this year just as we think about that low single-digit growth outlook?

Duane Dewey, President and CEO

I'll start and Tom, and Tom can add to it. But as you've heard over an extended period of time here, we've had a pretty intense focus on expenses across the board, in all aspects. I think the first quarter, if you look at a small decline in the first quarter is directly related to salaries, benefits, slower hiring than originally anticipated, commissions, some of the commission categories, mortgage, etc., where production maybe was a little below expectations and so on. Those things all accumulate to lower salary and benefit totals. And then some other contractual things that we do third-party support and so on, we're limited in the first quarter. I think as we look out into the remainder of the year, we have some things planned, where we have announced previously we have a core system conversion that will occur in the first part of 2026. So, there are some related expenses there. There is other just, I would say, normal expense increases across the board, contractual increases and those sorts of things that all then total to a mid-single digits year, and our hope and effort is to control that and maybe beat that number, but that's kind of what we are thinking at this point. Tom or Tom, anything to add?

Tom Chambers, Chief Accounting Officer

This is Tom Chambers. I just think that you have to remember that our merit increases are now coming at the beginning of the third quarter on salaries that previously were over the first quarter, the latter part of the first quarter event. So, we've got some backend expenses during the year that will be triggered that will get us to that right single-digit forecast.

Tim Mitchell, Analyst

Yes. Thanks for the color. Absolutely. If I could sneak one last one in, just on the buybacks, which was nice to see you guys lean into this quarter. Is this a pace kind of that you would expect to continue moving forward? And then just any other thoughts around capital? I know you mentioned potentially expanding in new markets and whatnot and organic growth remains a priority, but just any more color you could give overall would be awesome.

Duane Dewey, President and CEO

Yes, I'll start, and again, Tom can add to it. But as far as the pace, the market will dictate the pace and management discretion. I think loan growth and some other factors contribute to our thought process. We do feel some opportunity to continue that buyback trend and probably would forecast fairly consistent quarter-to-quarter, but we'll see. So, in terms of other deployment of capital, we're focused on strategic growth initiatives in key markets, which we hope generate or continue to generate organic loan growth. We think we have some opportunities in some very high growth markets, Houston, Birmingham, Atlanta, Gulf Coast of Florida and Alabama and so on. So, we've got some hiring plans there that we think can generate some organic growth. And I will say prior to the Liberation tariff announcement date, M&A was very, very much forefront in the industry. And I think Will noted in his earlier question, our CRE adjustment, which we think along with an improved balance sheet etc., put us in a position for some M&A activity post-April 2nd, maybe a little slower, but we'll see how the year evolves and we very much are interested in continuing that thought process. So, those would be some comments relative to capital. Tom?

Tom Owens, Chief Financial Officer

Yes, this is Tom Owens. I want to emphasize that we are very pleased to continue to increase our capital during the quarter with solid loan growth of $152 million and a deployment of $15 million through share repurchase. We achieved about nine basis points of CET1 accretion in the quarter and expect to maintain a similar pace of accretion moving forward. As Duane mentioned, our share repurchase decisions will depend on various factors, including the trajectory of loan growth over the rest of the year. Depending on how that unfolds, we may increase our share repurchase activities if loan growth is lower, or scale back if loan growth is stronger. It’s great to be in a position that allows us this flexibility.

Operator, Operator

Our next question will come from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac, Analyst

I want to drill back on the loan growth conversation. And I guess my curiosity is, if we're meeting the loan growth goal for this year, does that enable you to be incredibly sort of picky and selective on the loans you do? And does that therefore give you flexibility on credit costs and also provide more flexibility on deposits as well?

Barry Harvey, Chief Credit and Operations Officer

This is Barry. I'll discuss the loan segment while Tom will cover the deposits. We approach each day with a focus on being selective about the deals we take on, considering both credit and structure. What's changed a bit is that some deals, depending on the industry, have become more competitive in terms of pricing, such as origination fees and interest rates. This varies for us, as some deals remain attractive like they were at the beginning of 2023 and early 2024, with appealing fees and rates. Conversely, we've noticed some deals becoming highly competitive, especially within funded debt. We see many more of our peers actively pursuing similar deals compared to a few years ago. Nonetheless, we maintain selectivity regarding credit quality and aim for appropriate structures. While we may need to adjust our pricing, the credit structure remains our top priority to ensure we can proceed selectively. Currently, there are still opportunities and deal flows, but competition is higher now than a year ago. Tom?

Tom Owens, Chief Financial Officer

Chris, this is Tom. On your question about on the deposit side and flexibility there, I'd start by making the point we've been pleased with our ability to drive personal and commercial deposit balances of $394 million or 3.2% year-on-year. As you know, Chris, we have been really in a mode of optimizing, rationalizing our deposit costs. We're in an environment that remains competitive from a promotional perspective, and we have really not been leading into that at this point. And so, we have some levers that we can pull here. We have continued to develop our digital capabilities, and we have continued to deepen relationships with depositors that we brought in beginning as early as the first quarter of 2023. And so, we feel like we have really good flexibility there. We even made some adjustments to our tactics mid-quarter in the first quarter that have been very encouraging for us. So, we are very confident that we can calibrate on the deposit side cost-effectively to support loan growth opportunities going forward.

Christopher Marinac, Analyst

Great. That's helpful. Thank you both for that. Just a quick follow-up is just about the C&I utilization and does this environment kind of change behavior on C&I, do you think as the next few quarters unfold?

Barry Harvey, Chief Credit and Operations Officer

Barry noted that the quarter was not affected, and utilization remained at 36%, consistent with the previous year's fourth quarter and historical trends. He emphasized that they are monitoring the situation and anticipates a lesser impact from current conditions compared to new projects in the future until more clarity emerges. Barry added that, so far, there has been no change in the utilization of their revolving lines of credit.

Operator, Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Duane Dewey for any closing remarks.

Duane Dewey, President and CEO

Great. Thank you. Thank you again for joining us today. We look forward to catching up again at the end of the second quarter, and hope that everybody has a great week. Thank you.

Operator, Operator

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.