Trustmark Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's 2nd Quarter Earnings Conference Call. At this time, all participants are in listen only mode. Following the presentation this morning, there will be a question and answer session. As a reminder, this call is being recorded. It is now my pleasure to introduce Mr.

Operator

Joey Raine, Director of Corporate Strategy at Trustmark. Go ahead.

Speaker 1

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 mark.com. During the course of our call, management may make forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, And 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 as well as our filings with the Securities and Exchange Commission. At this time, I'd like to I'll introduce Dwayne Dewey, President and CEO of Trustmark.

Speaker 2

Thank you, Joey, and good morning, everyone. Thank you for joining us. With me this morning are Tom Our Chief Financial Officer Barry Harvey, our Chief Credit and Operations Officer and Tom Chambers, our Chief Accounting Officer. Trustmark had a solid second quarter with continued loan and deposit growth, expanding net interest income and growth in our fee income businesses. We reported net income of $45,000,000 or $0.74 per diluted share in the 2nd quarter.

Speaker 2

This level of profitability resulted in a return on average tangible common equity of 15.18 percent And a return on average assets of 0.96%. Let's look at our financial highlights in a little more detail by turning to Slide 3. Loans held for investment increased $117,000,000 or 0.9 percent linked quarter To a total of $12,600,000,000 Deposits during the quarter grew $130,000,000 or 0.9 percent linked quarter To the level of $14,900,000,000 revenue in the second quarter totaled 193 $1,000,000 an increase of 2.4 percent linked quarter. Net interest income increased 1.6% linked quarter while noninterest income grew 4.2% linked quarter. Noninterest income totaled 53 point $6,000,000 in the 2nd quarter and represented 27.7 percent of total revenue.

Speaker 2

Noninterest expense in the 2nd quarter $132,200,000 up 3% compared to the prior quarter. Credit quality remains solid as the allowance for credit losses represented 1.03 percent of loans held for investment and And 301 percent of nonaccrual loans. Net charge offs during the quarter totaled $1,200,000 and represented 4 basis points Nonperforming assets represented 0.6% of total loans as of June 30. We continue to maintain strong capital levels with common equity Tier 1 of 9.87 percent And a total risk based capital ratio of 12.08 percent. The Board declared a quarterly cash The dividend of $0.23 per share payable on September 15 to shareholders of record as of September 1.

Speaker 2

At this time, I'd like to ask Barry Harvey to provide some color on loan growth and credit quality.

Speaker 3

I would like to, Duane. Thank you. Turning to Slide 4, Loans held for investments totaled $12,600,000,000 as of June 30. That's an increase, of $117,000,000 same quarter. Loan growth during Q2 came from CRE, Equipment Finance and our mortgage line businesses.

Speaker 3

We continue to be very disciplined both from a credit And from a pricing standpoint, we do expect continued solid loan growth throughout the remainder of 2023. Our loan portfolio continues to be well diversified based upon both product type as well as geography. Looking to slide 5, Trustmark's CRE portfolio is 93% vertical, With 62% in the existing category and 38% being in the construction land development. Our construction land development portfolio is 82% construction. Trustmark's office portfolio, as you can see, It's very modest at $280,000,000 outstanding, which represents only 2% of our overall loan book.

Speaker 3

The portfolio is comprised of credits with high quality tenants, Low lease turnover, strong occupancy levels and low leverage. The credit metrics on this portfolio remains extremely strong. Turning to slide 6, the bank's commercial loan portfolio is well diversified as you can see Across numerous industry segments with no single category exceeding 13%. Looking to slide 7, our provision for credit losses for loans held for investment Was 8,200,000 during the quarter, which was attributable to a weakening macroeconomic forecast, Funding our provisioning for our loan growth and an increase in the average life within our mortgage company's portfolio. The provision for credit losses for all balance sheet credit exposure was $246,000 for the Q2.

Speaker 3

On June 30, the allowance for loan losses For loans held for investment, the balance was $129,300,000 Looking on to slide 8, we continue to post solid credit quality metrics. The allowance for credit Losses represents the allowance for credit losses represents 1.03% of loans held for investment And 301% of non accruals excluding those loans that are individually analyzed. In the Q2, net charge offs totaled $1,200,000 or 0.04 percent of average loans. Both non accruals, non performing assets remain near historically low levels. Duane?

Speaker 2

Okay. Thank you, Barry. Now turning to the liability side of the balance sheet, I'd like to ask Tom Owens to discuss our deposit

Speaker 4

Thanks, Duane, and good morning, everyone. Looking at deposits on Slide 9, Let me begin by saying we remain pleased with our ability to manage our deposit costs and maintain the strong liquidity And our core deposit base provides amid an exceptionally competitive environment for deposits. Deposits totaled $14,900,000,000 at June 30. That was $130,000,000 increase linked quarter and With promotional CDs up $197,000,000 and brokered CDs up 448,000,000 The increase in time deposits was offset somewhat by declines in other segments, most notably a $216,000,000 decline in public fund balances, primarily attributable to normal seasonality. As of June 30, our promotional time deposit book $887,000,000 with a weighted average rate paid of 4.32% Trade paid of about 5.25 and a weighted average remaining term of about 6 months as of June 30.

Speaker 4

Our cost of interest bearing deposits increased by 43 basis points from the prior quarter to 1.96%. Turning to Slide 10. Trustmark continues to maintain a stable granular and low exposure deposit base. During the Q2, we had an average of about 461,000 personal and non personal deposit accounts, excluding collateralized public fund accounts, With an average balance per account of about $26,000 Average accounts increased by about 4,000 for quarter or at an annualized rate of about 3.2%. As of June 30, 64% of our deposits were insured And 15% were collateralized, meaning that our mix of deposits that are uninsured and uncollateralized was essentially unchanged linked quarter at 22 We maintained substantially secured borrowing capacity, which stood at $5,500,000,000 at June 30, representing 172 percent coverage of uninsured and un collateralized deposits.

Speaker 4

Our 2nd quarter total deposit cost of 1.48 percent represented a linked quarter increase of 35 basis points and a cumulative beta cycle A date of 29%. Our forecast for the remainder of the year is for continued increase in deposit cost, Reaching a rate of about 2.15 percent in the 4th quarter, which would represent a cycle to date beta of 39%. The forecast reflects market implied forward interest rates with the Fed hiking the top of the target range for the Fed funds rate to 5.5 Turning our attention to revenue on Slide 11. Net interest income, STE, increased $2,200,000 linked quarter, totaled $143,300,000 which resulted in a net interest margin of 3.33%, representing a linked quarter decrease of 6 basis points. Drivers of the linked quarter compression Margin included accelerating deposit betas, deposit mix change to interest bearing from noninterest bearing And excess on hand liquidity maintained due to the challenging macroeconomic environment that pervaded particularly in the early part of with substantial asset sensitivity driven by loan portfolio mix with 50% variable rate coupon.

Speaker 4

During the Q2, we maintained the weighted average maturity of the cash flow hedge portfolio by entering into $100,000,000 of Forward starting interest rate swaps, which brought the notional for the portfolio at quarter end to $950,000,000 With a weighted average maturity of 3.1 years and a weighted average received fixed rate of 3.12%. Through implementation of the cash flow hedging program, we've substantially reduced our adverse asset sensitivity to a potential downward shock in interest rates Income for the 2nd quarter totaled $53,600,000

Speaker 1

a

Speaker 4

$2,200,000 linked quarter increase And a $300,000 increase year over year. The linked quarter increase was driven by increases in bank card and other fees of $1,100,000 insurance commissions of $459,000 and service charges on deposit accounts $359,000 For the quarter, noninterest income increased to 27.7 percent of total revenue, Mortgage Banking revenue totaled $6,600,000 in the 2nd quarter. That was a $1,000,000 Decreased linked quarter driven by a $1,600,000 increase in the amortization of the mortgage servicing asset, which more than offset a $100,000 increase in gain on sale and a $500,000 reduction in negative net hedge ineffectiveness. Year over year, mortgage banking declined by $1,500,000 driven primarily by reduced gain on sale. Mortgage loan production totaled $431,000,000 in the 2nd quarter, an increase of 19.5% linked quarter and a decrease of 36.7 percent year over year.

Speaker 4

Retail production remained strong in the 2nd quarter, Representing 81 percent of volume or about $349,000,000 And loans sold in the secondary market represented 77% of production, while loans held on balance sheet represented 23%. Gain on sale margin increased by 4 basis points linked quarter to 1.24 And now I'll ask Tom Chambers to cover noninterest expense and capital management. Thank you, Tom.

Speaker 1

Turning to Slide 15, you'll see a detail of our noninterest expenses broken out between adjusted, other and total. Adjusted non interest expense was $131,600,000 during the 2nd quarter, a linked quarter increase of $4,100,000 or 3.2%, mainly driven by an increase in salary and employee benefits of $1,900,000 as a result of 2nd quarter mortgage commissions and annual merit increases. In addition, services and fees increased $2,800,000 Due to increased professional and consulting fees during the quarter. As noted on Slide 16, Trustmark remains well positioned from a capital As Duane previously mentioned, our capital ratios remain solid with a common equity Tier 1 ratio of 9.87 percent and a total risk based capital ratio of 12.08%. Trustmark did not repurchase any of its common shares during the 2nd quarter, although we have a $50,000,000 authority for the remainder of 2023, under our Board authorized stock repurchase program, we are unlikely to engage in stock repurchase in a meaningful way.

Speaker 1

Our priority for capital deployment continues to be through organic lending. Back to you, Dwayne.

Speaker 2

Okay. Thank you, Tom. Turning to Slide 17, let's review our outlook. Let's first look at the balance sheet. We're expecting loans and deposits to grow mid single digits Just for the year, security balances are expected to decline by high single digits as cash flow runoff of the portfolio is not reinvested, which is, of course, subject to the impact of changes in market interest rates.

Speaker 2

Moving on to the income statement. We're Expecting net interest income to grow mid- to high single digits in 2023 driven by earning asset growth and reflecting a Full year net interest margin in the mid-320s based on the current market implied foreign interest rates. The total provision for credit losses, including unfunded commitments, is dependent upon future loan growth and the macroeconomic forecast. Net charge offs requiring additional reserving are expected to be nominal based on the current economic outlook. From a noninterest income perspective, insurance revenue is expected to increase high single digits full year Bank card fees to increase low single digits, and mortgage banking revenue is expected to stabilize atorabovetheprior year level.

Speaker 2

Noninterest expense is expected to increase mid single digits for the year. This reflects general inflationary pressures, especially on wages, New talent across added across the system and is subject to the impact of commissions in various lines of business. We remain intently focused on our Fit to Grow initiatives as discussed throughout the 2022 year. Our Atlanta based equipment finance division has grown its portfolio to $127,000,000 as of June 30. Implementation of our technology plans continued in the second quarter with the conversion of

Speaker 1

our credit card platform as well as

Speaker 2

the implementation of advancements in our loan underwriting system. During the quarter, we continued to design our sales through service process, which will be fully implemented across the retail branch network throughout 2023 and into early 'twenty four. We believe these actions will enhance Trustmark's performance and build long term value for our shareholders. Finally, we will continue a disciplined approach to capital deployment with a preference for organic loan growth and potential M and A. We will continue to maintain strong capital base with and implement corporate priorities and initiatives.

Speaker 2

With that overview of our Q2 financial results and outlook commentary, we'd like to open the floor to questions.

Operator

We will now begin the question and answer session. Our first question comes from Catherine Mealor of KBW. Go ahead.

Speaker 5

Thanks. Good

Speaker 2

morning. Good morning, Catherine.

Speaker 5

I thought I'd start with the margin, surprising I know, but I wanted to maybe Talk about your updated thoughts on deposit betas. It looks like you lowered your expected full cycle betas just a little bit to 39% from 43% last quarter. I think most companies are increasing it versus decreasing it. So just curious what you're seeing in your markets? Are you seeing kind of a stabilization in deposit activity through the quarter?

Speaker 5

Is there anything else to kind of read through your better guidance? Thanks.

Speaker 4

Good morning, Catherine. This is Tom Owen. Thanks for the question. So you're right. The 39% in the 4th quarter is a lower cumulative beta.

Speaker 4

Couple of thoughts. 1, as we We've discussed on previous calls for a full cycle beta, and now we're looking at A Fed funds rate of 5.5 percent and who knows whether this bet goes higher than that or not. Our thinking hasn't changed so much In terms of what that full cycle beta would be, which would maybe be mid-50s for Interest bearing deposit cost in mid-40s for total deposit cost, it's really about more about the trajectory of it. Our forecast is based on market implied forward interest rates, which as you know, a quarter ago, The market was pricing that the Fed would be easing in the second half of this year. And now we Looking at market implied forwards that basically have the Fed hiking today and then remaining on hold Through the Q1 next year and not beginning to ease until the Q2.

Speaker 4

And so that's really moved the goalposts In terms of where the peak in this interest rate cycle is in terms of the market applied forwards, And it's extended it out. So what I would describe it as, Catherine, is a flatter trajectory towards a Similar destination.

Speaker 5

That makes sense. Okay. Thank you for that. And then maybe just on the deposit composition, you talked a little bit about Promotional CDs you're doing, a little bit of mix shift out of non interest bearing, but that's not actually been, I think, less than Well, we've seen some of your peer banks. Could you just talk about how you're thinking about what that remix looks like as we move to the back half of the year between CDs, non interest bearing and the other?

Speaker 4

Well, one point to make is that on

Speaker 2

the noninterest

Speaker 4

bearing, some of what you've is a transition from DDA to interest bearing accounts on which were Our higher value added accounts, so we're able to charge fees on those accounts. So I'm going to say in round numbers in the second Quarter, for example, we had $150,000,000 or so of that migration. So our That decline linked quarter in noninterest bearing was a little bit more in the second quarter than it was in the first. But when I I think when you adjust for that, We're in the same neighborhood or maybe even a little less. So our thinking there has not really changed.

Speaker 4

We're at about 23% now. We're continuing to project that we're going to bottom out at about 20%.

Speaker 5

Great. Okay. Maybe one last one on the margin and then I'll step out for the questions. Just as I think big picture, you talked a little bit about the swaps that you put on, but In a higher for longer, let's just say we get to Fed550 and we stay there for a while, Just big picture, how do you think about the direction of your margin from here under that scenario? And then separately, In an environment where we start to see the Fed start to cut, also how you feel about the direction of the margin in that scenario?

Speaker 5

It feels like you're so asset sensitive, but it feels like you're taking some of that off the table. So just kind of trying to think how you're thinking about it.

Speaker 4

Yes. There's a lot there,

Speaker 2

But as simple as I can,

Speaker 4

When you get a Fed hike because half of our loan book is floating rate, you get the lift from that. So we get a Fed hike today. That's helpful in the short term, right? What happens though is in a hire for longer, as it becomes The race, essentially, if you think about it, between the ongoing repricing of your fixed rate loan Portfolio and then the onward upward grind in deposit cost over time. So if you look at our guidance for Your NIM, where the trajectory takes you is into the low 3s as a run rate, but then essentially, you do stabilize At that point.

Speaker 4

So the other thing I would say is stabilize somewhat, right? The other thing I would say is to your question about The Fed potentially beginning to ease at some point. Yes, we are asset sensitive, But you probably have some offset there because as everyone on this call knows, deposit betas are not linear, right? And here we are towards the higher end of, in all likelihood, the range of interest rates For this interest rate cycle, so deposit betas have accelerated. And deposit betas seemingly will continue to accelerate with the on hold, say, through the 1st or Q2 of next year as the market implied forward suggests.

Speaker 4

But then what happens is, to my way of thinking anyway, if you get into the onset of a Significant Fed easing cycle, those same deposits that were much higher beta Later in the cycle on our way up, historically, you have the opportunity to reprice those down more quickly As the Fed begins an easing cycle, that tends to be what happens. And so in the same way that ongoing grinding up of deposit costs from that beta compresses your net interest margin in a higher for longer environment. It gives you the opportunity, once the Fed does begin to cut to reprice those down more rapidly. So although we remain asset sensitive, that Out of the gate, in a Fed easing cycle, say, for the first 100 basis points or so, that can Actually be helpful. That can be a tailwind that offsets some of that natural asset sensitivity.

Speaker 5

Great. Okay. That's very helpful just to put it into context. All right. Thank you so much.

Speaker 5

I appreciate it.

Speaker 2

Thank you, Catherine.

Operator

Our next question comes from Kevin Fitzsimons of D. A. Davidson. Go ahead.

Speaker 4

Hey, guys. Good morning.

Speaker 2

Good morning, Kevin.

Speaker 4

Maybe I Appreciate all the color and the outlook looking further out. I guess what I want to drill into a little more is what happened in Q2. It seems like, Tom, that the you guys have guided to more margin pressure and then stabilizing the back half of the year. So that It seems like the margin definitely held up better than you and we expected and I guess it's on the cost of deposits. So What if you can point to what happened, was it a easing of the pricing pressure, the Competition, the mix shift over the course of the quarter, what kind of came in better than expected this quarter for the margin?

Speaker 4

Thanks. So great question, Kevin. Couple of several thoughts to share with you on that. First of all, So the guidance on the full year NIM, to your point about maybe stabilizing in the second half, the guidance for the full year NIM does suggest More decline on a linked quarter basis in the Q3 and Q4, right? That's where the math takes you in terms of ongoing Increase in deposit cost with only one more Fed hike.

Speaker 4

Now having said that, in terms of The fundamentals, what happened in a positive way in the second quarter, a couple of things. One is That through the course of the year, so to characterize it as you posed it, easing of competitive pressures or something like that, I would That is not the case at all. Not the case at all. I mean, it continues to be a very competitive environment for deposits. We see it everywhere we turn.

Speaker 4

I think there's a couple of things, though. One is through this process, we have Continued to experiment with combinations of product, price, promotion. We've continued To leverage our continually improving capabilities in digital delivery and digital promotion, We've had some success there in getting more targeted over time. If you look at our promotional practice Today versus where they were coming into the year in January, they are more targeted. That's given us the opportunity to reduce somewhat the repricing of the back book as we go through this.

Speaker 4

And then the other is, I'm getting all the questions so far this morning. Barry will get some, I'm sure. But on the other side of the balance sheet, as it relates to As we've said on previous calls, we have taken steps to increase The return requirements on the loans that we're making at the margin that has reduced loan growth, right? So It's not just the deposit side. It's the calibration of the relationship between loan growth and deposit growth.

Speaker 4

And because we have dialed that back A bit on the loan growth side, that gives us the opportunity to dial back a little bit less our Promotional and competitive profile on the deposit side.

Speaker 2

So Kevin, this is Duane. I'd just add, if you recall, coming out of 2022, where we experienced, particularly in the second half, virtually 20% loan growth for 2022 Coming into the Q1, that moderated slightly, but was still very significant, dollars 290,000,000 in the Q1. Then now we're seeing and as Tom noted, we're backing off. We're tightening a little bit on our ROE hurdles and that sort of thing, But we're seeing it moderate just a little bit across the system. Therefore, as Tom noted, it allows us a little flexibility on the other side of the balance sheet.

Speaker 4

Got it. And I see the guidance on loan oh, so I'm seeing that now. So You intend for loan growth and deposit growth to really be linked, right, at that mid single digit pace, right? So I take it That's the goal. You probably won't change all that dramatically.

Speaker 4

You're comfortable with where it is now?

Speaker 2

Yes. Yes, we

Speaker 4

are. Okay. And let me get Barry involved since you pointed that out, Tom. So How do you feel I know you're subject to the CECL model, but looking further out, How when you're stressing and when you're sitting down with your customers, what kind of sense are you getting For the potential for problems down the line, meaning commercial real estate maturities over the next few years That are going to see a big increase in rate. I recognize office is not a big part of your portfolio, but just trying to judge The numbers are what they are today, but like what you're concerned about or what you're not concerned about on credit?

Speaker 4

Thanks. Hey, Kevin, this is Barry.

Speaker 3

I guess a few things. One, as far as the maturing process, Our CRE book, the maturing process were about 14% for 2023, 34% for 24%, 32% for 2025%, and then it drops off dramatically there. So our CRE book is predominantly going to be Construction and then Mini Parm financing. And so there is a when we're looking at the various books, We are looking to see as those loans continue to reprice then bearing in mind that all of those construction mini perms Our variable rate across the board, so they are absorbing those higher interest rates and have been all the way along with the rate bumps. We're continuing to look to see as they have to hurdle from a net service standpoint, How they're going to perform given where they were when they were underwritten and the reserves established and the valuations versus The environment they'll need to either go to the permanent market in or possibly sell to a third party.

Speaker 3

So we're continuously evaluating those. We're not seeing a lot of cracks at this point in going through these evaluations and we're feeling very comfortable With our book, primary source of repayment, secondary source of repayment, so we're comfortable with that aspect of it. From a provisioning standpoint, this quarter during the provisioning process, it was we were Driven primarily by 3 factors. 1 was loan growth and where the loan growth came from and the provisioning required there. And then we did have the slight weakening in the macroeconomic forecast.

Speaker 3

That was probably about a third of our provision driver. And then from there, we did have the lengthening out from a LIFO loan in our mortgage book. And since our mortgage book is $2,300,000,000 When it does lengthen out from 21 quarters to 25 quarters in a given quarter, it does require So meaningful provisioning, both we had provisioning both from a quantitative standpoint and we had some provisioning from a qualitative standpoint as well. So clearly, that was the driver of the $8,200,000 provision and how much of that Against a slow from an average life expansion, we'll have to wait and see. And then, from a forecasting perspective, Things have been pretty good from an unemployment standpoint.

Speaker 3

Remember, Southern unemployment is one of the key A loss driver characteristics pretty much in every one of our books. So if we did see a substantial weakening In the Southern Unemployment, then obviously that would drive our provisioning going forward. Thus far, we've seen ever so slight changes And the 4 quarter forecast, we do have a straight line 4 quarter reversion to the main and then from there, the main drives The provisioning as it relates to the Southern unemployment attribute or national unemployment attribute. So, I mean, at this point, we feel comfortable with the guidance we provided on provisioning and at one point, probably before the year started, we thought it might be a little higher than 2022, I think at this point, we don't believe that to be the case. It may be in line or slightly less, but we don't see it being higher And what we had in 2022 based on what we know today.

Speaker 4

Okay. Thanks, Barry. One last one for me. I saw a fellow, one of your Should the bank peers or competitors announced or executed a bond transaction where they Down the bond portfolio by about a third, took an upfront loss, but used it To pay down higher cost borrowings, is that something I know you are already using cash flows to fund loan growth, but is that something that's even on your radar? So Kevin, this is Tom Owens.

Speaker 4

That is not something that we have actively contemplated. We certainly are aware of those type of transactions and the one to which you're referring. And I think every balance sheet is different. Every set of circumstances is different. I can see the merit From an economic standpoint, potentially in doing that type of transaction, but that is not something that we have actively contemplated at this time, no.

Operator

Our next question comes from Joe Yancunis of Raymond James. Go ahead.

Speaker 4

Good morning.

Speaker 2

Good morning, John.

Speaker 4

I appreciate all the color you gave on the margin, but I was hoping to slip in one more. Given your second half outlook in conjunction with some of that deposit beta commentary you provided, When

Speaker 3

do you expect the NIM to kind

Speaker 4

of trough and inflect higher? So Joe, this is Tom Owens. Again, I would not I expect the NIM to traject higher In all likelihood, until the pressure comes off on the deposit side, right? So as I said in my earlier comments, I think the mirror image of the of what we're living through now, right? Let's say we get the Fed hike Let's say the market implied forwards are correct and the Fed is on hold for 6 or 9 months.

Speaker 4

I do think that it also depends on the nature of the Fed ease, right? If we get into a situation where the Fed has overdone it And the economy softens, we wind up in recession and you get the on Let's say mid next year of a meaningful Fed easing cycle, couple of 100 basis points, and it just becomes apparent to the market that's Represents the opportunity to reprice down very quickly. I'll give you the example of March 2020, the pandemic, the Fed, 150 basis points of emergency cuts There, over the course of a couple of weeks, we had, from memory, dollars 1,500,000,000 $1,700,000,000 at that point of higher beta deposits that we were able to reprice down substantially and basically immediately. It just depends on the set of circumstances. It's virtually impossible to answer your question other than to sort of paint examples of Where that could occur, but to me, that would be the opportunity.

Speaker 4

The same thing that's squeezing net interest margin here, This intensely competitive environment for deposit costs that basically the Fed has engineered, Right. By creating competition for bank deposits, the ability for a depositor to pick up A 5% yield on a treasury bill ETF is frictionless as that is in today's world unless and until that pressure I think for the industry, we're going to continue to grind here with higher deposit costs and pressure on net interest margin. It will be the onset of the Using cycle that reduces debt competition for deposits and alleviates some of that pressure and gives us the opportunity to reprice down our deposit book. Understood and I appreciate the thorough Kind of switching over, so in the release and in some of your commentary, you laid out your 50,000,000 including your sales through service process. Can you provide some more detail on that project and Maybe unpack some

Speaker 3

of the potential financial impacts of some

Speaker 4

of these initiatives that you're implementing?

Speaker 2

I'll take a stab at that quickly. I mean, basically, that is a comprehensive Bank wide, particularly in the retail bank organization, customer focused Sales program that is currently underway and will be implemented over the next several months. It is a sales and service focused approach. It's using an external source For that training, and we're very excited about it. It's very positive.

Speaker 2

Through the Fit to Grow process, We implemented some changes in structure and relationship banker arrangements and things like that out in the retail system, And this is designed to really take advantage of that, but I'd stop short of making a real financial uptick Projection on what that might generate, we think in the long run, we already have an extremely strong customer base. We have a very A loyal customer base, we have a very solid core deposit base, etcetera, throughout the system. And we believe this will help us further capitalize on that strength.

Speaker 4

Okay. I appreciate it. And then if I could just follow-up with one last question here. So with Capital levels continuing to build and the buyback in place, what will it take for you to have a stronger appetite for share repurchases?

Speaker 2

I'm sorry, I missed part of that question. Could you repeat that?

Speaker 4

Sorry. So with capital levels continuing to build And you have the buyback in place. What will it take for you to have a stronger appetite for share repurchases? So this is Tom Owens. I would say, as we've said on prior calls, at the moment, Our focus with respect to deployment of capital is supporting loan growth.

Speaker 4

And we accreted capital We expect for that to continue to be the case. So we think our capital levels will build. We have not been actively Engage in buyback, as you said. You could absolutely see a scenario Sort of building on the discussion about NIM, right? You can see a scenario Where the economy softens, where loan demand declined substantially, Where bank stock prices become depressed, I mean, at the same time, if in the meantime, we have been accreting capital, Right.

Speaker 4

As we've always said, that's our preferred form of deployment is organic lending. But as we've demonstrated in the past, To deploy the retained earnings that we're accumulating, right, we certainly don't hesitate to deploy Via share repurchase. So you can envision a scenario. It's hard for me to envision a scenario frankly here in the second half of this year where that would be the case. But I think depending on how 'twenty four plays out, you can certainly imagine a scenario getting into mid- to late 'twenty four where that could become the case.

Speaker 4

All right. Well, thank you for taking my questions. Appreciate it.

Speaker 1

Thank you.

Operator

The next question comes from Graham Dyck of Piper Sandler. Please go ahead.

Speaker 6

Hey, good morning, guys.

Speaker 2

Hey, good morning, Graham.

Speaker 6

So most of my questions have been answered. I just had a couple follow ups. I guess starting with the loan yield, you mentioned that part of the reason that the growth guide is coming down is because you're asking for a little more on The rate side of things with your borrowers and then I guess obviously the other part of that is generally slower economic growth in your all markets in the country as a whole. But I just wanted to get Maybe some specifics on like what the differences you're asking for from clients. I mean, is it like a 50 basis points difference versus the last time you updated this guidance?

Speaker 6

Or is it Something else, are you starting to include deposit relationships into the actual, I guess, underwriting criteria for loans? Any color you can give there would be helpful.

Speaker 3

Graham, this is Barry and I'll start. As it relates to the deals flowing in, I think most of our growth and I'll speak just to that. Most of our growth and production opportunity It's coming through the still coming through the CRE side. We're very actively looking at other opportunities within C and I, public finance, Consumer lending, but as far as actual strong production of viable deals that can get on the books, We're still seeing most of that production coming from CRE and within that category, we're very, very mindful depending on the type of As it is, depending on the type of project it is, what the market is willing and able to bear at this point. So from a structure standpoint And from a pricing standpoint, we are able to continue to improve our position from a pricing standpoint Specifically, whereas we might use to be able to achieve a 50 basis point origination fee on some of our CRE projects and it is project dependent And category dependent, but we're seeing 75 basis points, being available to us routinely.

Speaker 3

Same is going to be true with a Little higher spread on 1 month's hope for we're able to see a little better consistent higher spread available to us as well. From the standpoint of how we approach the deposit side of the equation, Our folks are laser focused on asking for deposits, they have been, continuing to ask for deposits, not just when we have an ask from the customer, but Definitely when we have an ask and we're opening up our balance sheet, we are requiring deposits from the customer. Now as a condition of the loan closing, sometimes it may be, most of the time it's not, but we are getting those deposits. We are Following up to make sure we get them and our borrowers are being very responsive. We may not be the lead bank In every single transaction, but even as the 2nd bank and a 2 bank deal, we are able to get deposits from them and our People are being very successful and very persistent about doing that.

Speaker 3

And so we've been very pleased with the results of what we've seen from that effort.

Speaker 2

Yes. I would add real quick, Graham, on that question. One category Barry did not mention that we're very excited about, I'm pleased with his and as you know, in December of 2022, we announced an equipment finance division that's based in Atlanta, we're very excited about that group. We have a very high quality team there. And as noted in the release, We're up to about $127,000,000 outstanding in that group.

Speaker 2

We're expecting continued growth there, and we're doing that In a very measured way that is mid to large ticket equipment finance business with high quality borrowers, lessors That we think we can continue to grow significantly. And as you know, that's part of the C and I book and prevents or provides Some diversification to the overall portfolio. So that would be an added note. And that'd be one category maybe Where the ROEs are in the mid range, they're not the top end as Barry noted in some of the CRE projects, but again, very high quality and we're very Excited about where that business we think can head over time.

Speaker 6

Okay, that's helpful. And I guess just following up on that equipment division. Did you guys when you initially opened that, did you lay out a path to the level or to the proportion of total loans you would like that to get

Speaker 2

Yes, we did. We're nowhere near it. So we have ways to grow. I think In that business, I think probably is an overall portfolio from an overall portfolio perspective. You would never see us much over the 10% range, probably significantly below that for the Future here for the next several years.

Speaker 3

Do bear in mind, this is typically going to be 5 to 7 year paper that is Fully amortizing, so there will be it will take a while to get to the level that Duane referenced because there will be amortization That will be they'll need to have to overcome that headwind as well. So we've got plenty of runway in front of us To grow at a very nice pace with high quality credits before we have any concerns about Concentrations or things of that nature.

Speaker 6

Okay. That's helpful. And I guess just I wanted to hit on expenses really quickly. I know you guys have done a lot On this front over the last couple of years and trimming down and as part of the Fit to Grow initiative. But I just wanted to get any color from you guys on areas that you're looking at that you You can improve upon or make more efficient and then conversely other areas where you see opportunities to invest?

Speaker 2

So we as we talk about in the Fit to Grow discussion, We have invested over the last several years and particularly in 2022, 2023 in technology across the system, Both the core loan system and our core soup to nuts loan processing system, we expect Significant efficiencies as those things as the marketplace gets comfortable with those systems and As we reduce any kind of headwind, the implementation of a new system creates. And so we think Efficiency can be gained there. We have invested significantly in our digital applications and digital account acquisition and digital products and services Across the system, we think that over time will also generate some efficiencies. In some of these projects, 3rd party services are part of the equation. We expect that to decline over time here especially into the 2024 time period.

Speaker 2

So those are some areas. I would note in some of the expense guidance, Like mentioning equipment finance, loan production personnel throughout our system, we've been taking advantage of every opportunity to add skill sets Into our production side of the company, we're very excited about that as we talk about equipment finance as well as some commercial and corporate CRE areas, etcetera. So we think all of those things ultimately contribute to better revenue growth. And we could see into 2024 some maybe lightening up some of those third party spends, etcetera, across the system.

Speaker 6

Okay. That's very helpful. Thank you,

Speaker 4

guys. Thank

Operator

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

Speaker 2

Well, thank you again for joining us today for today's Q2 conference call. We look forward to being back together at the end of the Q3 And appreciate the questions and look forward to continuing discussions. Thank you, and have a great day.

Operator

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

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Earnings Conference Call
Trustmark Q2 2023
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