Trustmark (TRMK) Q2 FY26 earnings call: guidance and Q&A

Trustmark successfully completed the conversion of its 45-year-old core deposit and related systems to state-of-the-art platforms in Q2 FY26. This significant undertaking, which involved all associates, is expected to enhance customer experience and drive future operational efficiencies by allowing for job repositioning and potential headcount reductions in areas previously dedicated to system maintenance. The company also staffed up its retail system with 50-55 new associates for the conversion, with expectations for this number to trend downward over time^⏳, potentially stabilizing at 10-15 permanent additions.

While Q2 FY26 saw solid loan production of $643 million and $456 million in line draws, net loan growth was impacted by $318 million in CRE prepayments and $334 million in payoffs. Excluding a mortgage loan sale and $71 million in substandard credits pushed out, adjusted loan growth was approximately $179 million. Management remains confident in achieving mid-single-digit loan growth for FY26, driven by strong pipelines and steady production, though the pace of unexpected payoffs, particularly from the CRE book, remains a key variable.

Deposits expanded 2.3% linked quarter and 6.3% year-over-year, with the cost of total deposits declining 4 basis points QoQ to 1.59%. The company is actively managing deposit growth in alignment with loan activity, utilizing promotional campaigns. While near-term margin pressure of a couple of basis points is anticipated in Q3 FY26 due to increased deposit costs and pricing competition, management expects this to reverse in Q4 FY26, supported by fixed-rate loan and investment security repricing, and a projected September rate increase.

Trustmark reported a meaningful improvement in credit quality, with nonperforming assets declining 47.3% to 0.39% of loans held for investment. The sale of a $73.8 million portfolio of primarily delinquent mortgage loans contributed to this reduction, driving a $47.1 million decrease in nonperforming loans. Net charge-offs totaled $7.5 million, but excluding the mortgage sale, were $1.2 million, representing 0.03% of average loans. The net provision for credit losses was $6 million, excluding a $9.2 million release related to the mortgage sale.

Management expressed strong optimism regarding economic activity in the Southeastern U.S., particularly in Mississippi, Louisiana, and Alabama. This is attributed to significant investments in data centers, manufacturing (including battery generation, automotive), timber, and shipping. This robust activity is reflected in increased C&I revolver utilization and municipal project funding, suggesting a dynamic and positive economic environment for Trustmark's markets.

With the core conversion behind them, Trustmark is now actively considering M&A options across all size ranges. Management noted increased discussion and interest in the industry, emphasizing a disciplined approach to ensure any transaction adds value. The company continues its disciplined capital deployment strategy, prioritizing organic loan growth, potential market expansion, and M&A, while also executing its share repurchase program.

Following the core conversion, Trustmark is now able to focus more intently on AI efforts. The Chief Information Officer presented a comprehensive plan to the Board, outlining how AI can create future efficiencies across the organization. While it's early to quantify the precise financial impact, management sees tremendous potential for AI to drive gains now that the foundational system transition is complete.