Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's Second 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. [Operator instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark.

Good morning. I would like to remind everyone that a copy of our second quarter earnings release as well as the slide presentation that will be discussed this morning is available on the Investor Relations section of our website at trustmark.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. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission. At this time, I'd like to introduce Jerry Host, President and CEO of Trustmark.

Thank you, Joey and good morning, everyone and thanks for joining us. With us this morning is Duane Dewey, our Chief Operating Officer; Barry Harvey, our Chief Credit Officer; Tom Owens, our Bank Treasurer and Louis Greer, our Chief Financial Officer. I'd like to begin by, first of all, thanking you all for your interest in Trustmark and joining us on the call this morning. We're very pleased with the solid financial performance that we achieved during the second quarter. Our performance reflects the value of our diversified five state franchise through our banking, mortgage insurance and wealth management lines of business. We continued working diligently by focusing on our strategic initiatives and profitable revenue growth and disciplined expense management. Let's take just a minute to review some of the highlights from this quarter, which are shown on slides 3. Loans held for investments increased 121.7 million or 1.4% from the prior quarter and 437.8 million or 5% from the previous year. Revenue, excluding interest and fees on acquired loans, increased 7.6% linked quarter and 5.3% year-over-year to total 155.4 million. The net interest margin, excluding acquired loans, was 3.6% for the second quarter, unchanged from the previous quarter, and a 14 basis point increase from the prior year. Non-interest income totaled 49.6 million in the second quarter, a 19.6% increase from the previous quarter and a 4.7% increase from this time last year. Corn non-interest expense, excluding ORE and intangible amortization, totaled 105 million, an increase of 1.8% from the prior quarter and 2.3% year-over-year. From a credit quality perspective, it continued to remain solid, as non-performing assets declined 5% in the second quarter and 16.7% year-over-year. Net charge-offs represented 0.05% of average loans. At this time, I'd like to ask Barry Harvey if he would provide some color to both loan growth and credit quality. Barry?

Thank you, Jerry. Looking on slide 4, as Jerry indicated, we had loan growth during Q2 of $122 million; year-to-date. we're $281 million. So we're on track with what our guidance has been previously, which is mid-single digit loan growth. We feel good about that thus far in the year. Looking at where the actual growth occurred, one thing I would point out to you is when you look at that, you can see that we grew in secured non-farm, residential properties as well as other real estate secured and most of that growth is just going to be migration down from our construction bucket. Commercial construction actually grew $183 million during the quarter and what you see is the migration of the projects, once they have either – either have a certificate of occupancy or they go to P&R, they're migrating down into those existing categories, but where we are growing is going to be on that commercial construction book and it's going to be in multifamily, industrial warehouse, student housing, senior living, markets are going to be Dallas Fort Worth, Houston, Austin, Atlanta, Jacksonville, Florida. So we're very pleased with the continuation of good solid production coming out of our CRE book, and then we’re continuing to work hard in our other categories, C&I as well as public finance to continue to obtain growth there, we’re putting forth a lot of effort, a lot of work by a lot of people. It's just a very competitive environment that we're in today. Also mention to you, while we're still on slide 4, on the pie chart, you can clearly see, it evidences, we’ve got a well-balanced loan portfolio. The energy book is a modest $138 million. Looking on slide 5, as Jerry mentioned, we have seen a nice decrease and non-performing loans were down 57 basis points at this point. And then non-performing assets is down to around 90 basis points. So as we continue to work off the remaining portion of our ORE book, and we go ahead and -- be able to go ahead and get that non-performing asset level down to where we want it to be. Net charge-offs and provisioning for Q2 were extremely low. Net charge offs was 7 basis points and then the provision was 9 basis points. So we're very pleased with those results. Also as it relates to the ALLL, we believe it remains steady. Obviously, we believe it's adequate at 88 basis points without acquired loans and then with acquired loans of 89 basis points. Jerry?

Great, thank you, Barry. At this time, let's turn to the liability side of the balance sheet and Tom, if you would comment on both deposits and the net interest margin.

Happy to Jerry. So turning the slide 6, deposits totaled 11.6 billion at June 30, an increase of 31.8 million or three-tenths of a percent from the prior quarter, and an increase of 494.2 million or 4.5% from the prior year. Linked quarter average balance growth of 196 million or 1.7% was driven primarily by commercial and personal accounts and we had good balance between the two. Year-over-year, average balance growth of 559 million or 5.1% was also driven primarily by personal and commercial accounts. And there again, we had good balance. Our cost of interest bearing deposits rose 6 basis points from the prior quarter, representing a beta of 37% cycle to date relative to the Fed’s rate hike and non-interest bearing deposits represented 25% of average balances in the second quarter. Looking at revenue on slide 7, net interest income FTE totaled 111 million in the second quarter, which resulted in a net interest margin of 3.64%, a 1 basis point increase from the prior quarter. Excluding acquiring loans, the net interest margin was 3.60%, unchanged from the prior quarter and up 14 basis points from the prior year. And now Duane will provide an update on non-interest income.

Thank you, Tom. Total revenue in the second quarter was 157.4 million, that's a 7.6% increase for the prior quarter and a 3.2% increase from this time last year. Non-interest income totaled 49.6 million for the second quarter, an increase of 8.1 million from the previous quarter and 2.2 million from the prior year. Mortgage banking revenues totaled 10.3 million for the second quarter, a $6.9 million increase from prior quarter and 1.2 million over last year. Insurance revenue continued to remain solid in the second quarter, totaling 11.1 million, a 2% increase from the prior quarter and a 3.3% increase year-over-year. Louis will now cover expenses on slide 8 and capital management on slide 9.

Thank you, Duane. As Jerry mentioned earlier in his comments, core non-interest expenses totaled about 105 million for the second quarter, an increase slightly under 2% from the prior quarter and about 2.3 from this time last year, which was in line with our previous guidance. Salary and benefits did increase approximately $1 million linked quarter due to higher insurance mortgage commissions as a result of continued growth in both of those lines of businesses. Services and fee expenses increased from the previous quarter, primarily due to professional fees and continued investments in new software. I do expect that core expenses to remain stable in the third quarter. However, they could increase depending on commissions related to revenue growth and continued investments in technology. Now starting to slide 9, Trustmark continues to maintain a solid capital position. During the second quarter, Trustmark repurchased approximately 13 million or 398,000 shares of its common stock, bringing our total repurchase year-to-date to 50 million or 1.5 million shares. At June 30, Trustmark had 87 million of remaining authority under its existing stock repurchase program and expires March 31, 2020. Jerry?

Good. Thank you, Louis. We believe the strategic priority is in place to align our activities with our focus, enabling us to continue adding value to customers, communities and shareholders we serve. At this time, we'd be glad to address any questions that you might have.

[Operator Instructions] The first question comes from Brad Milsaps with Sandler O'Neill.

Looks like you guys had a nice quarter. Just maybe want to start with the net interest margin. Tom, could you kind of maybe, you walked through some of the components this quarter, maybe any impacts from loan fees and, you guys have been able to hold the core NIM stable for a couple of quarters, despite, I know you've been worried about it, about contraction, how do you feel about it now with the prospects of the Fed potentially cutting rates next week and beyond?

Sure. So, quite a bit to unpack there. I'll try and keep it brief. Second quarter, really nothing unusual in the way of loan fees or anything else. We have, you've got an extra day in the second quarter, creates a headwind. We had a normal, seasonal uptick in the second quarter versus the first quarter in terms of loan fees and so it's pretty clean quarter, pretty comparable to the year ago quarter. With respect to our projection for margin or outlook on interest rates, our current forecast, as you know, we use market implied forwards. Marketing platforms basically have the Fed cutting 25 next week, another 25 in September, and call it a 50% chance of a third cut in December. So that is what's in our forecast, we would anticipate some margin compression as a result of that, probably, say 4 to 5 [ph] basis points linked quarter compression in core net interest margin, probably for the third quarter. Assuming that that's what comes to pass that the Fed is consistent with market implied forwards. Now that being said, you look at first half, we put up a good first half, 360 for the first half. And so even with the anticipated margin compression here in the second half, if the Fed is consistent with market implied forwards, 4 to 5 basis points of pressure linked quarter in the third quarter and then maybe a little bit more in the fourth quarter. So maybe in the second half, we get into the low-350s. I think for the full year ‘19, we're going to be in the mid-350s. So that's consistent. When you think about the guidance that we gave coming into the year, in terms of year-over-year increase in core net interest income, we said 2% to 4%, call it a midpoint of 3%. When you look at the way the margin is held up, even with the anticipated pressure going forward, and when you look at the growth in earning assets that we've achieved, I think that that guidance is still reasonable, call it, a midpoint of 3% year-over-year lift in core net interest income.

And then maybe just to follow up on capital and maybe your appetite for M&A. Jerry or Louis, you did buy back some stock this quarter, maybe less than the previous quarter. Just curious, your appetite for buybacks. And then, in terms of M&A, kind of what size deal would you guys consider at this point, if in fact, you are interested in continuing to look for acquisitions.

This is Jerry and I'll take the question. Capital is viewed holistically in terms of the options that we see in front of us for, call it, buyback, the organic growth pace and CRE loan growth slowed just a little bit in the second quarter, and that's a function of our discipline relative to credit quality and loan structures. We're seeing a few banks that are looking at easing some of those disciplines, we’re holding to our disciplines from a credit standpoint, it has gotten very competitive from a pricing standpoint. So we look at capital use relative to the availability of finding new loans and growing the balance sheet there. Also look at where we are from a buyback perspective, we have a very disciplined approach that we look at on a weekly basis and we're holding to our disciplines there in terms of the range of pricing, which we would buy back and there are a lot of factors that go into account. Dividend remains steady. And we're at right about 40% payout there, which we think is an appropriate level. And that leaves the last part of capital utilization and that is acquisition. And yes, we have very much an interest in continuing to grow, expand our footprint, both in continuous markets and in existing markets. But what we're looking for are franchises that fit within our disciplines or can be shaped in that manner, but have good solid core customer base behind it. We see an awful lot of opportunities out there for organizations that were put together within the last five to seven years that are ready to sell and we feel like we can replicate those on our own. So no real need to buy them. So [indiscernible] as you know, it has been a while. Last deal we did was in Huntsville, relatively small deal. But it was in what we felt like was a really good market with good growth opportunities. So that's going to be our approach. Deal size, we feel like we can handle anything from 200 million to 5 billion in size. We've got good structure, good governance. Some of the money that we've spent over the last several years, Louis mentioned outside fee services, a lot of that is going towards improving risk management practices that include everything from, as you said, software enhancements to improving our compliance and other functions. So we're very interested in finding the right franchises, we are well aware of how investors in the market looks at pricing on these deals and we're going to just like we do on the credit side, and on our discipline and buyback, we’re going to do the same thing from an acquisition standpoint.

The next question comes from Jennifer Demba with SunTrust.

Question is on a credit quality, yours has remained excellent, but we have seen other bank with credit costs bouncing off the bottom. I was just wondering if you're seeing any areas that are out there or within your own portfolio that are causing you pause right now that you’re avoiding altogether?

And Jennifer, this is Barry. We're constantly looking at, I guess, one of our main focus is going to be our own concentration, how much we have in various categories. I think we do have a very diverse overall book within the CRE category. We’re focused very much on the different types of products we have and de-emphasizing some where appropriate, emphasizing others where we'd like to see some growth to balance ourselves out. We're also very much focused on which markets are performing well, which ones are projected to perform well, which ones have or we think will be frothy in the future and trying to make sure of what we're doing in those markets that it's stabilized projects, credit tenants, performing well. And so our main focus has been on concentrations, and making sure that we're not, whether it be on a product type within CRE, or within the markets themselves, making sure that if we're getting less comfortable with either one that we begin to do less of it. There's not really anything we see in any of our trends at this point that concern us. We're very active in surveying our lenders quarterly on every one of our CRE projects to make sure we understand where they are in the process, where the ORE is in terms of completion status, versus where it was pro forma, where we approved it, how things are going, what rents are being achieved, things of that nature to make sure the projects are going along as planned. And when they're not, we're following up to understand why and if they're going to be able to be corrected in a timely fashion. So I think we're doing a lot of things to try to stay on top of what's going on. But I think our main focus is inward, as it relates to concentrations, either by category or by marketing.

The next question comes from Catherine Mealor with KBW.

Tom, I wondered if we could dig into the margin just a little bit more as a follow up to Brad's question and maybe starting first on the loan side, your legacy loan yields were up this quarter, I think about 5 basis points. So maybe first, as a start, can you talk about where on average your new and renewed loan yields were coming on from your strong growth this quarter versus that kind of 495 or 498 level that the portfolio is yielding today? And then within that, how much -- just remind us how much of your loan book is variable rate type, either LIBOR or prime and how we should think about that repricing upon a Fed cut.

Sure, Catherine. This is Tom. So I guess I’d start with, there's a lot to consider here, right? The Fed is 180, the market’s reaction, the flattening of the yield curve, we have to think about, as I said earlier, whether the Fed is consistent with those market implied forwards or not. So there's a lot to think about. I would say, with respect to, you think just about the impact of the flattening yield curve. And so that spread, whereas over the last couple of years, we're getting a pretty consistent level of accretion or lift to the weighted average coupon on the loan portfolio, from new business coming on, that's really come down a lot. Now, the linked quarter increase in loan yield of 5 basis points versus the linked quarter increase in interest bearing deposit cost of 6 basis points. As I've said in the past, Trustmark has gotten a remarkable consistency over time, over an extended period of time. That spread has remained in the neighborhood of 400 basis points. Now, of course, if the Fed cuts next week, if they follow through in September, when you think about the relationship between the asset side driven by the loans and the deposit side, of course, you're going to get pressure on your core net interest margin, we have about 4.7 billion of floating rate loans when indexed to LIBOR and prime. When you look at the drivers of our increase in deposit costs, as it relates to interest bearing non-maturity deposits, that's -- maybe that's more like 3.1 billion, something like that, that you would consider I'll call it really high beta deposits. And so you do the math on that. And what you find is you've got 3 to 4 basis points there of compression in the short end. And that's why, I gave you the guidance earlier of 4 to 5 basis points linked quarter compression in core net interest margin, that's the primary driver. Now what happens then longer term is the time deposit book gradually reprices as well. So, I would anticipate, as you look further out, you're looking at less compression going forward, as a result -- if the market implied forwards are right, which is basically 400 basis points of cuts, right, 2.5, let's call it by year and this year, and maybe 100% chance they've done the third cut in March, and then maybe another one by September. So, the longer that stretches out, the more it mitigates the compression on your core net interest margin. And so, I think it would be a mistake to take one quarter’s linked quarter guidance of 4 to 5 basis points and extrapolate that forward for the whole 100 basis points, right, because there's other dynamics to the balance sheet. So we should stabilize. And I guess I'll just stop there and see if that's helpful, or if you have any follow up questions?

No, I think that was really helpful. I think what -- it seems like you're saying is that the guidance for the third and fourth quarter is really just indicative of more of the immediate repricing in terms of the floating nature of your loan book and then the part of your deposit base that's directly indexed or has a high beta, but over time that compression will moderate as you're able to lower funding costs. Is that a fair assessment?

That's correct.

[Operator Instructions] The next question comes from Daniel Mannix with Raymond James.

Quick question for you here. First, on the balance sheet optimization. It looks like you guys finally reached that 21% target in the second quarter. How are you looking at reinvesting cash flows going forward here maturing securities, given the current environment and what does that mean for your earning asset growth, as we look into 2020?

Daniel, this is Tom, great question. Thanks for asking it. So, as we had guided previously, second quarter of ’19 and about 21% of average earning assets was about the inflection point where we would discontinue the run off of the securities portfolio. So here we are, right. Second quarter ‘20 has come and gone, we've got to the 21%. In the meantime, as I was just saying earlier, the Fed has thrown an enormous curveball at us here. I would describe the decision as tactical at this point. Now, I will say in our current internal forecast, we're assuming that we continue to run off the portfolio through year end. But I think that's a conservative assumption. Now, securities, as a percentage of average earning assets, when you look at the consistent run off of the securities portfolio, when you look at the reasonably consistent growth we've had in loans, that ratio tends to decline about 1% per quarter. And so if we do continue to run off through year end, that would put us at about 19% of average earning assets in the fourth quarter. That is about where our self-defined pure median was, as of the first quarter, just as a reference point. So I would describe it as we're in a zone now, where it is tactical. And it is quite possible that here in the second half, we will begin to reinvest, it's also possible that we continue to run off through year end. I don't really see it going beyond that, but it's very much a function, as you would imagine, of our outlook on interest rates. I think all of us in the industry, all of us in the market are looking for -- looking to next Wednesday, what action does the Fed take and what kind of messaging do they give us and that will help inform the market’s view and help inform our view. So that's a lever that we're -- we got our hand on and it's just going to be a tactical decision.

My other question, I wanted to turn to fee income, really strong quarter on the mortgage line. So how sustainable is that number? I understand the seasonality here, but just want to get more color on how much of that was due to the higher margin business on the retail side, shifting your mortgage platform to be more retail versus wholesale. And then just kind of a generic understanding of volumes and how your gain on sale margins are looking so far here in 3Q?

Yes, this is Duane Dewey. The mortgage business, as you can tell, had a very solid second quarter. Volumes, production volumes were very strong across and as you noted, very retail oriented, about 70, 70-ish percent retail. We expect that to continue into the third quarter. The volumes remains strong into the third quarter, probably at or above where we were for the second quarter. And in terms of gain on sale, volume helps that. We had increased volume and then also we had better margins. And we see those continuing in to the third quarter as well. So all in all, have good feelings about the mortgage business moving into the second half of the year. Of course, as you note, there is some seasonality and third quarter is a really good quarter for us. So all positive on that front.

Yeah. And I think, Duane, the only thing I'd add is the unknown is the volatility in the mortgage servicing rights. We have been hedging that asset now for, in excess of 20 years. And it has helped us to take some of the fluctuation in volatility out of the overall mortgage earning stream. Overall, it's been very positive for us. But like we experienced in the first quarter, we had a significant loss in the hedge. And here in the second quarter, it was just neutral. So that's the one big element that we can't control. But overall, we've built out the mortgage platform in all five states and continue to feel good about that business overall, and feel like we have better control and opportunities because it is retail to do other business with the customers, as we make them their mortgage loan.

This concludes our question-and-answer session. I would like to turn the conference over to Mr. Jerry Host for any closing remarks.

Thank you, operator and thank you all for joining us today. I hope you can see that we have a well-seasoned management team, a balanced approach to running the company long term. With Duane Dewey focused on generating new revenues from all of our lines of business, Louis controlling the expenses as he does -- as he's done all along, Barry and his role in controlling -- in helping us to grow loans and manage credit overall and Tom and what he does in matching deposits against that growth and then managing the net interest margins. We commit to stay focused and disciplined in our approach to how we run the company. We appreciate your interest in Trustmark and we look forward to reporting to you again on our third quarter results in late October. Thank you all and have a great day.

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