Q2 2020 Trustmark Corp Earnings Call
So try your question. Please press Star then too.
A reminder, this call is being recorded.
So my pleasure introduce Mr., Joey Rein director Investor Relations or trust.
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The Securities Litigation reform.
[music] substrate.
Joining me this morning are Duane.
As Chief operating officer.
No one square, our CFO, Barry Harvey, our Chief Credit Officer, and talk about once our bank treasure.
During the second quarter, we remain focused on ensuring the safety of our customers.
[music] supporting our local communities.
We continue serving customers both remotely.
Ranch and actively promoting digital touch points and funding our ATM.
Networks, as well as digital and mobile banking applications.
We continue to offer customers flexibility by providing waivers of certain fees and charges.
Thing extension apparel and forbearance as appropriate.
And Paul one thing office papers and repossessions.
Maybe just be a paycheck protection program, we provided over 9700 loans totaling $970 million to local businesses.
I'm, especially proud Barr associates spending a credible medication they show working tirelessly <unk>.
The implement this program and help small businesses secure much needed funding.
[music] following best practices for the health and safety Barr Associates.
Oh sure gift insane.
Required temperature check and face masks and common areas.
Approximately 45% of our son should continue to work remotely well some larger departments are working on rotating schedules.
We eliminate vendor and public access to our corporate buildings.
And extended our employee travel <unk>.
Additional actions are detailed on page three of our investor presentation.
Moving to page four.
Let's review some highlights from the sport.
Our results reflect the value <unk> diversified financial services business as a strong performance in all be income businesses more than offset interest rate headwinds.
Non interest income increased 6.5% [noise].
Linked quarter, driven by strong mortgage performance.
Oh vision and expense for credit losses.
44.4 million in the second quarter due to macroeconomic uncertainties related to the Cobiz 19 pandemic.
PPP loans totaled 970 billion at June Thirtyth, pointing 20.
For deferred fees and call.
Almost $30 million.
[noise] loans held for investment excluding <unk> be loans increased 92 million or 1% from the prior quarter, and 450 million or 6% year over year.
Oh pretax pre provision net income totaled 62.1 million up 9.8% linked quarter and 21.1% year over year.
We maintained disciplined expense management as core non interest expense.
Clumping Cobiz 19 related costs.
Hundred 11 billion in the second quarter [noise].
Less than one per cent per quarter.
Credit quality remains solid as nonperforming assets declined 12.3% linked quarter.
Reflecting declines in both nonaccrual loans and other real estate.
We maintained strong capital levels would you comment I would.
What do you tier one capital ratio of 11.42% and a total risk based capital of 13%.
The board of directors declared a quarterly cash dividend of 23 cents per share payable September 15th to shareholders of record on September 1st.
At this time I'd like to ask Barry to provide some additional detail.
PPP loans loan growth.
<unk> Wally Barry. Thank you Gerry I'll turn the page Bob you can see the bike has continued to actively participate and then I checked protection program. It has been able to successfully assess does look at number one local management since I've been negatively impacted by the cold chain pandemic [laughter].
[noise] RP loans totaled $940 million as of June Thirtyth, that's net of the deferred loan fees and cost of $30 million Jerry Brown watermelon through the program. We originated 90 750 loans totaling 991.
<unk> dollars worth about subs.
Most of our people they volumes have been ended up 350000, and less category, what our average size being roughly a $100000. We look forward to processing, our wallboard us forgiveness request as we began to take.
Application for forgiveness, hopefully sometime later next part.
Turning to page six.
[noise] loans held for investment excluding <unk> totaled $9.7 billion as of June Thirtyth, that's up $93 million or 1% like order growth was driven by fundings in our commercial construction loans, they bought more levels remain well.
Diversified Oh, my type and geography.
Looking forward to page seven.
Trustmarks CRM portfolio was approximately two thirds existing.
Projects and one third construction land development.
Oh, the construction land development book, 81% is construction.
The banks owner occupied portfolio, that's a nice mix, but twain well, let's take types as one of those industries.
Looking on over to page eight.
The bites commercial portfolio is well diversified across industry segments. Typically these loans are well secure governed by formulaic borrowing bases there coveted chemtec, both the income statement and the balance sheet.
On page nine.
You can say, we have a minimum exposure to both restaurants and energy.
Trustmark has never been in the high receiving <unk> lending business Carla we had one customer were $3 million imbalances.
If I could always underwritten both in some tail on the retail CRT bonds in a conservative manner.
Oh recently, we surveyed our material borrowers that around the at risk categories, and so far have largely fail then performing better than we anticipated.
Looking at page 10, Trustmark continues to offer.
Even deferrals for all product types.
As requested by customers.
We've been extremely successful in converting request for all you're not deferrals to interest only.
Those pay an odd to pearls and we are that are required to be made I've been elevens, it's 90 days.
That's an opportunity to continue to.
And our information, what's the ball worse lucky because all that shorter duration.
This point the ball words requesting a second round the payment concessions have not materialized at the level, we anticipated, which we're very encouraged Bob.
Do you lost concessions are on track to be roughly half of what we saw one gene.
Looking at page 11, we continued to post positive asset quality metrics nonperforming loans decreased 5.7% from the prior quarter and 5.5% year over year other real estate declined 26% from the previous quarter and 42%.
For the same quarter previous year.
Oh, Hi July Thirtyth, our allowance for loan losses represented 1.33%.
As long as held for investment.
I'll reserve increases reflect the deterioration in the macroeconomic factors, resulting I'm, probably not paying pandemic Jerry.
Thank you very now if we turn to the liabilities on the balance sheet like to ask Tom to comment on a on deposits and the net interest margin.
Thanks Terry.
Turning to page 12 deposits totaled 13.5 billion at June Thirtyth.
Up 1.9 billion from the prior quarter, primarily reflecting additional customer liquidity associated BPP loan program and government stimulus payments.
Hi segment growth was comprised of 48% in commercial 40% in public funds and 12% in consumer balances.
Our cost of interest bearing deposits declined 34 basis points from the prior quarter totaled 37 basis points as we continued to practically reprice deposit.
In response to the said mid March freight costs.
We continue to maintain a favorable deposit mix as noninterest bearing deposits rose to 28% of deposits at June 30.
63% of deposits in checking accounts.
What did he remains strong with a loan to deposit ratio 78% of June thirtyth.
Reliance on wholesale funding of less than 2% about [noise].
Turning our attention to revenue on page 13.
Net interest income FTD totaled 108 million in the second quarter, representing a linked quarter increase of $947000.
Interest and fees on PPP loans totaled 5 million well 103, knowing what's core which was a decline of 4.1 million from the prior quarter as a reduction of 10.9 billion in core interest income more than offset a decline of 6.8 million in interest expense.
Net interest margin in the second quarter of 312 declined by 40 basis points from the first quarter, well coordinated X X P. P. P loans declined by 38 basis points.
Approximately 20 basis points of the decline reflects the impact of lower interest rates, well 18 basis points is due to an increase in other earning asset balances representing excess reserves held with the sad driven primarily by an increase in public fund deposits balances, which is anticipated to be transitory.
And now come Wang will provide an update on noninterest income [noise].
Thank you Tom as shown on page 14 are definitely seems posted strong performance in the second quarter non interest income totaled 69.5 million up 6.5% linked quarter and 40% year over year for the quarter non interest income represented.
39.8% of Trustmarks rabbinate, demonstrating a solid diversified revenue stream.
Our mortgage banking group led the way the quarter and we will discuss in detail in a moment.
Service charges on deposit accounts decreased 3.6 million linked quarter due to lower NSF ODP.
That's reflect the impact of stimulus actions and the slowdown and economic activity due to cope with 19.
Insurance revenues increased 2.8% linked quarter driven by growth in property and casualty Commission.
Also I want to second quarter, we completed the acquisition oil smoke insurance services in Richland, Mississippi.
Our wealth management business was impacted by the equity market decline in the second quarter as revenue was up 11.3% for the quarter, reflecting lower income from pre fee based business.
Turning to page 15, being our mortgage banking group had an outstanding quarter as long production totaled 853.3, nobody had an increase of 86.7% from the prior quarter and 106.1% year over year.
Retail protection represented 70.5% of volume for 601 602 million in the second quarter.
Gain on sale at lunch for the quarter totaled 34.1 billion, which is an increase of 19.7 million on a linked quarter basis.
Overall mortgage banking revenue in the quarter totaled 33.7, Marianne up 6.3 million from the prior quarter, a very nice quarter, our mortgage well, that's one I'll cover non interest expense and capital management.
Thank you the way, let's turn to page 16, you see the detail or.
Right.
For a core.
Core noninterest expenses, which included over 90 related cost of about 2.5 day over 211, they so.
Let me phrase of approximately 850000 dollar bye.
For our war, which was in line in Oh God.
Core Hay group purchasing invited our mortgage.
Since generated about anything more.
853 million in itself.
As the Wayne just mentioned.
Non core expenses total.
Kind of 6 million, reflecting 6.3 million in credit losses for all balance sheet burning exposure, a little about them as well as 1.4 million fire.
Thank you all are you sensing.
Other non core about board.
The third quarter respect core expenses remained fairly flat paintball anyway, congrats on getting in the continuation from.
Volume.
Our core.
Yes, Mark all right well.
Thank you guys noted HM.
Except to say our core our capital ratios remain solid.
Common tier one ratio.
Okay, and total risk based pricing.
As a temporary certain books and that's about the.
The border collector declared a quarterly dividend.
Yeah.
Thanks, Cheryl record so far.
Yes.
Thank you most.
Trust the discussion of our second quarter financials has been helpful. In closing I'd, just like to point out the Trustmark remains focused on providing support advice and solutions to meet our customers.
He needs during these unprecedented circumstances brought about by the coded 19 and dynamic.
Overall, our hundred 31 year history.
We have weathered many storms and we remain well position to continue serving customers in creating long term value.
For our shareholders at this time, we would be glad to address any questions that you might have.
Yes. Thank you.
We'll now begin the question and answer session.
Question, You mean press Star then one in your Touchtone phone.
If you're James Speakerphone, please pick up her hands up before pressing the case.
So anytime your questions about addressing new tied to withdraw please press star then too.
The time, we'll pause momentarily to assemble roster.
And the first question comes from Ram Dick with Piper Sandler.
Hey, good morning, guys. Thanks for taking my question.
Good morning.
So starting off with PDP loans, guys deep pretty good detail on the earnings release.
I was just wondering if you could provide breakdown on what portion of that 5 million in PDP income and from these its what came from a 1% interest rate basically just trying to get idea of how much of that 30 million. These you have remaining.
Well I'll start this is Tom Oh, and so if I understand the question correctly trying to get a feel for the 5 million in interest income associated with the PDP loans in the second quarter again as you indicated it is a it's a 1% coupon, but then we're on.
Also recognizing over the life of the loans the net fees associated with the well. It's so you end up with a higher yield which is how you arrived.
5 million net interest income for the quarter.
Right Okay.
Hi, I guess this just moving towards expenses.
Youre seeing any income impact from the third loan origination cost related to that you learn.
This quarter.
Sorry would you repeat that question I'm quite sure.
Sorry, and moving towards experiences you guys to me like bag 91 impact our personnel expenses from very loan origination costs related DPP production.
Oh, I will be Oh, yeah, I can answer that I.
I would say than we had a lot of.
Oh false associated where would it not capitalizing costs, because we expect most of that would be amortized within the year ended the year. So we have not recognized any internal goals associated Fas 91, where we can go because we expect a recognized almost.
All in.
Core expenses that we paid out to all boats by December.
So it would be a week period expense by deferring Paul you're right now the virtual.
Not only adding probably an immaterial.
Okay, Great. That's that's very helpful. And then just kind of sticking to expenses, obviously, another really strong quarter for mortgage banking nine kind of outline what kind of impact this had.
Non compensation expenses this quarter I want this kind of production had a nice.
Oh, it's certainly it has increased because of those volumes I would say increase a couple million dollars as a result.
Volumes.
Great.
That's very helpful. And then I guess lastly from me what do you guys kind of expect to see I'm, along great right and that's the year, excluding that PDP rental and borrowers grain anymore patches recently with recent headlines about thinking it would be cases are you kind of leveled off I guess.
And this is Barry I'll pick what we've got into previously a gain here of course lot has changed since then but we were looking toward mid single digit loan growth I think we're still on track for that.
Q2 was.
A little bit slower that way that we would have anticipated, but obviously, there's a lot that went out there in Q2 in terms of the pandemic and its impact on our borrowers I do think Thats still a good barometer for US is mid single mid single digit loan growth for them for the full year 2020.
Alright, great excluding anything that's flowing pick and pay right.
Good morning, they've been pay we're really not well learn from ratio standpoint from any measurements standpoint, obviously from loan growth, we're not we're not including the depending on the denominator.
Right exactly. Thank you that's that's very helpful.
Ill from you guys.
Congrats on great, where I'll get back in Q.
Thank you much.
Thank you and the next question comes from Jennifer Demba Suntrust.
Thank you good morning.
Morning, Jeff.
Good question first just curious about pipeline.
The mortgage business for the third quarter and then my second question can you just give us some.
Details about your trends in criticized and classified loans from first quarter second quick [laughter].
Oh.
Morning. This is the wind doing.
Pipeline in mortgage remain solid.
Oh fairly consistent but the second quarter to date, maybe down slightly.
More expecting the third quarter in the baby, 90% range up the second quarter, but we've not seen those client yet at this point in the pipeline remains solid moving living through the quarter.
And Jennifer this is Barry I would mention to you as it relates to criticize loans when we're probably about 70 basis points up in the quarter over quarter and own classifies would probably down 16 basis points. So I would just call that flat little to no no, but and criticized and classified <unk>.
We are actively reviewing RMBS portfolios.
Our course, having brown bought out the pay when deferrals or we're going to rounds to Bob we're pleased with the the level of around two we've seen thus far and of course, it's early relative to what we expected maybe to rolls around through from around one and we're monitoring that round two and all of that.
Well.
To ensure that we're getting the grades correct and people correct at all times looking at that cash flow burn, saying how long. These customers can so Bob before hopefully will return somewhat normal say and 2021. So we are very conscious about making sure those grades are accurate at all times thus far.
But 23 31, and six started a we'd say no change in criticized and classified just pick up.
Would you envision they're being allowed three wonderful.
That's much.
[noise] do envision around three.
Forever.
Oh, okay.
Oh, probably I think there will be around three Jennifer we under the care in fact as you know we have the ability to go all the way to 12 31 as it relates to how to yours are viewed.
Obviously, the way, we view to yards and how we view risk right changes that accrual status and things of that nature are on related will be grading the credits.
Yeah do it through the process of a year and making sure the grades are appropriate accrual status as appropriate what are we getting would've been a relief from the cares back that's right as it relates to what we classify the PDR.
It's important to us well, but the main thing we want to do is work with our customers. So we had around one we limited our customers to typically for 90 days and we did a very good job avoiding as many bowl PNR deferrals as we could about 42% of what we have requested and.
And pick an Apple deferral, if we were able to turn into interest only payments for 90 days, we felt very positive about the fact that they were able to continue to pay interest as opposed to needing to pull deferral and we had route one which you know began in the very end of March were into round. So now we will have round three.
The fall in early winter and all the way through 12th already won our focus is to continue to work with our customers where needed in order to give them an opportunity to kind of reestablished their businesses as we move through this this pandemic and hopefully move toward some form of a vaccine either later this year or sometime.
Next year, but our focus is company to continue to work with our customers to this process.
Thank you.
Thank you Jennifer.
Thank you.
And once again. Please press Star then one if you would like to ask the question.
And the next question comes from Kathryn Miller with KBW.
Thanks, Good morning.
Good morning Kathryn.
I would ask about the margin he kind of strip out the impact of the excess liquidity.
Quarter How're you doing your forecast for the margin on it seems like.
You mean really nice.
Progress and learning deposit costs, but 37, that's you're you're probably I'd say on the low end. So I guess question. One is how much room you have on the funding died and Dan Q on your loan yield you know what kind of down side do you see from layers to today. Thanks.
Good morning, Catherine This is Tom.
So I think there's a few questions there.
I'll start with how much room do we have.
To continue to lower deposit costs, so I would say that with respect to.
Interest bearing non maturity we've done a lot. That's obviously the big driver of the linked quarter decline.
And our deposit costs.
At this point forward most of it would come from the ongoing repricing of the time deposit book.
Which ended at about 90 basis points are so as a weighted average coupon.
At June 30, yet we're projecting that that will continue to go lower say 10 to 15 basis points per quarter over the next four quarters would get you down into the neighborhood of say 40 basis points works, so and so as a result that would take our interest bearing deposit costs.
Say from a 37 basis points it would cost approximately an.
Now, we will still get continue to get some.
Oh continued moderate pressure in our core net interest margin because obviously you have the asset side of the balance sheet continuing to reprice with respect to securities with respect to fixed rate loans I'm going to say that.
Looking for four quarters ahead, we have we're projecting the decline into securities yields go from.
Say to 10 or so we're we're in the second quarter down to about 180.
So got all that up and what you get is.
Earning asset yields on a linked quarter basis over the next four quarters or so assuming that market interest rates don't change.
You'd have earning asset yields declined.
Mid single basis points, you'd have our interest bearing deposit cost.
Declining at low single digit bases points, and so linked quarter you'd be looking at low to mid linked quarter single.
Digit basis point decline, so that would be the run rate.
I'll also said that if you just go ahead.
Hey, guys.
So I'll also say, it's obviously very noisy.
When we're talking about core net interest income core net interest margin, we're excluding the PPP loans, but obviously, we have tremendous excess liquidity on the balance sheet right now and so you have to think about how is that deployed over time, there's not a lot of visibility on that.
But I would say if you book past the excess liquidity for full year, Twomey say compared to full year 19 on a core basis.
You're probably looking at a mid single digit decline.
In the percentage decline in net interest income and the way you get there is high single digit percentage decline in net interest margin.
Excuse me offset by mid single digit percentage increase in average earning assets.
Great. Okay, that's really helpful.
Really helpful. Thank you and then on and thinking about the loan growth.
<unk>.
You know how some of your growth outlook, what I would which I would say is actually pretty good compared to what I've heard from other banks this quarter, but how much of that would you say, it's coming just from the findings of the commercial construction when that you already have versus new pipeline, new originations that you're making today.
Catherine This is Barry I would say virtually all of it oh, they see organic growth, but you'll see for us and definitely in second half the year, it's gonna be based upon fundings Oh projects that are on the books today that are beginning to fund so absent the second quarter, although the $92 million worth of football.
But you saw was based upon fundings on existing projects and those were those were in various categories, whether it be apartments student housing office, and it's going to be Jay group geographically diverse as well, where obviously in Dallas Houston Atlanta being some of the show some of the markets that we had fundings man for Q2.
When we would anticipate that that geographical diversity and as well as steep as far as the category adverse to being the side, but I do expect the growth in second half a year to come from existing projects that are funding.
That's great gives you a bread.
<unk>.
Now in that number or in my question is just on capital.
You have a lot of capital yeah, but I think if you look at your some of your regulatory ratios first is one of your peers that have raised preferred and sub debt over the past quarter now that that you've seen from active capital or anything that the your little bit below peer averages on that.
Just curious how you're thinking about your capital versus your risk today and any thoughts on considering the preferred or sub debt today, there's got to appreciate it. Thanks.
So Catherine this is Tom.
We continue to maintain a rigorous capital stress testing a framework.
Here are trustmark, we continue to proactively a assessed our capital adequacy.
And we're very comfortable our capital levels.
You know.
When you look at total risk based capital for example.
At the high end of our operating target range there so.
We do not currently anticipate issuing any type of.
Sub debt tier two tier two capital.
Okay.
Great. Thank you for all the color.
Thank you.
Catherine.
Thank you and once again please press Star then one if you'd like to ask your question.
All right is there is nothing else to present time. This concludes our question answer session or not just trying to conference back over to Mr., Jerry host for any closing remarks.
Thank you operator, and thank you all for joining us for the second quarter call. We're very pleased with our results.
I want to assure you that our board of directors on our management team.
It's staying very focused on not only the short term impacts Bogot 19.
But also on the longer term and and planning.
For.
For the potential impacts at this continues.
And we look forward to meeting with you again sometime in the October timeframe.
For the third quarter announcement, Thank you again and please stay safe.
Thank you the conference call has now concluded thank you for attending today's presentation.
Now lets Nicole.
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