Q2 2021 Trustmark Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's second quarter earnings.
Earnings Conference call at this time, all participants are in a listen only mode. Following the presentation. This morning, there will be a question and answer session.
To ask a question you May press Star then 1 on a touchtone phone to withdraw your question. Please press Star then 2 as a reminder, this call is being recorded it is now my pleasure.
Introduce Mr. Joey Rein director of Investor Relations at Trustmark.
Good morning.
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 only investor Relations section of our website at Trustmark.
Tom.
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 want 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 Duane Dewey President and CEO of Trustmark Corporation.
Thank you Joey and good morning, everyone. Thank you for joining US with me. This morning are Tom Owens, our Chief Financial Officer.
Officer, Barry Harvey, our Chief credit and operations Officer, and Tom Chambers, Our Chief Accounting Officer.
From the second quarter of 2021 Trustmark is pleased to report net income of $48 million or 76 cents per share will review the second quarter financial highlights starting on slide.
Free.
Loans held for investment increased to $169.2 million per 1.7% from the prior quarter and $493.1 million or 5.1% year over year.
During the quarter Trustmark sold $354.2.
$2 million in P. P. P loans that were originated in 2021 that accelerated the recognition of unamortized P. P. P loan origination fees of approximately $18.6 million.
Pre provision net revenue totaled $57.2 million from the second.
Quarter of 38, 2% increase linked quarter.
Net interest income increased $17.2 million from the prior quarter and non interest income totaled $56.4 million at June 30th.
Adjusted non interest expense.
Totaled a.
$116.3 million in the second quarter, a 3.3 per cent decrease from the prior quarter.
Our efficiency ratio improved to 64.3 per cent for the quarter credit quality remained solid as nonperforming assets declined 17, 9% from the prior quarter.
Net charge offs totaled 1.2 million reported.
We maintained strong capital levels with common equity tier 1 capital of 11, 8% and a total risk based capital of $14.1 per cent.
During the second quarter Trustmark repurchased 20.
$28 million or approximately 630000 shares of common stock as of June 30th we maintained 75 billion in remaining authority.
Under our repurchase program that will expire December 30, <unk> of 'twenty 1.
The board of directors.
Turning to 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 Harvey to provide some color on loan growth and credit quality.
I'd be glad to Duane I'm looking on slide 4 our loans held for investment.
<unk> totaled $10.2 billion as of June 30, or an increase of $169 million from the prior quarter and $493 million year over year. The loan growth during the quarter was centered in public finance and mortgages as anticipated our CRE payoffs slightly.
To close our fundings in that book the loan portfolio remains well diversified both by product type as well as geography.
On slide 5 you can see Trustmark CRE portfolio was approximately 65 per cent of existing and 34% 35% construction.
Construction land development.
Our construction land development book is 80% construction or vertical.
<unk> owner occupied portfolio has a good mix between real estate types or categories as well as industries.
Looking onto slide 6.
The bank's commercial loan portfolio was well diversified across.
Ross all industries and with no single category of exceeding 10%.
Typically these loans are well secured and governed by formulated borrowing basis coveted to protect both the income statement and the balance sheet.
On slide 7 we have a minimum exposure as you can see the restaurants and energy.
Trustmark has never been in the high risk C&I lending business and currently we only have 1 customer for roughly $10 million in that category.
The banks portfolios and the highest impacted COVID-19 industries have held up extremely well the bank has always underwritten both hotels and.
CRE in a very conservative manner.
Moving on to slide 8.
We conducted an analysis as we have in the previous quarters of our Covid.
19 portfolio are those that we have seen have either a COVID-19 concession or fit into 1 of the categories.
So it's been highly impacted and we look during the quarter at those.
In specific categories, mainly retail and hotel, but we looked at those that were watch or worse that have received a concession during during the COVID-19 downturn and those credit specifically that we're over a million dollars.
Reach of Assembly, we review roughly $482 million in the balances.
We reviewed 99% of our hotel book and 69% of our restaurant portfolio. As a result of this review we are pleased to indicate that we are at about $4.5 million in downgrades into the criticized.
Sales category, but on the other side, we've got about 14 and a half million that was moved.
From 2 paths from the from the classified or criticized category.
I'm looking on slide 9 our allowance for credit losses decreased $5 million from the previous quarter.
Collaborative calculation included decreases in individual individually analyzed.
<unk>.
And the qualitative changes.
Due to the production and the impact of COVID-19 on our portfolio.
Quantitative portion of the reserve was impacted by improvements.
And the macroeconomic forecast, which resulted in releases of reserves, but we also implemented a.
Probability of default loss given default floors inside of specific portfolios, which actually resulted in provisioning on June 32021, the allowance for credit losses on loans held for investment.
Our reserve at a $104 million.
On slide 10, we continue to post solid credit quality metrics on June 30th our allowance for credit losses represented 537 per cent of nonperforming loans, excluding those that were individually analyzed.
Net charge.
<unk> totaled $1.2 million in the second quarter and recoveries have exceeded charge offs by the same $1.2 million year to date.
Non accruals declined $12 million in the second quarter and $1.5 million from this time last year on June 30th non performing.
Assets had declined $13 million from the prior quarter and $7 million from the previous year.
On slide 11.
We can take a quick look at our PPP program during the second quarter as Duane indicated we sold $354 million of our PPP loans.
Also as noted in 2021 this sales loans accelerated the recognition of unamortized PPP loan origination fees by $18.6 million net of cost on June 30 of 2021, our PPP loans totaled $166 million net of deferred.
<unk> and cost of $2.1 million Duane.
Thank you Barry now turning to the liability side of the balance sheet.
I'd like to ask Tom Owens to discuss our deposit base net interest margin and non interest income.
Thanks, Dwayne and good morning, everyone looking at slide 12.
Loans totaled $14.6 billion at June 30.
$249 million increased linked quarter, and $1.1 billion increase year over year.
Growth during the quarter was driven primarily by public fund balances, while personal and non personal balances were both relatively flat.
So perhaps we're beginning to see long anticipated inflection point, where balances begin to rollover as the economy continues to recover and consumer spending continues to normalize.
Our cost of interest bearing deposits declined 3 basis points from the prior quarter to tell from 19 basis points and we continue.
To maintain a favorable deposit mix with 30% of balances and noninterest bearing.
Turning to slide 13, net interest income FTE totaled $122.4 million in the quarter, resulting in net net interest margin of $3.16, and representing a linked quarter increase of $17.
Okay.
Interest and fees on PPP loans totaled $25.6 million.
Which was an increase of $16.3 million linked quarter and is buried away preferred to the $18.6 million in origination fees.
Which were accelerated by the sale of the PPP loans.
To interest income FTE was $96.8 million.
Which was an increase of $800000 linked quarter.
Driven primarily by ongoing decline in deposit cost, while earning asset growth basically offset ongoing declines in loan and security sales.
Core net interest margin.
<unk> was $2.94, a decline of 5 basis points linked quarter.
Turning to slide 14, noninterest income for the second quarter totaled $56.4 million or.
A $4.2 million linked quarter decrease and a $13.1 million decrease year over year.
Core net linked quarter and year over year decreases are primarily attributable to lower mortgage banking revenue.
For the quarter noninterest income represented 32, 1% of Trustmark revenue continuing to demonstrate a well diversified revenue stream.
Okay.
On.
On slide 15 mortgage banking revenue in the second quarter totaled $17.3 million.
$3 million to $5 million decrease linked quarter, and a $16.4 million decrease year per year.
Mortgage loan production remained strong but declined 3.9% linked quarter and 13.7.
Percent year over year from historically high levels.
For the second quarter retail production remained strong representing 70% of 77% of volume or $571 million.
We've added a trailing quarterly chart to the slide.
Trading gain on sale margin as well as the mix of loans sold versus retained on balance sheet.
You can see the gain on sale margin declined about 20% linked quarter dropping from 391 basis points in the first quarter to 315 basis points in the second quarter.
In origination volume.
Find it up 4% linked quarter dropping from 767 million to $737 million.
We hope. The addition of this chart.
<unk> will help.
The reader to understand the dynamics of the mortgage banking gain on sale.
And now I'll turn it over.
To Tom Chambers, who will cover noninterest expense on slide 16.
I'd be glad to call turning to slide 16, you see the detail of our non interest expenses broken out between adjusted other in total.
Adjusted noninterest expense totaled $116.3 million per second quarter a $3.
$9 million decrease from the prior quarter.
Salaries salaries and employee benefits decreased $1 million linked quarter, principally due to the seasonality of payroll taxes from the prior quarter.
Additionally services fees decreased $715000.
Equipment expense decreased 677.
<unk> thousand dollars on a linked quarter basis.
Turning to slide 17, Trustmark remains well positioned from a capital perspective, with our common equity tier 1 capital ratio of 11, 76%.
Risk based capital ratio of 14, 10% as of June 32021.
In the first 6 months from 2021, we repurchased approximately 775000 common shares totaling $25 million.
At June 30, we had $75 million under our existing stock repurchase plan, which expires on December 31.2021.
At this time I will turn it back over.
Duane will now cover our outlook commentary on slide 18.
Thank you Tom and again this is I do add to our DAC.
Give you some insight into our outlook.
Looking at the balance sheet, we're expecting loans held for investment.
To grow low to mid single digits for the.
A year with potential headwind in the second half of 2021 from accelerated repayment activity in the commercial real estate book.
Our security balances are targeted at 20% of earning assets and growth in deposits is expected to flatten in the second half of the year.
We're expecting.
The net interest margin to remain under pressure from the low interest rate environment and excess balance sheet liquidity. Our core net interest income is expected to stabilize during the second half of the year as core earning asset growth offsets.
<unk> modest of linked quarter compression in core net interest margin.
Based on the current outlook the total provision for credit losses, including unfunded commitments is expected to remain in line with the second quarter results for the remainder of the year.
Net charge offs are expected to be muted for the remainder of 'twenty 1 based upon the current economic outlook and the overall portfolio.
Yeah.
Non interest income category, we expect service charges and bank card fees to rebound modestly from depressed levels as the economy emerges from the Covid crisis.
Mortgage banking is expected to continue trending lower and production entered a lower gain on.
Sales margin.
Wealth management and insurance are both expected to grow by mid single digits for the year.
For expenses, our adjusted non interest expense is expected to increase by low single digits for the year subject to the impact of commissions in mortgage insurance and.
Wealth management businesses.
We will continue to work on initiatives like the voluntary early retirement program and market off for opportunities to improve the efficiencies and workflow.
We will also continue our disciplined approach to capital deployment with a preference for organic loan growth.
Potential M&A and opportunistic share repurchase we will continue to maintain a strong capital position to implement corporate priorities and initiatives.
With that I I Trust. This second quarter discussion has been helpful. In the.
The financial results and now.
Commentary has been insightful at this time I'd like to open the floor for questions.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Anytime you question that's been.
<unk> addressed and you would like to touch on your question. Please.
Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
Okay.
Our first question will come from Graham <expletive> with Piper Sandler. Please go ahead.
Hey, good morning, everybody.
Hi, good morning.
I see so you just mentioned taking securities to 20 per cent of earning assets from today's levels. I'm. Just wondering I guess, what your plan would be for the remainder of whatever liquidity might be there. After you reach that 20 per cent threshold.
And maybe if you're expecting I guess, a large chunk about to flow out of the bank.
Just kind of trying to get an idea of what the overall balance sheet might look like and in a few quarters.
Graham Good morning. This is Tom Owens. Thank you for the question.
So yes, we do continue to target 20% of earning assets.
Assets from the Securities portfolio.
Came up a little bit short of that in the second quarter.
Our deposit growth in the second quarter was sort of back loaded.
And then as we got towards the end of the second quarter. You know, we had quite a rally in bond market and.
Yeah.
Our investment alternatives, we're less appealing at that point so some of it is tactical.
You should expect us to continue to target at least 20%.
Of earning assets and you know as we've discussed in the past, there's really 2.2 big considerations.
Iterations there 1 as you alluded to is the uncertainty around the effective.
Effective duration of the deposits the deposit growth that we've experienced here.
Over the last 5 quarters or so.
As I said in my prepared comments, we really started to see that.
Starting out with respect to personal and non personal in the second quarter and so if we're at a point here, where we've stabilized and we start to see some attrition that looks more consistent with the back book.
That will increase our confidence in terms of the amount of liquidity.
That flat to deploy.
The second part of that as we've discussed in the past is the desire to maintain a competitive level of asset sensitivity in terms of our interest rate risk profile.
You know.
As of the first quarter, our peer median.
Securities to earning assets.
That we had about 25% I think.
You should expect us to set a stay below that so but that would be the range, 20% to 25%.
It.
Sort of dimension in your question there as you said over the next few quarters or so I would think that will be more towards the lower end of that range.
[laughter].
Okay Awesome that was very helpful.
And I guess, just just trying to securities I know you said that probably have more color on the impact of the voluntary retirement program with Requeue 21 earnings.
I was just wondering if you guys had maybe have any early idea of how many.
People might be planning to participate in that or even just a rough estimate of how it might.
The impact of reduced salaries.
At the point of of its implementation.
Yes. This is Duane now where we're not in a position really to comment on the.
The overall program at this point in time.
Closes here before too long.
And we'll be disclosing the full results at the end of the third quarter.
If you recall, we had a early retirement program in 2020 early 2020, right as Covid was starting to take shape.
And so this.
Graham is in somewhat.
Following.
That is Covid now has started to lessen and.
The.
Markets are improved and other things that have.
Happened during that 18 month period so.
Really don't have a lot more color.
At this point, we'll give you full details at the end of the third quarter.
Okay. That's understandable and then I guess, just just a quick 1 here on expenses I was wondering.
Salaries are lower quarter over quarter, how much of a benefit did you guys see from the lower mortgage related comp versus last quarter.
Or at this.
So we're flipping pages here.
The exact answer to that question is volume declines commissions decline I don't know that.
Tom do you have that.
Mortgage commissions actually.
Order by about $700000 this quarter second quarter versus first.
Because we have a lag that we have a month in arrears payment before.
Third month of the quarter.
We do expect that to trend lower over time its volume is just fine.
It was coming down the last half of the year.
Yeah, I mean, it's a good question and you would expect with decreases in origination volume decrease.
Expense Graham and I think in this case its just a question of timing.
As is the case with a while that makes it the mortgage banking business right.
But as we said is projecting forward lower.
Encourage nation volume certainly would lead to lower commission expense.
Okay Awesome, that's it from me thanks, guys.
Thank you.
Our next question will come from Jennifer Denver with true Securities. Please go ahead.
Okay.
Pardon me, Jennifer your line might be muted.
Hey, This is Brandon can you also Jennifer How're you doing.
I'm, sorry could you say your name again.
Hey, this is Brandon King awkward unit for Tim, but how's everyone doing.
We're doing well good morning.
Good morning.
Yeah could you please talk about what you're seeing in CRE with Paydowns in.
I know you expect there to be continued headwinds going into the second half of the year low could you see that abating somewhat as we get into 'twenty 2.
True.
And Brandon this is Barry.
Glad to address your question.
What we are seeing as when we just after we got past the end of second quarter. We've reassessed of course, what we think the second half of the year will look like and as we move into 2022 that you referenced 1 thing we are seeing within our CRE book, we are seeing.
Some.
Shifting.
Scheduled pay offs.
Either later into this year.
We didn't see from something that we expected to see in Q2, we saw a shift of some of that into a second corner scream at third quarter fourth quarter share.
<unk> saw a meaningful portion of it shift into 2022, so I think from a loan growth perspective, if that's where you're heading is we're probably a little more comfortable thinking about mid single digits for 2021, then we werent the first per year and it's mainly because we're seeing.
Some of those scheduled payoffs getting pushed back.
Into either later this year, which really doesn't have a big impact on 2021, but we are seeing a meaningful amount of pushing into 2022 on the flip side of that we're seeing a higher than anticipated unexpected pay off those that we didn't have.
We also need to come out in 2021, that's occurring at a pretty rapid pace. They do seem to be offsetting each other to an extent. So we're we're we're feeling like from a CRA perspective for the year, we're going to end up being around flat at this pace from what we know today we are pleasantly.
I'm not surprised but encouraged by the fact that we're seeing growth in both our public finance businesses as well as in our mortgage business. Those loans were choosing the portfolio. So we are seeing growth during Q2 from a couple of areas that were previously not had meaningful growth and we do expect from the.
Slide state CRE portion of our book to not be too much of a drag on our <unk>.
Our loan growth for the year. So we are more comfortable now thinking in terms of mid single digit growth as opposed to low single digit growth as we move out through the rest of 2021.
Okay.
From color on that.
And then Paul you mentioned.
Higher activity in your markets.
Basically benefit.
Service and bank card fees is there a certain level that you're targeting once a level of fee income in those areas.
In relation to.
Thanks for the prepayment levels.
Yes.
This is Duane I'll take a stab.
Not really we're not targeting anything specific it's Ben.
A little hard to forecast.
You know again based on deposit.
Deposit conversation.
<unk> liquidity out there in the marketplace. We do expect the day overall economic activity to pick up which means more service charges more.
Activity however.
It's just so hard to forecast how quickly now with no.
Maybe 2.
Mountain wave of Covid related stuff.
We don't really have a target to give you at this point in time.
Okay.
Finally, I know your preference is for organic loan growth, but with all these margins being announced.
Change the calculus for you guys.
Guys. Thank you so.
This set capital from M&A and if so.
What are your thoughts there as far as potential whole bank acquisitions, Bursey nonbank acquisition for certain businesses.
Again this is Duane.
As you know I mean, it's a very active market out there.
Hum.
We are hearing and seeing a lot of deferred.
Opportunities and and so we continue to stay focused on the things that will improve and impact trustmark moving toward as we stated in our outlook commentary.
Organic.
Loan growth growth continues to be a priority. It's the most efficient use of capital M&A is something that we are monitoring and and our.
Evaluating on a continuous basis and as you know there is increased.
Thought and discussion at some of the non bank categories.
There could be of interest.
And then the third use of capital was the opportunistic buyback so.
High volume on the M&A side, but we're staying disciplined and focused and are going to be opportunistic and really haven't changed our view on that from our prior guidance.
Okay. Thanks for the answers.
Again, if you have a question. Please press Star then 1 our next question will come from Michael Rose with Raymond James. Please go ahead.
Okay.
Hey, Good morning. This is Carl door range for Microbrews. Thank you for taking my question.
Just to piggyback off the <unk> expense.
Expense.
<unk>.
Basically.
I'll back you had talked about certain initiatives on top of growth and innovation, which includes improving efficiency.
With the efficiency ratio currently running in the mid sixties do you.
Perhaps have a target for where you would 1 debt to be eventually.
Yeah.
Well.
We you kind of went in and out we missed a portion of that question I apologize could you Carl repeat.
Sure no problem.
You hear.
Jeremy clearer now.
Yeah, a little bit muffled.
Okay. So basically you had about <unk> <unk>.
Proving efficiency as part of your initiatives a while back.
Just wanted to know with the voluntary retirement program and the closing of branches.
Do you happen to have perhaps a target or where you would want the efficiency ratio to eventually be at its currently given its currently running in the mid sixties right now.
The answer is no I mean, we we don't have a target efficiency ratio.
I've stated.
As our calls where we are laser focused on.
On efficiencies.
That includes.
Things like the voluntary retirement programs to reduce head count, but along with that that means back.
Back office efficiencies process improvement.
And probably entire leadership management team is laser focused on those.
Those topics we have.
A number of technology initiatives, we completed so far this year.
A couple more that will began or are completed in the latter part of the year that we think over time will create.
And continued efficiency improvements and opportunities too.
<unk> reduced expenses across the board, but we don't really disclose the target for efficiency ratio at this point.
Well this is Tom Owens I would add debt.
As Wayne said, we're focused we're keenly focused on the numerator in the efficiency ratio, but let's not lose sight of the denominator either.
Clearly.
The fed's emergency rate cuts in Super Accommodative Monetary policy has had.
<unk> had quite an impact on our net interest.
Margin in our net interest income we do believe that we are well positioned.
Relative to peers in terms of our interest rate risk profile and we do believe that as the economy continues to recover and as the fed eventually normalizes monetary policy that we should outperform the peer.
Peer group.
Why you hear me each call talk about the desire to maintain.
A competitive competitively asset sensitive interest rate risk profile.
Got it got it thank you.
On capital I know I know you've mentioned you've talked about buybacks.
Previously with the share price I guess, a bit down from where it has traded at.
During last quarter.
Im assuming.
I guess im more attractive for you guys and I assume.
Sure.
And you are still buying shares.
So again.
We're pretty consistent.
Our with how we go about.
Capital management, we have a disciplined process disciplined framework in place for evaluating the returns available from various forms of capital deployment.
Yes, we were active in the second quarter.
That's the opportunity presented itself.
<unk>.
You know what.
We had a good quarter in that regard if you think about the amount of balance sheet growth that we achieved in the second quarter. If you think about the amount of capital we deployed via share repurchase and yet our capital ratio still increased linked quarter, a very good quarter in that regard.
Each of our regulatory capital ratios continues to remain above the top of our operating target range is.
For the ratios and as Dwayne indicated in his comments, we continue to have $75 million of authorization.
Remaining between now and year end and so yes.
I would think that you should expect us to consider continue to manage capital consistent with the way we have done so in the past.
Alright, Thank you for taking my questions.
[laughter].
Our next question will come from Caslin, Catherine Mealor with <unk>. Please.
Yes.
Thanks, Good morning.
Kathryn good morning.
What I can just go back on the PPP sale can you remind us what your remaining unamortized fees our debt to come in to the rest of the year.
Okay.
So Catherine this.
As Tom Owens.
It is approximately $2 million.
In on the amortized origination fees that would be recognized as you know sort of straight line amortization over the life of the loans, but we'd be accelerated.
We continue to experience a forgiveness on the loans.
Okay great.
Then that come from mortgage conversation at your slide was very helpful that share the gain on sale margin as we look at the gain on sale margin for the quarter is there any sense as to what that margin look like towards the.
As the quarter that may give us a sense as to where that margin may be heading into the back half of the year.
So Catherine this is Tom I don't know that we can slice it quite that finally.
Yes, we're hoping.
This is obviously a hot topic.
1 of the primary reasons.
Reasons, we added that chart to slide 15, we do want to try and be as transparent as we can and give you.
As much guidance as we can.
With respect to the key drivers of the mortgage banking business and the revenues generated from that business. So again, we saw about a 20% linked.
The decline in.
And the gain on sale of margin. It remains as you know at high levels.
Historically speaking I mean, just in very round numbers probably double.
What was considered normal sort of pre pandemic. So.
We can't slice it that finely but I think.
Core Gen World, We think that we expect continued pressure both on the gain on sale margin.
As well as origination volume and we're hoping that chart can kind of.
It gives you a visual in terms of what that trend has looked like.
And then it looks like you kept more on balance sheet as well should we.
And to see that trend continue as gain on sale margins continue to come down so that puts more pressure on the mortgage revenue, but in theory instead, you've got better loan growth as a result, the an answer to that Catherine is yes, we would expect a whole more on balance.
Okay.
We expect that at year end down mid single digit guidance that you've already put out or would that be additive to that.
It is reflected that's reflective and Catherine thats going to be tapped from where you're going to be your some.
10 year type Jumbo and book profit per.
Predominantly there's can be 15 year appear to zero.
And it's going to be a fairly short duration and.
As far as what's being added to the book on a quarterly basis.
Great.
Great very helpful. Thank you so much thank.
Thank you Catherine.
This concludes our question and answer session I would like to turn the conference back over to Dwayne.
So for any closing remarks.
Well, thank you for participating on our call. This morning, we hope the information presented is helpful and useful we look forward to getting back together at the end of the third quarter.
And we will talk to you in October thank you.
<unk> Conference is now concluded. Thank you for attending today's presentation you may now disconnect.