Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's Second Quarter 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. As a reminder, this call is being recorded. It is now my pleasure to introduce Mr.
Joey Raine, Director of Investor Relations at Trustmark.
Good morning. I would like
to remind everyone that a copy of our 2nd 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 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 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 Barry Harvey, our Chief Credit and Operations Officer and Tom Chambers, our Chief Accounting Officer. For the Q2 of 2021, Trustmark is pleased to report net income of $48,000,000 or $0.76 per share. We'll review the 2nd quarter financial highlights starting on Slide 3.
Loans held for investment increased $169,200,000 or 1.7 percent from the prior quarter and $493,100,000 or 5.1 percent year over year. During the quarter, Trustmark sold $354,200,000 in PPP loans that were originated in 2021. That accelerated the recognition of unamortized PPP loan origination fees of approximately $18,600,000 Pre provision net revenue totaled $57,200,000 for the 2nd quarter, a 38.2% increase linked quarter. Net interest income increased $17,200,000 from the prior quarter and non interest income totaled $56,400,000 at June 30. Adjusted non interest expense totaled $116,300,000 in the 2nd quarter, a 3.3% decrease from the prior quarter.
Our efficiency ratio improved to 64.3% for the quarter. Credit quality remained solid as non performing assets declined 17.9% from the prior quarter. Net charge offs totaled $1,200,000 in the second quarter. We maintained strong capital levels with common equity Tier 1 capital of 11.8% and a total risk based capital of 14.1%. During the Q2, Trustmark repurchased $20,800,000 or approximately 630,000 shares of common stock.
As of June 30, we maintained $75,000,000 in remaining authority under our repurchase program that will expire December 31, 'twenty one. The Board of Directors declared a quarterly cash dividend of 0.2 $3 per share payable September 15 to shareholders of record on September 1. 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. Looking on the Slide 4, our loans held for investments totaled $10,200,000,000 as of June 30, an increase of $169,000,000 from the prior quarter and $493,000,000 year over year. The loan growth during the quarter was centered in public finance and mortgages. As anticipated, our CRE payoffs slightly outpaced 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's CRE portfolio is approximately 65 percent existing and 34% or 35% construction, land development. Our construction, land development book is 80% construction or vertical. The bank's owner occupied portfolio has a good mix between real estate types or categories as well as industries. Looking on to Slide 6, the bank's commercial loan portfolio is well diversified across all industries and with no single category exceeding 10%. Typically, these loans are well secured, governed by formulary 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 to restaurants and energy. Our Trustmark has never been in the high risk C and I lending business and currently we only have one customer for roughly $10,000,000 in that category. The bank's portfolios and the highest impact of COVID-nineteen industries have held up extremely well. The bank has always underwritten both hotels and retail 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-nineteen portfolio of those that we have seen have either a COVID concession or fit into one of the categories that'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 the COVID downturn and those credits specifically that were over $1,000,000 Collectively, we reviewed roughly $482,000,000 in the balances. We reviewed 99% of our hotel book and 69% of our restaurant portfolio. As a result of this review, we're pleased to indicate that we had about $4,500,000 in downgrades into the criticized category. But on the other side, we had about $14,500,000 that was moved from to pass from the classified or criticized category.
Looking at Slide 9, our allowance for credit losses decreased $5,000,000 from the previous quarter. Our reserve calculation included decreases in individually analyzed credits and the qualitative changes were due to the reduction in the impact of COVID-nineteen on our portfolio. The quantitative portion of the reserve was impacted by improvements in the macroeconomic forecast, which resulted in releases of reserves, but we also implemented a probability default and a loss given default floors inside of specific portfolios, which actually resulted in provisioning. On June 30, 2021, the allowance for credit losses on loans held for investment totaled $104,000,000 On Slide 10, we continue to post solid credit quality metrics. On June 30, our allowance for credit losses represented 5 37 percent of non performing loans excluding those that were individually analyzed.
Net charge offs totaled $1,200,000 in the 2nd quarter and recoveries have exceeded charge offs by the same $1,200,000 year to date. Non accruals declined $12,000,000 in the 2nd quarter and $1,500,000 from this time last year. On June 30, non performing assets had declined $13,000,000 from the prior quarter and $7,000,000 from the previous year. On Slide 11, we can take a quick look at our PPP program. During the Q2, as Duane indicated, we sold $354,000,000 of our PPP loans originated in 2021.
This sale of loans accelerated the recognition of unamortized PPP loan origination fees by $18,600,000 net of cost. On June 30, 2021, our PPP loans totaled $166,000,000 net of deferred loan fees and cost of $2,100,000 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, Duane, and good morning, everyone. Looking at Slide 12, deposits totaled $14,600,000,000 June 30, a $249,000,000 increase linked quarter and $1,100,000,000 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 roll over 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 total 19 basis points, and we continue to maintain a favorable deposit mix with 30% of balances in non interest bearing.
Turning to Slide 13, net interest income FTE totaled $122,400,000 in the quarter, resulting in a net interest margin of $3.16 and representing a linked quarter increase of $17,200,000 Interest and fees on PPP loans totaled $25,600,000 which was an increase of $16,300,000 linked quarter and as Barry and Duane referred to the $18,600,000 in origination fees, which were accelerated by the sale of the PPP loans. Core net interest income, FTE, was $96,800,000 which was an increase of $800,000 linked quarter, driven primarily by ongoing decline in deposit cost, while earning asset growth basically offset ongoing declines in loan and security deals. Core net interest margin was 2.94%, a decline of 5 basis points linked quarter. Turning to Slide 14. Non interest income for the 2nd quarter totaled $56,400,000 a $4,200,000 linked quarter decrease and a $13,100,000 decrease year over year.
The linked quarter and year over year decreases are primarily attributable to lower mortgage banking revenue. For the quarter, non interest income represented 32.1 percent of Trustmark's revenue continuing to demonstrate revenue stream. On Slide 15, mortgage banking revenue in the 2nd quarter totaled $17,300,000 a $3,500,000 decrease linked quarter and a $16,400,000 decrease year over year. Mortgage loan production remained strong, but declined 3.9% linked quarter and 13.7% year over year from historically high levels. For the Q2, retail production remains strong representing 70 percent of 77% of volume or $571,000,000 We've added a trailing quarterly chart to the slide illustrating 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 3.91 basis points in the 1st quarter 3 15 basis points in the 2nd quarter. And origination volume declined about 4% linked to quarter, dropping from $767,000,000 to $737,000,000 We hope the addition of this chart will help the reader understand the dynamics of the mortgage banking gain on sale. And now I'll turn it over to Tom Chambers, who will cover non interest expense on Slide 16. I'll be
glad to Tom. Turning to Slide 16, you see the detail of our non interest expenses broken out between adjusted, other and total. Adjusted non interest expense totaled $116,300,000 in the second quarter, a $3,900,000 decrease from the prior quarter. Salaries and employee benefits decreased $1,000,000 linked quarter, principally due to the seasonality of payroll taxes from the prior quarter. Additionally, services and fees decreased $715,000 and equipment expense decreased $677,000 on a linked quarter basis.
Turning to Slide 17. Trustmark will remain well positioned from a capital perspective with our common equity Tier 1 capital ratio of 11.76 percent and a total risk based capital ratio of 14.10 percent as of June 30, 2021. For the 1st 6 months of 2021, we repurchased approximately 775,000 common shares totaling $25,000,000 At June 30, we had $75,000,000 under our existing stock repurchase plan, which expires December 31, 2021. At this time, I'll turn it back over to Duane, who will now cover our outlook commentary on Slide 18.
Thank you, Tom. And again, this is a new add to our deck to give you some insight into our outlook. Looking at the balance sheet, we are expecting loans held for investment to grow low to mid single digits for the year with potential headwind in the second half of twenty twenty one 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 continued modest linked quarter compression in the 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 2nd quarter results for the remainder of the year. Net charge offs are expected to be muted for the remainder of 'twenty one based upon the current economic outlook and the overall portfolio. 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 in production and to a lower gain on sale 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 the wealth management businesses. We will continue to work on initiatives like the voluntary early retirement program and market op for opportunities to improve efficiencies and workflow. We'll also continue a disciplined approach to capital deployment with a preference for organic loan growth, potential M and A and opportunistic share repurchase. We will continue to maintain a strong capital position to implement corporate priorities and initiatives.
With that, I trust this second quarter discussion has been helpful and the financial results and outlook 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. Our first question will come from Graham Dyck with Piper Sandler. Please go ahead.
Hey, good morning everybody.
Good morning.
Good morning.
So you just mentioned taking securities to 20% 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% threshold? And maybe if you're expecting, I guess, a large chunk of that to flow out of the bank. Just kind of trying to get an idea of what the overall balance sheet might look like 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 for the securities portfolio, came up a little bit short of that in the Q2. Our deposit growth in the Q2 was sort of back loaded.
And then as we got towards the end of the second quarter, we had quite a rally in bond market and investment alternatives were less appealing at that point. So some of it is tactical. I think you should expect us to continue to target at least 20% of earning assets. And as we've discussed in the past, there's really 2 big considerations there. 1, as you alluded to, is the uncertainty around the 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 flatten out with respect to personal and non personal in the Q2. 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, I think that will increase our confidence in terms of the amount of liquidity that we have 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. As of the Q1, our peer median securities to earning assets was about 25%. I think you should expect us to stay below that.
So but that would be the range, 20% to 25%. And I started sort of dimensioning your question there, as you said over the next few quarters or so, I would think that we'll be more towards the lower end of that range.
Okay, awesome. That was very helpful. And I guess just turning to securities, I know you said that probably have more color on the impact of the voluntary retirement program with 3Q 'twenty one earnings. But I was just wondering if you guys have 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 impact or reduce salaries at the point of its implementation?
Yes, this is Duane. No, we're not in position really to comment on the overall program at this point in time. It closes here before too long and we'll be disclosing the full results at the end of the Q3. If you recall, we had a early retirement program in 2020, early 2020 right as COVID was starting to take shape. And so this program is in somewhat following that as 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 Q3.
Okay. That's understandable. And then I guess just a quick one 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?
That's we're flipping pages here to get the exact answer to that question. As volume declines, commissions decline, I don't know that Tom, do you have that?
Mortgage commissions actually increased by about $700,000 this quarter, 2nd quarter versus 1st
because we have a lag. We have a
month in arrears payment for the 3rd month of the quarter.
But we do expect that to trend lower over time as volumes decline.
It's coming down the last half of the year.
Yes, I mean, it's a good question and you would expect with decreases in origination volume decrease in mix expense, Graham. And I think in this case, it's just a question of timing. As is the case with a lot of the mortgage banking business, right. But as we said, it's projecting forward lower origination volume certainly would lead to lower commission expense.
Okay. Awesome. That's it for me. Thanks guys.
Thank you.
Our next question will come from Jennifer Demba with Truist Securities. Please go ahead. Pardon me, Jennifer. Your line might be muted.
Hey, this is Brandon King on for Jennifer. How are you doing?
I'm sorry. Could you say your name again?
Hey, this is Brandon King on for Jennifer Demba. How is everyone doing?
We're doing well. Good morning.
Good morning. Good morning. So, yes, could you please talk about what you're seeing in CRE with pay downs? And I know you expected a potential headwind going into second half of the year. So could you see that abating somewhat as we get into 2022?
And Brandon, this is Barry. I'll be glad to address your question. What we are seeing as of when we've just after we've 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. One thing we are seeing within our CRE book, we are seeing some shifting of scheduled payoffs either later into this year, some we didn't see some that we expected to see in Q2. We saw a shift of some of that into the Q2 excuse me, Q3 and Q4 of this year.
We also 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 than we were at the 1st of the year. And it's mainly because we're seeing some of those scheduled payoffs getting pushed back into either later this year, which really didn't have a big impact on 2021, but we are seeing a meaningful amount pushing into 2022. On the flip side of that, we're seeing a higher than anticipated unexpected payoff. Those that we didn't have slated 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 feeling like from a CRE perspective for the year, we're going to end up being around flat at this based on what we know today. We are pleasantly not surprised, but encouraged by the fact that we're seeing growth in both our public finance line of businesses as well as in our mortgage business, those loans we're choosing the portfolio. So we are seeing growth during Q2 from a couple of areas that we've previously not had meaningful growth. And we do expect for the real estate CRE portion of our book to not be too much of a drag on 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. Thanks for the color on that. And then for you mentioned as far as higher activity in your markets and how that will eventually benefit service and bank card fees. Is there a certain level that you're targeting when it comes to level of fee income in those areas in relation to pre pandemic levels?
This is Duane. I'll take a stab. Not really. We're not targeting anything specific. It's been a little hard to forecast.
Again, based on deposit, the deposit conversation, the amount of liquidity out there in the marketplace, we do expect the 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 maybe the second wave of COVID related stuff, we don't really have a target to give you at this point
in time.
Okay. And finally, I know your preference is for organic loan growth, but with all these mergers being announced, does it change the calculus for you guys to use some of that capital for M and A? And if so, what are your thoughts there as far as potential whole bank acquisitions versus non bank acquisitions or certain business?
Again, this is Duane. As you note, I mean, it's a very active market out there. We are hearing and seeing a lot of different opportunities. And so we continue to stay focused on the things that will improve and impact Trustmark moving forward. As we stated in our outlook commentary, organic loan growth continues to be a priority.
It's the most efficient use of capital. M and A is something that we are monitoring and are evaluating on a continuous basis. And as you note, there is increased thought and discussion in some of the non bank categories that could be of interest. And then the third use of capital is the opportunistic buyback. So high volume on the M and 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 prior guidance.
Okay. Thanks for the answers.
Our next question will come from Michael Rose with Raymond James. Please go ahead.
Hi, good morning. This is Karl Doerin for Michael Rose. Thank you for taking my questions. Just to piggyback off the expense questions. Basically, a while 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-60s, do you perhaps have a target for where you would want that to be eventually?
Well, you kind of went in and out. We missed a portion of that question. I apologize. Could you, Karl, repeat?
Sure. No problem. Can you hear me clear now?
Yes. A little bit muffled. Okay.
So basically, you had talked about the improving 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 for where you would want the efficiency ratio to eventually be at, it's currently given it's currently running in the mid-60s right now?
The answer is no. I mean, we don't have a target efficiency ratio. As I've stated in prior calls, we are laser focused on efficiencies. That includes things like the voluntary retirement programs to reduce headcount. But along with that, that means back office efficiencies, process improvement and the entire leadership management team is laser focused on those topics.
We have a number of technology initiatives we completed so far this year, a couple more that will begin or are completed in the latter part of the year that we think over time will create continued efficiency improvements and opportunities to reduce expenses across the board. But we don't really disclose a target for efficiency ratio at this point.
And this is Tom Owens. I would add that 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 and super accommodative monetary policy have had quite an impact on our net interest margin and 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 group.
It's part of 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. And on capital, I know you've mentioned you talked about buybacks previously. With the share price, I guess, a bit down from where it's traded at during last quarter, assuming it's more attractive for you guys and I assume you're still buying shares?
So again, we're pretty consistent 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 as the opportunity presented itself. 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 ratios still increased linked quarter, very good quarter in that regard.
Each of our regulatory capital ratios continues to remain above the top of our operating target ranges for the ratios. And as Duane indicated in his comments, we continue to have $75,000,000 of authorization remaining between now year end. And so, yes, I would think that you should expect us to consider continue to manage capital consistent with the way we've done so in the past.
Sounds good. All right. Thank you for taking my questions.
Our next question will come from Catherine Mealor with KBW.
Wanted to just circle back on the PPP sale. Can you remind us what your remaining unamortized fees are that to come into the rest of the year?
So, Catherine, this is Tom Owens. It is approximately $2,000,000 in unamortized origination fees that would be recognized as you know sort of straight line amortization over the life of the loans, but would be accelerated as we continue to experience forgiveness on the loans.
Okay, great. And then back on the mortgage conversation, your slide was really helpful that showed the gain on sale margins. As we look at the gain on sale margin for the quarter, is there any sense as to what that margin looked like towards the end of the quarter that may give us a sense as to where that margin may be heading in the back half of the year?
So, Catherine, this is Tom. I don't know that we can slice it quite that finely. Yes, we're hoping this is obviously a hot topic and it's one of the primary 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 revenue generated from that business. So again, we saw about a 20% linked quarter decline in the gain on sale 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 in general 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 give you a visual
in terms of what that trend has looked like.
And then it looks like you've kept more on balance sheet as well. Should we expect 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 answer to that Catherine is yes. We would expect to hold more on balance sheet.
Okay.
And is that reflected in your increased mid to single digit guidance that you've already put out or that be additive to that, do you think?
It is reflected. It's reflective. And Catherine, that's going to be typically going to be your some 10 year type jumbo and but predominantly it's going to be 15 year pay to 0. So it's going to be a fairly short duration and as far as what's being added to the book on a quarterly basis.
Thank you, Catherine.
This concludes our question and answer session. I would like to turn the conference back over to Duane Dewey 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 Q3, and we will talk to you in October. Thank you.