Trustmark Corp (TRMK) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to 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. (Operator Instructions) As a reminder, this call is being recorded.

It is now my pleasure to introduce Joey Rein, Director of Investor Relations at Trustmark. Please go ahead.

Good morning and thank you. I would like to remind everyone that a copy of our second-quarter earnings release, as well as a 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 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 as well as our other filings with the Securities and Exchange Commission.

At this time, I will turn the call over to Jerry Host, President and CEO of Trustmark.

Good morning, all, and thanks for joining us. Also with us this morning are Louis Greer, our CFO; Barry Harvey, the Chief Credit Officer; and Tom Owens, the Bank Treasurer.

Let's begin by looking at our second-quarter highlights that begin on page 3 of the presentation materials. We are pleased to report another quarter of solid financial performance. Our legacy loan portfolio expanded for the fifth consecutive quarter. Our acquired loan portfolio continues to perform extremely well, as cash flow estimates continue to improve and yields on acquired loans have increased. Asset quality metrics also continue to perform well, as criticized and classified loan balances continue to decline in our legacy loan portfolio.

Our deposit base remains very strong. Noninterest deposits represented 27% of average deposits in the second quarter, and our cost of deposits declined to 16 basis points in the second quarter. Total revenue expended 7.5% relative to the prior quarter to just shy of $150 million. Our capital base continued to grow, providing us with a continued ability to meet customer demand.

Net income in the second quarter was $32.9 million, which represented earnings per share of $0.49, an increase of 14% from the prior-quarter. Our financial performance during the quarter produced a return on tangible equity of 13.9% and a return on average assets of 1.1%. I'd also like to remind you that our Board declared a quarterly cash dividend of $0.23 per share payable on September 15 to shareholders of record on September the 1st.

Let's review the quarter in a little more detail. Turning to slide 4. As I mentioned a moment ago, we continue to experience solid growth in our legacy loan portfolio. At quarter-end, loans held for investments totaled $6.2 billion, an increase of $263 million or 4.4% from the prior-quarter, or an annualized rate of 17.6%. Growth was diversified by both market and loan type. Commercial real estate loans increased $83 million, reflecting growth in Trustmark's Texas, Alabama, Mississippi, and Florida markets. The single-family mortgage loan portfolio grew $48 million during this period. Other real estate secured loans increased $57 million.

Construction and development loans declined $61 million from the prior quarter, reflecting, in part, the transition to the nonowner-occupied category. Other loans, which include loans to states and municipalities, increased $88 million during the quarter and was spread among our footprint. Commercial and industrial loans increased $43 million, as growth from the Alabama, Tennessee, and Texas markets more than offset some reductions in the Mississippi and Florida markets.

Our consumer lending portfolio expended $5.2 million, primarily from our growth in Mississippi and Alabama. Collectively, loans held for investments and acquired loans totaled $6.8 billion at quarter-end, an increase of $164 million or 2.5% from the prior quarter. Year-to-date, our loans held for investments have increased 6.7%. As you can see, loan growth has been diverse, both in terms of loan types and geographic markets. And we'll be glad to provide more information as needed during the question-and-answer portion of the call. Our loan pipelines remain healthy and consistent, with Alabama and Texas providing significant opportunities for growth.

Let's turn to slide 5. Acquired loan performance continues to exceed our expectations. At June 30, acquired loans totaled $647 million, a decrease of $99 million from the prior quarter. The effective yield on acquired loans in the second quarter was 8.25%. Recoveries on acquired loans totaled $8.9 million, which added 515 basis points to the yield. As a result, the total yield on acquired loans was 13.4% for the second quarter.

As acquired loan balances have declined, the estimated accretable yield has remained relatively constant because of improvements in future estimated cash flows, resulting in increased anticipated acquired loan yields in the future. Based upon our most recent cash flow estimates, accretable yields totaled $93 million at June 30. But keep in mind cash flow estimates change quarterly, and this amount could be offset to some degree by increased provisioning for acquired loans. But so far, we are very pleased with the performance of our acquired loan portfolios.

Excluding recoveries, we anticipate the yield on acquired loans to be in the 8% range during the remainder of the year. This is higher than our previous expectation and is based on the most recent re-estimations of the cash flows. We would also anticipate acquired loan balances, excluding any settlement of debt, to decline by roughly $60 million per quarter during the remainder of the year.

Turning to slide 6. We continue to post strong credit quality metrics. Credit metrics I'll discuss exclude acquired loans and other real estate covered by an FDIC loss share agreement. Nonperforming loans at June 30 totaled $71.1 million, an 11.1% increase from the prior quarter, and a 4.3% decrease from the prior year. This increase is primarily from a -- is the result of one substandard credit migrating to nonaccrual status. Foreclosed other real estate totaled $107 million, a decrease of $4.6 million or 4.1% from the prior quarter. When compared to levels one year earlier, this portfolio decreased $10.7 million.

During the second quarter, net charge-offs totaled $1.2 million or 8 basis points of average loans, while the provision for loan losses was $351,000. Classified loans declined $10.4 million or 4.9% from the previous quarter, while criticized loans decreased $5.5 million or 2.2%. Compared to the prior year, classified loan balances decreased $37.8 million or roughly 16%, while criticized loan balances decreased $43.7 million or about 15%. The allowance for loan losses totaled $66.6 million and represented 120% of commercial loans, 0.75% of consumer and home mortgage loans, and roughly 160% of nonperforming loans.

Now, turning to slide 7, during the second quarter, average non-interest-bearing deposits increased $46 million, while average interest-bearing deposits declined roughly $100 million. Collectively, average deposits declined $52 million during the quarter to total $9.9 billion. We've got a fantastic mix of deposits. Approximately 57% of our deposits are in checking accounts. Non-interest-bearing deposits represented 27% of our average deposits and our cost of deposits fell 2% -- excuse me -- 2 basis points during the quarter to 16 basis points.

On slide 8, net interest income for the second quarter totaled $109.2 million, up $10.5 million from the prior quarter. As you know, there are two components that make up this number. Net interest income on acquired loans totaled $23 million, an increase of $6 million from the prior quarter, due principally to a $5 million increase in recoveries on acquired loans. Excluding acquired loans, net interest income totaled $86 million, a $4 million increase relative to the prior quarter, due to increased loan yields and loan balances.

The net interest margin in the second quarter was 4.21%, a 29 basis point expansion from the prior quarter. As we indicated a moment ago, this reflects 13.4% yield on the acquired loan portfolio. Excluding acquired loans, the net interest margin in the second quarter totaled 3.55%, an increase of 3 basis points from the prior quarter as a result of increased loan yields and balances.

Based upon the current interest rate environment, we would expect the net interest margin, excluding acquired loans, to remain relatively stable during the remainder of the year. Noninterest income remained stable at $44 million for the second quarter. Bank card and other fee income totaled $9.9 million during the second quarter, an increase of $813,000 from the prior quarter, and was attributable to increased interchange income.

Now remember that the Durbin Amendment became effective for Trustmark on July 1. And we estimate our pretax revenue will be reduced by approximately $4.5 million during the second half of the year. And that's a pretax number.

Service charges on deposit accounts totaled $11.8 million, an increase of $278,000, or 2.4% from the prior quarter. For the second quarter, insurance revenues totaled $8.3 million, an increase of 2.5% from the previous quarter, and was mainly due to increased commercial, personal property, and casualty business. Wealth management revenue totaled $7.7 million for the quarter, down $425,000 from the previous quarter, and this was due to a reduction in annuity sales income.

Mortgage banking revenue for the second quarter totaled $6.2 million, a decrease of $638,000 from the prior quarter, and was due mainly to decreased positive mortgage servicing hedge ineffectiveness. For the second quarter, mortgage loan production totaled $322 million. That's an increase of 40% from the prior quarter, which was due to multiple factors: seasonality, lower mortgage rates, expanded originations in our Alabama market.

Now let's turn to slide 9. Noninterest expense in the second quarter totaled $102.8 million, excluding ORE intangible and intangible amortization of $6 million. Noninterest expense totaled $96.7 million, an increase of $725,000 from the previous quarter. Break that down: salaries and benefit expense continued to remain well-controlled and totaled $56.1 million for the second quarter, down about $600,000 or 1% from the prior quarter. Services and fees increased $1.4 million as a result of higher legal and professional service fees.

In a continued effort to enhance productivity and efficiency, we consolidated two banking centers with limited growth opportunities into two of our larger banking centers. In addition, we opened two new banking centers, which also contained a regional administrative offices in both Memphis, Tennessee and Montgomery, Alabama. We will continue to evaluate our branch network and our delivery channels based upon customer patterns and trends, and realign the resources as needed.

Now let's turn to slide 10. Trustmark has traditionally been a leader in capital strength among its peers. We use capital to support organic growth. We also leverage capital in acquisitions to create additional growth opportunities. And it is used to utilize -- it's utilized to pay cash dividends to our shareholders. Trustmark has a solid capital base, and is well-positioned to meet the needs of our customers and provide value for our shareholders. Even with significant loan growth, our capital levels have continued to increase. Our tangible common equity ratio was 8.51% at June 30, while our total risk-based capital ratio was 14.54%.

Turning to slide 11. Our Board of Directors recently affirmed our strategic plan and related initiatives. And as a reminder, we have five strategic priorities to enhance shareholder value. The first is profitable revenue generation. This is our primary focus. Finding more ways to create and expand customer relationships. Second, process improvement and expense management. We must effectively utilize technology to become more efficient and manage the cost of doing business, while ensuring we provide a competitive array of products, services and delivery channels.

Third, credit quality. Something we never forget about. We must continue our sound underwriting and review processes. We're also focused on resolution of problem assets acquired through acquisitions. Fourth, effective risk management. There's been a tremendous amount of new regulation placed on the banking industry. We must ensure that we remain in compliance. We want to use enhanced risk management processes to more effectively manage our businesses. And then finally, mergers and acquisitions. Banking is increasingly becoming a business of scale. We are a proven acquirer, having successfully completed 11 transactions since 2000.

Going forward, we will continue to use M&A as an opportunity to supplement internal growth and expand into additional attractive markets. But rest assured we will be patient and disciplined in the process to ensure that we create long-term value for our shareholders.

At this time, I would be happy to take any questions.

(Operator Instructions) Steven Alexopoulos, JPMorgan.

I wanted to start -- at $263 million, loan growth was obviously very strong in the quarter. How are you thinking about loan growth potential for the rest of this year? Does it stay at $263 million? Does it fall back to the 1Q level at $125 million? And maybe comment on drivers.

Good, Steve. I'll answer kind of at a higher level; ask Barry to add a little detail to that. I would tell you that our feeling is that if you look at growth year-to-date, that would be a good indication of what our expectations are for the remainder of the year.

Second-quarter was extremely strong, but some of that was a timing issue. We -- these are construction loans that were made in the first quarter and the fourth quarter of last year, where the equity was put into the project, and now they are starting to draw down in their lines on the -- during the second quarter. So, some of that was just kind of a timing difference. So I think you'd be better off looking at the first half of the year as an indication of what we expect going forward.

Pipelines look extremely healthy. We've talked before, the fourth quarter and the first quarter -- fourth quarter last year, first quarter -- about the fact that our pipelines are looking better than they have in five or six years. That continues to be the situation here. So, pipelines are healthy. Good demand. It is a competitive environment. We are maintaining disciplines relative to our underwriting processes.

And Barry, maybe you can speak a little bit to diversification and add any additional details you'd like to.

I'll be glad to, Jerry. I guess -- Steven, I guess a couple of things. One, when you look at the numbers here, you see the negative $61 million in the construction category, land development. In reality, there's about $140 million that has migrated out of that category, into our non-bond, nonresidential and other real estate secured. And that's going to be your nonowner-occupied and your multifamily projects that are -- that have been completed and they are migrating down into the existing category.

Actually, we are up roughly $88 million in construction land development and it's in the construction category; a little bit 1-to-4 family, but most all of it's other construction or commercial construction, if you will. When you look at the 1-to-4 family growth of the $48 million, that's going to be predominantly coming out of our mortgage company, about $38 million; about $10 million is going to be in our home equity lines and loan portfolio. We're glad to see some growth beginning to reoccur there.

The mortgage quality that's to our mortgage company is extremely solid in today's environment. It's mostly predominantly still 1- year paper; non-jumbo. There is a little jumbo. There is a little 30-year paper, but commonly, it's what it always has been: 15-year non-jumbo. When you look at commercial C&I portfolio, well-diversified between Tennessee, Texas, and Alabama. Nice solid growth, high-quality customers.

You also see that within the other loan category, we've got a significant amount of growth there -- $88 million. That's going to mostly be coming out of the public finance side -- about $69 million of that $88 million, that's coming from a diverse -- from really all of our markets. Mississippi, Florida, Texas, and Alabama are all contributing in that area.

So we are very pleased with not only the diversity of the types of growth we are seeing, we're very pleased with the diversity as it relates to the markets. When it -- as it relates to the CRE portion of it, one thing that's a pleasant situation for us is, while we worked our CRE exposure down over 2008, 2009, 2010, and 2011, as some banks did, it's provided us with the room to pursue these good opportunities with strong sponsors, a lot of equity going in.

As Jerry mentioned, this takes a little while for these types of loans to fund up, but they are beginning to fund up. Some of this is stuff that we booked back in 2013 that's beginning to fund up as the equity has gone in. And we still see quite a bit of loans on the books today that have quite a bit more to fund. So, over time, we expect that to happen over the next 18 months.

That's excellent color. Thank you. Maybe to follow-up on that. This quarter, I guess the interest income on the acquired loans was about 20% of total interest income. Can you talk about the ability to drive net interest income growth for the rest of the year, given your guidance of $60 million of runoff per quarter from the acquired?

Yes, we'll talk -- first of all, let's talk core from the held-for investments. We -- as this growth continues, we do feel comfortable we should remain steady as long as we are in this interest rate environment, somewhere in that 3.50% range; obviously, with rates having dropped just a little bit from where we were several months ago. That puts a little pressure on, but we feel comfortable about that core margin.

Now, Barry, we've -- the acquired loan yields, as well as acquired loan recoveries, is a very difficult item to accurately project, because there's so many variables in there. But, Barry, maybe you could give just a little bit of a sense as to what we see for the remainder of the year in that portfolio.

Sure. And now let me comment a little bit on it and I may pass it over to Lewis to comment on it from the accounting side of it as well. Because the two work hand-in-glove. From the credit side of it, what we continue to see within the -- unrelated to the recoveries, what we continue to see in the portfolio is improvement in the overall risk ratings, more upgrades than downgrades. That results in a lower probability default, a lower loss-given default. Therefore, we have an improvement in the projected future cash flows that are going to come off that portfolio.

We continue to see some paydowns that aren't scheduled -- principal paydowns, as we are able to work with the customers. We are also very encouraged by the fact that the loans that we are losing out of that portfolio typically are loans that are substandard credits, problem credits that happen to fit inside of some pools; whereas what we're not seeing is, it's the loss of the core franchise that we purchased. The good solid customers, we are able to retain them and continue to expand that relationship. So, from that perspective on the credit side, we continue to see working through the problems but also maintaining and actually growing the solid relationships that we acquire.

Louis?

Yes, Barry. And as those cash flows improve on a quarterly basis, and the re-estimation of that cash flow prospectively, it increases the yield forward. So, as cash flows continue to increase, yields will continue to remain at this level or even higher. It just depends. Because, as you can see, this portfolio continues to run down. So, that's the way the accounting works.

And one last comment I'll make on the recovery side. While we did have a nice recovery this quarter, we are seeing opportunities to continue to have solid recoveries coming out of this portfolio.

So I guess what you're saying is, given your outlook for recoveries, you expect to be able to drive net interest income growth for the balance of the year? Is that what you're saying?

I think what Barry said is there is some potential to see recoveries to continue. At what level, it's just very hard to predict, Steve.

Okay. Okay, thanks for the color.

Thank you.

Michael Rose, Raymond James.

Can you just update us on what you're doing to offset the loss revenues from Durbin? If you have any specific initiatives in place and what your thoughts are there?

Yes. Good question, and obviously, one that I think the industry as a whole is looking at. We are -- obviously, there's been a change in focus as it relates to interchange income, as it relates to NSF OD, but it also has had an impact on us. As we've released earlier, we have settled our NSF OD litigation. The checks and the credits for that went out during the second quarter with some explanation. Yet, we continue to see increased volumes of debit card usage throughout the system, which helps to offset that.

We continue to work to open new checking accounts and relationships; work to expand the electronic banking channels, so that we can be more responsive to customer needs. But it's going to be a matter of working to grow various areas within the retail banking sector, as Barry pointed out. We have been working steadily and have had success in growing the home equity lines.

The credit card portfolio, which is, from a pure margin standpoint, most profitable, has grown in the second quarter. So, it's not any one thing, but I think a matter of ensuring that we are in front of customers and offering all the products and services that we have available.

Okay. That's helpful. And then as a follow-up, can you talk about or walk us through your thoughts on regulatory costs as we move through the remainder of this year and into next? And more specifically, if you could maybe touch on what you've done in the BSA and AML arenas? Thanks.

Yes. The -- obviously, there has been -- now, we celebrated Durbin, I think -- on the fourth anniversary of Durbin on Monday. And obviously, there has been significant change in the regulatory arena. And both the regulators and the banks are working their way through all of the new rules and regulations that have been put out there.

We -- in addition to that, we have -- after the acquisition of Bank Trust, we went over the $10 billion mark, which creates an additional focus. And as we just talked, Durbin is one of the major impacts there. As far as preparing for this, it's not a one-time event. It is an ongoing process of staying up with the changing rules and regulations. The interpretation that the regulators have of these rules and regulations, and working to have good communications with them to ensure that we stay in sync and we adjust accordingly.

As far as cost, you'll see some of the increase in the second quarter that we had as a result of some external experts that we have had in, in the areas of model risk validation, the areas of DFAST, as well as in the areas of BSA AML. We feel good about where we are with these programs. However, there's an awful lot of changing that is taking place. And, as I mentioned, it's not getting to a point in being there. It is a process of this constant change adjustments and improving upon what you're doing.

We take it very seriously not only at a management level, but at a Board level. It is something that we are very focused on. I think you will see that there will be continued costs there. But we have already absorbed significant costs in preparing for the major changes of Dodd-Frank. So we have roughly 45% of Dodd-Frank to be put -- yet put into play. We feel as though the more significant items have already been put into rules and regulations, and that we have absorbed much of that cost.

So, I hope that's helpful. But it is a very difficult issue to quantify to any exact level.

Very helpful. Thanks for taking my questions.

Thank you, Michael.

Catherine Mealor, KBW.

Jerry, can you talk a little bit about how we should think about expenses going forward? I know you've guided the [95 to 96] range the past couple of quarters, and we're just a smidge above that now. And it feels like with higher regulatory costs, and even with growth being better, you've got higher commissions coming with that. So do you think there is still upward movement in the expense line over the next couple of quarters?

Well, our feeling is, and our projections are, that we are going to be able to hold at these levels, even with these increased costs. Because we're going to have to find ways that we can better utilize the technology; look more closely at our retail branch delivery structure, and see if there are some things that we can do to reduce costs there.

Main focus is, we've put -- we've spent some significant money over the last four or five years putting technology in place. And a lot of it is changing processes in an effort to utilize that technology and reduce costs in some other areas. At the same time, you're delivering a higher level of service to your customers.

So, long-winded way of saying, Catherine, that we feel good with, despite the fact that we will continue to spend more from a regulatory standpoint -- and we will add people into our compliance areas and areas of DFAST, and model risk validation, BSA AML -- we'll do all that, but we will find reductions in other operating areas of the Company to offset that.

Okay, thank you. And then a new follow-up on the margin. Can you -- how should we think about just the mix of the balance sheet, and maybe the size of the securities portfolio and the loan to deposit ratio moving forward? As loan growth improves, do you have any intentions to bring the securities portfolio down a little bit and let the loan to deposit ratio drift up, which may help the margin? Or are you comfortable targeting the asset mix that you have currently?

Very good question. And, as we mentioned earlier, we would anticipate that we would continue to grow loans at a rate somewhat in line with or very close to what we've done in the first half.

I want Tom Owens, our Treasurer, to comment on the plan for the securities portfolio and maybe deposits as well.

So, Catherine, as you know, quarter-over-quarter, very little change in the size of the investment portfolio. We continue to be positioned relatively neutral with respect to interest rate risk profile. The securities portfolio is a key lever that can be pulled to adjust that.

So, no plans to grow the investment portfolio. The focus is on growing earning assets through loans. And I would say we'll just adjust securities portfolio as necessary to maintain relatively neutral interest rate risk profile. But also, in terms of liquidity, we obviously have ample liquidity, so could grow the investment portfolio if we needed to.

Got it. Okay, thank you very much.

Thank you, Catherine.

(Operator Instructions) Steve Moss, Evercore.

Just wanted to ask here with regard to how low the loan-loss reserve could go? It looks like it declined to 1.08 of loans excluding acquired assets. And I'm -- acquired loans -- and I'm wondering, given that nonperforming assets were essentially flat quarter-over-quarter, what are your thoughts with regard to where that ratio could go? I appreciate the color with regard to the substandard and classifieds improving, but just curious if there is a floor to that.

Right. Let me ask Barry Harvey if he will address that question. As you know, there's this balance and there is some subjectivity, as well as the constant changes that take place as we reevaluate and review all the loans in the Company. And the quality of the portfolio overall has gotten significantly better over the last several years. And we've moved problem loans out. And as a result, we have to accurately reflect, based on both historical and what we see now, that overall level of provisioning.

So, Barry, if you would, maybe add a little detail to that.

Sure. And Steve, I guess from our perspective, we would love to see the loan-loss reserve begin to level out at these levels. From a dollar perspective, I think that will begin to occur. As we continue to grow loans, the actual percentage coverage has the potential to drift downwards; hopefully, not much, is what we would strive for.

I do think that one thing that works in our favor is, we work off of, on the quantitative side of our reserve calculation, we work off of a 12-quarter rolling average. And we, this quarter, rolled off our last big historical net charge-off quarter. And the quarters that will roll off hereafter will be much smaller. So therefore, there will be less historical losses rolling off. Therefore, there will be less reserve being released, as a result, on the quantitative side. So there will be less reserve that will be flushed into earnings unless they have somewhere else to go.

So I think from that perspective, we'll be -- it will be a little easier as we move forward to -- for the reserve to level out, at least from a dollar perspective, if not from a percentage perspective. I think the percentage is going to be dictated by how well we're able to continue to grow loans and at what point we need to begin provisioning, and have a positive provision, more than we do this quarter, to reflect the loan growth.

The loans coming off obviously have more reserves on them than the loans coming on require. Being good loans coming on and most of the stuff working their way out, goes back to the criticizing, classified reduction that you referred to earlier. So, it is the challenge I think all banks are faced with that. And we'll just continue to try to keep a -- retain an adequate reserve, which we feel like we have today, based upon the credit risk we have in the portfolio.

Okay. Appreciate that. And then just wondering what are your thoughts here in terms of nonperforming asset disposition? Basically, the balance is stable quarter-over-quarter. What are you seeing for activity there?

Oh, we -- outside of some -- an outlier like the one large one that moved in, which was $9.3 million, that kind of bumped up our number this quarter, we expect for that downward trend to continue. We're getting down to some reasonable -- not reasonable levels based upon where we'd like to be, but from where we've been, we're getting down to some more reasonable levels.

We would expect for that downward trend to begin to occur again next quarter, and in a directionally consistent way, will move down. Maybe not to the levels we've moved down after we came out of the downturn, but we'll continue to move downward and continue to work those out. We've not gone the route of bulk selling our nonperforming loans. That is always an option that we can consider. We've looked at that and determined it's just more efficient, more profitable for our shareholders, for us to continue to work them out of the bank, as opposed to bulk sell them and not have to see them every day.

Right. Okay, that's helpful. And then one thing on the mortgage banking side, it looks like gain on the sale of margins was about 85 basis points this quarter. Kind of wondering if that's a clean run rate going -- clean number going forward? Or if we should expect it to improve?

Steve, this is Louis. I think that's a fairly reasonable rate. I think in the second quarter, we've had a volume increase of about 40%. So, whether that volume continues, I think you have a fairly reasonable rate going forward.

Okay. Thank you very much.

Thanks, Steve.

David Bishop, Drexel Hamilton.

Just getting a little bit granular here in terms of some of the loan growth we saw this quarter. We saw decent growth sort of in the -- on the commercial real estate side in the hotel/motel segment. Maybe some color there in terms of what you're seeing, what's driving some of that?

Sure. And this is Barry. We are continuing to see on the -- on all the nonowner-occupied, we are continuing to see some opportunities present themselves. These are going to be projects that we construct. And then once they are complete, they do migrate into the existing category. That's not necessarily a line of business that we go out and actively pursue; but for the right borrower at the right amount of equity going in, in the right location where we feel good about the demographics, that is something that we continue to do.

Multifamily is an area where we have grown quite a bit. And we do quite a bit more of that, as far as on an ongoing basis today. So -- and that's something that we have in the pipeline. And as far as within the construction category, we have a reasonable amount of multifamily that is being constructed today. And then we've had some multifamily, actually this past quarter, move out into the existing category.

But we do feel like commercial real estate in general under our underwriting -- reading our underwriting standards is an opportunity for us to grow, where there is a little less competition overall compared to maybe C&I business, where -- because you do have a few banks that are just not interested in the CRE business today, just because they still have quite a bit of exposure from the 2008, 2009 and 2010 time periods.

Got it. And then just in terms of the provision this quarter, remind me in terms of the provision related to the acquired loans. Is that just reflecting originations on that platform that were brought over without reserves, and you've got a reserve for that growth out of that platform?

No, it's not. Those loans are part of our traditional reserve. And -- but with the acquired provision, what you've got is a situation where, on some specific review loans, you have terminal values on these loans; typically, they're based upon appraisals. We get updated appraisals. We have had a few appraisals come in a little bit lower. So, the actual terminal value that we anticipated has gone down. Therefore, we needed a provision for that difference.

Also, where the terminal value didn't change, but for whatever the reason the terminal day got pushed out further into the future, that -- you have discounted cash flows, such as time value of money. A lot of times what you'll have is something you think you're going to foreclose on, and then you get a bankruptcy filing and that protracts you out another 6 to 9 to 12 months. So you have a time value to money factor there.

And then in the second quarter, we did have a large number of loans that we were able to settle the debt on and resolve, and/or move them over into ORE. And in some cases, when we settled the debt -- just like a lot of times we settle the debt for more than the mark, there are occasions where we settle the debt for less than the mark. And when we do that, we need to provision for that difference; as well as when properties move into ORE with an appraised value below the carry value, we've got to provision for that difference.

So, that $3.8 million provision for the acquired loans is unique to the acquired loans that we purchased, both from the heritage, from Bay Bank, as well as from Bank Trust. So -- and there's also always, obviously, within this -- within the accounting side of it, there is some timing differences. Some things happen in June that get flushed out in July. We may have had some larger events happen in June that will get flushed out in July, maybe compared to March and April. But nonetheless, it's just a wash.

So, the $3.8 million, we don't view that as a -- as something that will be on a reoccurring basis. We would anticipate that number being more back in line with what we've historically provisioned for these acquired loans.

Okay, great color. And then moving back to the funding and loan growth I think you started to talk about -- just curious what -- and on the deposit and borrowing side, maybe sort of the dynamics there, what you're thinking about moving forward?

Okay. I'll ask Tom to address that. One of the good things about our franchisee is that it has very high, percentage-wise, very high levels of core deposit funding. And we -- you see a slight decrease from previous quarter in this quarter, but that really was planned as a result of moving some of the more expensive deposits, particularly in the Alabama markets, off the balance sheet. But the ability to attract dollars has been something that has been consistent throughout the franchise for quite some time, especially as we've gone through different cycles.

But, Tom, let me let you add to that, if you would please.

Yes. So as I said earlier, we -- David, do have ample liquidity to grow both loans and securities holdings as necessary and if desired. Tying it back to my comments on interest rate risk, I mean, obviously, you need to factor in both interest rate risk and your liquidity profile in terms of what you do with the investment portfolio.

So, depending on the pace of loan growth, and in particular, relative to deposit growth and the composition of the loan growth, the other lever you could pull is to take securities cash flows and redeploy them into loan growth. We currently run about $40 million to $60 million per month of investment security cash flows that we are currently reinvesting to maintain the portfolio at its current size. Obviously, we could ratchet back that reinvestment and have ample liquidity again to fund loan growth.

Great. Thank you.

Thank you, David.

Blair Brantley, BB&T Capital Markets.

Had a question on the loan growth. I just want to get some more color in terms of how much was taking share? How much was from new production? How much moved over from the acquired portfolio?

Good question. Well, go ahead, Barry.

Sure. I'll be glad to. Blair, I guess the increase that we've experienced, obviously, is a continuation of growing the relationship with our existing customers and then opportunities with new customers as well. I think it's important to note that about 33% of our growth for the quarter came from Alabama. And, of course, those are new loans in Alabama.

Of that 86% increase you see in Alabama, there was about $16 million that were loans that migrated from the acquired portfolio into the non-acquired portfolio. But the key there is, whenever we migrate a loan, there's accounting guidance that dictates when you can and when you can't; we're very careful not to migrate loans. This is a -- these loans that migrated are a complete rewrite. They are no different than any other loan that walks in the door. It's something that's not amortizing. And then you turn around and amortize it out over an extended period of time. New guarantors. New collateral. It's just a complete new loan.

So we don't view that as something where we've -- that $16 million to us is part of that $86 million, just like all the rest of it is. So we really do see one-third of our growth coming out of the Alabama market, which we are very excited about.

As far as the other growth we are experiencing, I would point you to the fact that our levels of shared national credits increased $9 million over the quarter. So obviously, when we grew $263 million, it's not coming through SNICs. And then year-to-date, our level of SNICs is actually substantially down.

So, these are going to be -- for the most part, these are going to be direct transactions, new borrowers, additional business with existing borrowers, well-diversified as to the types of lending, and well-diversified as to the markets. And we are very pleased to see the growth, but we are very cognizant of continuing to maintain, as Jerry said earlier, our underwriting discipline as well as our pricing discipline. And obviously, if we have to give on one, we'll give on pricing as we need to, to be competitive. We try to maintain our underwriting discipline throughout all the opportunities we evaluate.

Okay. Thank you. And then just a follow-up. Can you give a sense of then, I guess, the paydown activity from Q1 to Q2? Has that really changed at all? And what you're kind of seeing there?

We are not seeing a significant change on the non-acquired loans. We're not seeing a significant change in the paydown. It's just pretty standard business. We're not losing customers or relationships over price. So we are being competitive where we need to be on existing customers. So we're not seeing any unusual paydowns or payoffs on the non-acquired loans.

On the acquired loans, there is a natural progression for the problem loans to be worked to either be rehabilitated or to a past credit or to be worked out of the Bank. So, we fully expect that trend to continue, both on natural payoffs as well as the working out of problems.

Great. Thank you very much.

Thank you, Blair.

Jennifer Demba, SunTrust Robinson Humphrey.

I jumped on late, so if this has been covered, I apologize. The bank card revenue -- are you expecting that to come down seasonally in the third quarter on top of the decline related to Durbin?

Jennifer, no, we are not. We are actually -- if we are to take Durbin out, we have seen continued increase in bank card usage. We have done a number of retail promotions that effectively are aimed at putting the cards out there, showing the convenience. Obviously, though, there's been -- besides Durbin, there's been a number of issues in the news lately with the target situation that make it difficult to project. But our overall sense is that despite Durbin, we will continue to see an increase in volumes. And that that revenue is growing, although slowly, it is growing, not decreasing, outside of Durbin.

Okay. Thank you very much.

Thank you.

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

Thank you very much. I would like to thank you for joining in and your interest in Trustmark. It has been a very good second quarter for the Company in a lot of ways, with the loan growth, the improvement in credit quality, the steady growth of the Company. And we are very pleased with that. We would anticipate that as long as the economy continues to slowly improve, that our earnings will, as well.

We again appreciate you joining us and look forward to the third-quarter results. Thank you very much.

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