Earnings Call Transcript - TRMK Q4 2020

Operator, Operator

Good morning, ladies and gentlemen and welcome to the Trustmark Corporation Fourth 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, today's conference call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark.

Joey Rein, Director of Investor Relations

Good morning. I'd like to remind everyone that a copy of our fourth-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 would like to caution you that these forward-looking statements may differ materially from actual results, due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission. At this time, I'd like to introduce Jerry Host, Executive Chairman of Trustmark Corporation.

Jerry Host, Executive Chairman

Thank you, Joey. Good morning, everyone and thank you for joining us. This past year has been an extremely challenging time for everyone. COVID-19 and the effects of this pandemic significantly impacted the ways in which we live, work, and interact with each other. As an essential business in the communities we serve, our associates quickly adapted and found new ways to serve our customers and meet their financial needs during these unprecedented times. Customers embraced our digital banking platforms and many associates transitioned to a remote work environment. While not without challenges, our associates never missed a beat and we leveraged investments in technology and learned lessons that have strengthened our organization. During the course of the year, we participated in the government's Paycheck Protection Program, to help those struggling in our communities pay their employees and sustain their businesses. We provided nearly $1 billion in PPP funds through more than 9,000 loans. That's nearly two years of normal loan production in a period of less than two months. Our associates went above and beyond to ensure our customers and communities received the assistance needed. I'm extremely proud of their tireless efforts. Last week, we began processing applications to provide additional support for those in need under the latest round of the SBA's Paycheck Protection Program. We also helped our communities in a number of ways, including programs to provide meals for first responders and members of the healthcare industry. Trustmark also provided funds for school and community-based food programs for students and families. And in our Sleigh Hunger Campaign, contributing more than $250,000 to food banks and pantries across our five-state franchise. As we begin 2021, Trustmark remains committed to providing solutions to the customers and communities we serve. Now, I will ask Duane Dewey, Trustmark's President and CEO, to share with you our performance for the fourth quarter and 2020. Duane?

Duane Dewey, President and CEO

Thank you, Jerry. With us this morning are Louis Greer, our CFO; Barry Harvey, our Chief Credit Officer; and Tom Owens, our Bank Treasurer. We are pleased to announce net income of $51.2 million or $0.81 per share in the fourth quarter. For the year, Trustmark's net income totaled a record level of $160 million, representing diluted earnings per share of $2.51. Let's briefly review the financial results, which start on slide three of our presentation. Loans held for investment in 2020 increased $488.9 million, or 5.2% from the prior year. As Jerry mentioned, we did participate in the SBA's Paycheck Protection Program and originated $970 million in loans. We also had a record level of mortgage production totaling $3 billion for the year, which produced non-interest income of $125.8 million. Total deposits increased $2.8 billion or 24.9% from the prior year, reflecting additional customer liquidity. Total revenue in 2020 was $701.1 million, a 14.3% increase from the previous year. Pretax pre-provision net revenue totaled $239.2 million, an increase of 29.6% from this time last year. These are very solid results, particularly in light of the operating environment. Adjusted non-interest expense for the year totaled $455.4 million and our efficiency ratio improved to 63.35%. Credit quality continues to remain solid for 2020 as non-performing assets declined 9.3% from the prior year and net charge-offs represented 0.02% of average loans. We maintain strong capital levels and provided consistent cash dividends. The Board declared a quarterly cash dividend of $0.23 per share payable March 15th to shareholders of record on March 1st. As you may recall, we suspended our share repurchase program during the first quarter of 2020, given the economic uncertainty related to the pandemic. We now expect to resume the share repurchase program through open market or private transactions depending on market conditions and management's discretion. We have authorization to repurchase up to $100 million of Trustmark's outstanding common shares through December 31 of 2021. At this time, I'd like to ask Barry Harvey to provide color on loan growth and credit quality.

Barry Harvey, Chief Credit Officer

Thank you, Duane. Looking on to slide four, as you can see our held for investment, excluding PPP loans totaled $9.8 billion as of December 31st, a slight decrease of 0.2% from the prior quarter, and an increase of $489 million or 5.2% year-over-year. CRE was the driver of the majority of our loan growth during 2020. The loan portfolio remains well-diversified, based both on product type as well as geography. Moving on to slide five, Trustmark's CRE portfolio is 66% existing, 34% construction land development. It's important to note that the construction land development is 80% construction. 87% of our total CRE book is vertical in nature. The bank's owner-occupied portfolio has a good mix between real estate types and industries. Looking on to slide six, the bank’s commercial loan portfolio is well-diversified, across numerous industries. Typically, these loans are well secured, governed by a formulated borrowing basis, and with covenants to protect both the income statement and the balance sheet. On slide seven, 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 only has one customer with $11 million outstanding. The bank has always underwritten both hotel and retail CRE in a conservative manner and our exposure to these industries is being monitored carefully. Only 0.35% of our total loan book remains on some type of COVID concession plan, as of year-end. That's down from a peak of roughly 12% earlier in Q2 of 2020. Looking at slide eight, we conducted a follow-up review during the fourth quarter of 2020 of our COVID-19 portfolio that had potentially been impacted by the economic environment resulting from the virus that was approximately $1.8 billion worth of loans that we consider in this category. These are loans that have had one or more payment extensions or payment deferrals, as a result of the impact of COVID-19 on the business and/or those that have been in industries that have been greatly impacted such as hotels and restaurants. We reviewed roughly $970 million of that $1.8 billion book during Q4, which gave us a coverage of about 54%. We focused on the low-past credits and the non-pass graded credits within that book. Approximately 47% of the loans reviewed did have one or more concessions granted to them. We also got coverage in our hotel portfolio of about 93%. In our restaurant portfolio, we looked at about 44%. And then, of our retail CRE book, we looked at about 41% of that. So, out of all that, we reviewed $970 million worth of credits. We ended up downgrading to non-pass $32 million. So we felt good about the fact that we only moved $32 million into the criticized category during this review. Looking on to slide nine, our allowance for credit losses decreased to $4.7 million from the prior quarter. Our reserve calculation included increases in the qualitative changes due to the efforts to fully address and recognize the impact of the COVID-19 pandemic. It also reflected decreases in our quantitative reserve, as a result of the fact that our economic forecast continues to improve throughout the second half of 2020. At December 31, 2020, the allowance for credit losses on loans held for investments totaled $117.3 million. Looking on to slide 10, we continue to maintain solid asset quality metrics, the allowance for credit losses represents 1.19% of loans held for investment. That's 573% of non-performing loans, excluding those that are individually evaluated. During Q4, net charge-offs totaled only $291,000 or 0.01% of average loans. Other real estate declined 28% linked quarter and 60% from this time last year. Looking at slide 11. As Jerry indicated earlier and Duane as well, the bank actively participated in the first couple of rounds of the Paycheck Protection Program and successfully assisted a significant number of local businesses that have been negatively impacted by the COVID-19 pandemic. Our PPP loans totaled $610 million at December 31, 2020 net of the deferred loan fees and costs.

Duane Dewey, President and CEO

Yes. Thank you, Barry. Turning now to the liability side of the balance sheet. I'd like to ask Tom Owens to discuss our deposit base and net interest margin.

Tom Owens, Bank Treasurer

Thanks, Duane. So turning to Slide 12. Deposits totaled $14 billion at December 31, up $826 million or 6.2% from the prior quarter and up $2.8 billion or almost 25% year-over-year. Average balances were essentially unchanged linked quarter at $13.5 billion and up $2.2 billion year-over-year primarily reflecting additional customer liquidity associated with the PPP loan program and government stimulus payments. Our cost of interest-bearing deposits declined 4 basis points in the third quarter to total 27 basis points. We continue to maintain a favorable deposit mix at year-end with 31% in non-interest-bearing deposits and 64% of deposits in checking accounts. Our liquidity remained strong with a loan-to-deposit ratio of 74% at year-end and reliance on wholesale funding at 3% of assets. Turning our attention to revenue on Page 13. Net interest income FTE totaled $114.3 million in the fourth quarter representing a linked-quarter increase of $5.1 million. Interest and fees on PPP loans totaled $14.9 million which was an increase of $8.1 million from the prior quarter driven by the accelerated recognition of previously deferred PPP loan origination fees as a portion of the PPP loan portfolio paid down. Core net interest income FTE was $99.4 million which was a decline of $3 million from the prior quarter as a reduction of $3.6 million in core interest income more than offset a decline of $600,000 in interest expense. About $2.6 million of the linked quarter decline in interest income was driven by a decline in securities yield to 1.65%, representing a linked-quarter decline of 40 basis points. The decline in securities yield was driven by higher residential mortgage prepayment speeds, lower reinvestment yields and a reduction in yield in payment receipts. Net interest margin in the fourth quarter of 3.15% increased 12 basis points from the third quarter, driven by the accelerated recognition of PPP loan origination fees, while core NIM excluding PPP loans of 2.91% in the fourth quarter, declined by 14 basis points from the third quarter. Average other earning assets remained elevated during the quarter as the anticipated reversal in public fund, as well as certain other deposit balances have yet to begin in earnest. We continue to anticipate a reversal in 2021, but given the uncertainty around magnitude and timing we also expect to continue carrying significantly elevated excess Fed reserves for some period of time. And now Duane will continue with an update on non-interest income.

Duane Dewey, President and CEO

Thanks Tom. Looking at Slide 14. Non-interest income for the fourth quarter totaled $66.1 million, a decrease of $7.6 million from the prior quarter. The linked quarter change reflects increases in service charges on deposit accounts, bank card and other fees which were offset by seasonal decreases in mortgage banking and insurance revenue. The $87.5 million increase from 2019 to 2020 was mainly due to increased mortgage banking revenue. As noted, the mortgage banking group reported solid production for 2020 and we will discuss its results in more detail in a minute. Insurance revenue for 2020 totaled $45.2 million, a high watermark up $2.8 million from the prior year. Wealth management revenue for the year was $31.6 million, a $946,000 increase over this time last year. For the year ended 2020 non-interest income totaled $274.6 million, an increase of $87.5 million from the prior year. For the fourth quarter non-interest income represented 37.3% of Trustmark's revenue and reflected a strong and diversified revenue stream. Turning to Slide 15. Our mortgage banking group had a record year in 2020 with loan production totaling $3 billion, an increase of 69.4% from the prior year. For the fourth quarter mortgage loan production had a seasonal decline of 11% from the prior quarter and an increase of 58.1% year-over-year. In the fourth quarter retail production represented 73.4% of the volume or $579 million, a very strong year for our mortgage group for sure. Louis will now cover non-interest expense and capital management.

Louis Greer, CFO

Thank you, Duane. Let's move to slide 16. As you can see, we've detailed our non-interest expenses, broken down into adjusted core other. Our core expenses for the quarter were $119.6 million, which is a $5 million increase from the previous quarter. This increase can be attributed to three factors: first, salaries and benefits went up due to additional performance-based incentives accrued during the quarter, totaling around $2.5 million. Second, service fees for technology rose by about $1.3 million as we continue to invest in technology and professional services. Third, other expenses also increased by roughly $1.3 million. As Jerry mentioned earlier, we made significant contributions to non-profits in the fourth quarter, totaling approximately $300,000, which contributed to the rise in other expenses. For 2020, as Duane highlighted, our non-interest expenses totaled $455 million, representing an increase of $34 million compared to 2019. For the year, salaries and employed benefits increased by $20 million. This was largely due to various factors, including a $10 million rise in mortgage commissions driven by the revenues generated, which, as Duane pointed out, constituted 50% of the commissions from mortgage production. Other salary and benefit increases accounted for $10.5 million, as also noted in slide 16. Additionally, services and fees increased by $10.5 million over the year as we continued to invest in technology and professional services. In 2020, our credit loss expenses related to off-balance sheet and credit exposures grew by about $9 million following our implementation of CECL, although real estate expenses decreased by about $2 million due to fewer write-downs on other real estate and increased gains from property disposals. In 2020, Trustmark also incurred a one-time charge of approximately $4.4 million related to a voluntary early retirement program initiated in the first quarter. Looking ahead to guidance for the first quarter, we anticipate our adjusted core non-interest expenses to be approximately $114 million to $116 million, which depends primarily on mortgage production in the first quarter, which is currently looking relatively strong. So again, the guidance for the first quarter stands at $114 million to $116 million. Now, moving to capital. As shown on slide 17, Trustmark is well-positioned from a capital standpoint. In the fourth quarter, Trustmark issued $125 million in subordinated fixed-to-floating notes at a rate of 3.625%, enhancing our regulatory Tier 2 capital ratio. These proceeds are meant for general operational purposes. Consequently, our capital ratios remain robust, with a common Tier 1 ratio of 11.62% and a total risk-based capital ratio of 14.2%, an increase from 13.25% at the end of 2019. As Duane indicated, the Board declared a quarterly dividend of $0.23 per share payable on March 15 to shareholders of record on March 1. Additionally, as mentioned by Duane, we have lifted our self-imposed suspension on the repurchase program, authorizing up to $100 million of common stock repurchases through December 31, 2021. This repurchase may occur through open market transactions or private deals, depending on market conditions and management’s discretion. Duane, I’ll now turn it back over to you.

Duane Dewey, President and CEO

Okay. Thank you, Louis. I trust this discussion of our fourth quarter financial results; it's been insightful and helpful. At this time, we do open the floor for any questions that we may see.

Operator, Operator

And ladies and gentlemen, at this time we’ll begin the question-and-answer session. Our first question today comes from Jennifer Demba from Truist Securities. Please go ahead with your question.

Jennifer Demba, Analyst

Thank you. Good morning.

Duane Dewey, President and CEO

Good morning, Jennifer.

Jennifer Demba, Analyst

So, just a question about what you're expecting in terms of loan growth this year? It would be my first question. And then secondly, can you talk about your interest in M&A? Right now, you have pretty robust capital levels. Thanks.

Duane Dewey, President and CEO

Barry, go ahead.

Barry Harvey, Chief Credit Officer

Glad to, Duane. Jennifer, I think, what we're looking at this year is probably going to be low single-digit loan growth. I think as we had guided the Street last year or 2020 to mid-single-digits and that's exactly where we ended up. I think for this year, we’d be expecting low single-digits at this point. Obviously, as the year goes along, we'll have a better feel for that. I think the biggest headwind we have for 2021 versus 2020, it's going to be – we have about $0.5 billion worth of CRE projects that are scheduled to move out. Now if any of those get delayed then obviously, that would impact – that would positively impact our loan growth. And then we do anticipate as we plan out the year and anticipate – and budget out our loan growth, we do anticipate a certain amount of unexpected payoffs coming from that CRE book and we've been pretty much in line with that. So we do plan for the unexpected. We do put it in our forecast and in our budget, but we do have scheduled that we believe will happen about an additional $0.5 million worth of payoffs that we've not had that headwind in previous years. It's kind of just something that cycles through. Most of these are about 40-month, 48-month processes. And it just so happens, we have a larger number than normal that are slated to leave us during 2021. The production coming out of that CRE portfolio is extremely strong. It's good now as it's ever been. So it's not a matter of production there. It's just a matter of some payoffs that are kind of an aberration for 2021 versus what we experienced in 2020 and 2019 or maybe what we'll see in 2022. So for that reason we do – we have lowered our expectations to low single-digits as far as loan growth for 2021. Duane?

Duane Dewey, President and CEO

Jerry, do you want to answer the M&A?

Jerry Host, Executive Chairman

Yes. And thank you for that question, Jennifer. As far as M&A as you mentioned, we're positioned well. We feel from a capital perspective. We also feel like over the last several years. We've done some things to strengthen and improve internal structure as it relates to compliance-related and risk management issues. Some of the restructuring Duane did last year in the company in his role as Chief Operating Officer has allowed us to grow the company in a way that we think we could take kind of a sizable organization in terms of an acquisition. Our focus remains within the southeastern part of the United States. We'd like to do something that either complements our existing footprint and would allow for some improvement in our overall concentration level in certain markets or to enter some new markets in the southeast that we're not yet in. As you've heard from Barry in the past, we are doing business with some existing customers and some of the larger markets like Atlanta or Nashville or Dallas. We'd like to remain focused in markets that we've operated in. We entered the Birmingham market. As you know, we'd like to look at expanding further in the Houston market, if there's an opportunity there and certainly along the I-10 and I-20 corridor.

Operator, Operator

Our next question comes from Brad Milsaps from Piper Sandler. Please go ahead with your question.

Brad Milsaps, Analyst

Hey. Good morning.

Jerry Host, Executive Chairman

Good morning, Brad.

Brad Milsaps, Analyst

Maybe I wanted to start with the balance sheet and the margin with Tom. Well, obviously, a lot of moving parts, particularly with some of the municipal inflows that you guys see at the end of the year. It looks like you finished during the quarter had just under $900 million of average liquidity. Total cash balances were closer to $2 billion. I'm not sure how much of that's actually interest-earning cash, but can you give us a sense of, kind of, how you're thinking about that liquidity? I know you mentioned you expect it to flow out kind of in the first part of the year, but kind of how that kind of dovetails with kind of how you're thinking about the margin NII in 2021?

Tom Owens, Bank Treasurer

Sure, Brad. This is Tom. We finished the year with around $2 billion, mostly consisting of excess reserves at the Fed earning 10 basis points. In rough numbers, we have about $1 billion that we believe is associated with large depositors, which is expected to decline throughout 2021. The remaining $1 billion is more widely spread out, and we will need to see what the effective duration of those deposits turns out to be. We would like to utilize a portion of those deposits if they have any effective duration. It seems reasonable to expect a growth of about 10% in our securities portfolio, which has been targeting around $2.5 billion. However, as you've likely noticed during this earnings season, there aren't many attractive options for securities growth, which makes it less compelling for us. Therefore, we might proceed cautiously. This situation does affect the net interest margin. The positive aspect is that we aren't paying any significant rate on the deposits, so it could be considered a break-even scenario with the large depositors or perhaps even a slight positive for us rather than a negative impact.

Brad Milsaps, Analyst

Got it. That's helpful. And I guess, I mean that kind of accounts for the liquidity you have now. And then presumably you'll be giving more as the PPP loans forgive as well?

Tom Owens, Bank Treasurer

Yes, the liquidity remains with us. It essentially shifts from one area to another. What we are giving up is the run rate yield, which acts as a headwind to our overall net interest income. This situation complicates matters. When considering the PPP program and the loans, while they may seem non-core, if those loans are mostly paid down or forgiven, it raises the question of when we should view the excess liquidity as non-core versus core. It's difficult to discuss net interest margin dynamics as we used to.

Brad Milsaps, Analyst

I completely understand. Thank you, that's helpful. Just as a follow-up question, Louis, I appreciate the guidance regarding expenses in the first quarter. I know it's quite tricky with the way mortgage rates can fluctuate. However, I'm curious about any broader expense plans or initiatives related to branch closures. Is there anything else being considered to address the more challenging revenue environment?

Louis Greer, CFO

Well, Brad, as you're aware I've announced my retirement as of March 1st. I'm turning that to Tom Owen who is sitting across me and Mr. Duane who's been turned over from Jerry as CEO. So, I'm going to let those two gentlemen comment about that.

Brad Milsaps, Analyst

I wanted to give you one more shot Louis.

Louis Greer, CFO

Yes, I'll refer to these gentlemen.

Duane Dewey, President and CEO

Thank you for the question, Brad. We are highly focused on expansions. In this challenging revenue growth environment, it is a top priority for us across the organization. We have tasked every executive to evaluate and concentrate on expenses within their business units. Regarding branch optimization, we closed six branches in 2020 and have identified another 10 to 13 for 2021 as part of our ongoing program that has been in place for over a decade. We are committed to optimizing our branch system and enhancing how we serve our customers. In several markets, we are implementing a strategy of closing two branches and opening one in a more favorable location. We are still assessing the adoption of digital platforms and customer interactions. We have introduced a significant number of ITMs throughout our network. Therefore, branch optimization remains a key focus. Additionally, we have initiated an internal headcount management program where every open position, mid-year raise, and all aspects of salary and benefits are being scrutinized for expense management. As Louis mentioned, we are leveraging technology to improve efficiency across the company. While Louis provided first quarter guidance, I want to emphasize that we are intensely focused on managing expenses for 2021 and beyond. Tom, do you have any comments or additions?

Tom Owens, Bank Treasurer

Nope.

Brad Milsaps, Analyst

Okay. Thank you, guys.

Operator, Operator

Our next question comes from Catherine Mealor from KBW. Please go ahead with your question.

Catherine Mealor, Analyst

Thanks. Good morning.

Tom Owens, Bank Treasurer

Good morning.

Louis Greer, CFO

Good morning.

Catherine Mealor, Analyst

I wanted to follow-up on the margin and see if you could talk a little bit about your outlook for loan yields and where new loan production is coming on today. And then on the other side of the balance sheet where you think deposit costs will end up bottoming out later this year? Thanks.

Tom Owens, Bank Treasurer

Sure, Catherine. This is Tom. Thank you for your question. Regarding the margin, specifically the net interest margin overall, it's a bit challenging to provide exact figures, but I can share some guidance on the key elements of core net interest income and the resulting core net interest margin. For the full year 2021 compared to 2020, we anticipate a decline of around 60 basis points in security yields and approximately 40 basis points in loan yields, which will be somewhat balanced by a 20 basis point reduction in interest-bearing deposit costs. Taking this into account, we expect a year-over-year decline in core net interest income for 2021 to be in the high single digits. However, with the growth in earning assets, particularly the gains from 2020 and the expected growth for 2021, we project a mid-single-digit increase year-over-year in core net interest income. Therefore, the net effect results in a low- to mid-single-digit percentage decline in core net interest income year-over-year. In terms of the Paycheck Protection Program, we are currently estimating an $8 million decrease in total net interest income for 2021 compared to 2020. This also leads us to expect a mid-single-digit percentage decline in total net interest income year-over-year.

Catherine Mealor, Analyst

Got it. And does that $8 million decline year-over-year include an assumption for the second round of PPP or just the first round?

Tom Owens, Bank Treasurer

Just the – so Catherine just the existing loans on the books from the first and second round, not for the current round. Again, it's very early days there. And maybe I'll ask Barry to weigh in with kind of the start that we're off to there and maybe any outlook on volume and economics associated with that.

Barry Harvey, Chief Credit Officer

I'll be glad to, Tom. Catherine, I think we've been very pleased with the volume thus far. It's been very steady through last Friday. Since then, it's begun to slow down a little bit. But as you can imagine, there's a lot of people who sit on ready and as it was in the previous two rounds that we had, if you consider when we ran out of money and then they replenished the money in the second round. So from our point of view, the volumes have been good and solid as you'd expect; it's a high percentage of second draws and that's good for Trustmark. So, we know we're helping our first round customers. Our first draw customers come through again and get that second draw. I think that overall we've been very pleased with the program. We do expect for that to continue to be volume as the program continues to move along. But we did expect and we did see a heavy volume the first three to four days and then it's begun to taper off after that. As you know, the fee program for this third round if you will is a little more attractive for the banks, especially when you get down into the smaller loans, it becomes more attractive than it was previously. We're averaging about $100,000 per loan and that's where we were in the prior two programs as well.

Catherine Mealor, Analyst

Okay. Great. Great. And then how about on the buyback? How aggressive do you think you – maybe how soon do you feel like you'll turn the buyback on? And is it your intention to try to repurchase the entire authorization, or do you look at this more as opportunistic, if there's more volatility in your stock price?

Tom Owens, Bank Treasurer

Hey, Catherine, this is Tom. So definitely in the camp of opportunistic as compared to programmatic, I would describe it. I would say that we're reactivating, and there's no change in our practices. In other words, we have a pretty disciplined framework for comparing the returns available on deployment via share repurchase versus other forms of deployment. And I think as you've seen in the past that results in – that will result in a quarter or quarters, where there's no repurchase activity. And then it will result in a quarter where there's substantially more repurchase activity. And we feel good about the value that we've been able to add over the years by conducting it in that manner. So, I would say that we'll continue with that practice. And there's not a target in terms of redeployment relative to the subnet issuance, for example. It is more opportunistic. As we've said in the past, our regulatory capital ratios are above our operating targets. And so, we do have operating target ranges that we're trying to manage to win them. So you can expect that you will see repurchase activity, as soon as here in the first quarter, depending on what type of opportunity the market presents us to do so.

Catherine Mealor, Analyst

Thank you so much for the help.

Tom Owens, Bank Treasurer

Thank you.

Operator, Operator

And our next question comes from Joe Yanchunis from Raymond. Please go ahead with your question.

Joe Yanchunis, Analyst

I appreciate taking my question. I guess as a follow-up to the last question what are your operating target ranges for your capital ratios?

Tom Owens, Bank Treasurer

Well, this is Tom. We have not disclosed those in the past. As I mentioned, we're above the ranges. If you look at our capital ratios, it's reasonable to conclude that our target ranges are hundreds of basis points above well capitalized. So, we definitely have room to deploy via share repurchase.

Joe Yanchunis, Analyst

Understood. Understood. And then what is your sense on how the mortgage business will perform in 2021? And how do you view the gain on sale margin? So what other fee businesses do you expect will be a partial offset? Thanks.

Duane Dewey, President and CEO

This is Duane. I'll take a stab. So the mortgage business it's very difficult to forecast. As stated multiple times, 2020 was a phenomenal year in many regards. There is seasonality. First quarter or fourth quarter are usually slower quarters. Fourth quarter was dramatically higher than what we experienced in the prior year. First quarter similar compared to 2019, albeit down from the fourth quarter in terms of volume. The industry is forecasting 30% or higher declines in volumes. But as you pointed out and as you know volume or production volume is one part of the equation. The other part is the gain on sale. We – the 2020 gain on sale margin was extremely strong virtually the entire year. We started to see some pullback in the fourth quarter in that margin, but it's really difficult to forecast and project what we're going to see in 2021 at this point. Tom do you have any further comments on the gain on sale margin? We do see it tightening. Maybe not to the norm loans, but we do see it tightening some in 2021. And then the other offset Louis mentioned it when he talked about expenses. But as mortgage production volume goes down commission expenses go down likewise. I think in 2020, we experienced about a $10 million increase in our commissions related to the mortgage production. And so if we see mortgage production normalize in 2021, there's an offset on the expense side as well.

Joe Yanchunis, Analyst

Got it. And then just one more quick housekeeping question. In the slide deck, it looks like there's about $12.9 million of fees left to be recognized under rounds one and two of the PPP program. Is that correct?

Tom Owens, Bank Treasurer

That's roughly correct.

Louis Greer, CFO

Correct. Yes.

Joe Yanchunis, Analyst

All right. Well, thank you very much.

Operator, Operator

And ladies and gentlemen that will conclude today's question-and-answer session. At this time I'd like to turn the conference call back over to Duane Dewey for any closing remarks.

Duane Dewey, President and CEO

We appreciate everybody participating on today's call. We had a very fantastic year under very challenging and difficult circumstances. We do appreciate you listening in and we appreciate your interest in our company and look forward to getting back together at the end of the first quarter. Thank you.

Operator, Operator

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.