Trustmark Corporation (NASDAQ: TRMK) — Q3 2020 Form 10-Q
Business context and reporting period
Trustmark is a bank holding company headquartered in Jackson, Mississippi, operating 187 offices across Alabama, Florida, Mississippi, Tennessee and Texas. This filing covers the quarter and nine months ended September 30, 2020. Results were shaped by the COVID-19 pandemic, historically low interest rates, Paycheck Protection Program (PPP) lending and elevated mortgage refinancing activity.
Financial performance
- Third quarter: Total revenue was $179.9 million, up 14.7% year over year. Net interest income was $106.2 million, down 2.1%; noninterest income was $73.7 million, up 52.5%; and net income was $54.4 million, or $0.86 per diluted share, versus $41.0 million, or $0.64, a year earlier.
- First nine months: Total revenue was $523.6 million, up 13.7%. Net interest income was $315.2 million, down 1.8%; noninterest income was $208.5 million, up 49.5%; and net income was $108.8 million, or $1.71 per diluted share, versus $116.5 million, or $1.80, in 2019.
- Margins and returns: Net interest margin was 3.03% in Q3 versus 3.66% a year earlier, and 3.21% for the nine-month period versus 3.64%. Return on average assets was 1.37% for Q3 and 0.97% year to date, compared with 1.21% and 1.15%, respectively, in 2019.
- Credit costs: Provision for credit losses was $1.8 million in Q3 and $40.5 million for the first nine months, compared with $3.0 million and $7.1 million in the corresponding 2019 periods. The Q3 provision reflected pandemic-related borrower downgrades, partly offset by improved economic forecasts. Nine-month credit costs were substantially higher amid pandemic-driven forecast deterioration and adoption of the expected-credit-loss standard.
- Operating costs: Noninterest expense increased 6.7% in Q3 to $114.0 million and 11.7% year to date to $356.4 million. First-quarter expenses included $4.3 million for a voluntary early-retirement program.
Financial position, liquidity and capital
- At September 30, total assets were $15.56 billion, compared with $13.50 billion at December 31, 2019. Loans held for investment were $9.85 billion, up 5.5%; deposits were $13.22 billion, up 17.6%.
- PPP loans totaled $944.3 million net of deferred fees and costs. They are separately presented, 100% guaranteed by the SBA, and excluded from the LHFI portfolio.
- Cash and due from banks was $564.6 million. Nine-month operating cash flow was negative $29.0 million; investing cash flow was negative $1.57 billion; financing cash flow was positive $1.80 billion, primarily reflecting deposit growth. Cash and cash equivalents increased $205.7 million over the period.
- Other borrowings were $178.6 million; federal funds purchased and repurchase agreements were $153.8 million; junior subordinated debt was $61.9 million. Shareholders’ equity was $1.71 billion.
- Trustmark reported a 9.20% Tier 1 leverage ratio, 11.36% common equity Tier 1 ratio and 12.88% total risk-based capital ratio. The company and bank met applicable well-capitalized guidelines. Management said liquidity and capital resources were adequate; available sources included $2.82 billion of additional FHLB Dallas capacity and $913 million of Federal Reserve Discount Window collateral capacity.
Material changes and management commentary
- Mortgage banking was the principal driver of revenue growth: it contributed $36.4 million in Q3 and $97.7 million year to date, versus $8.2 million and $21.9 million in 2019. Higher loan-sale gains and mortgage production, driven in part by refinancing, were key factors.
- Deposit growth reflected customer funds from line draws, PPP loans and other pandemic-related stimulus. Lower deposit rates reduced interest expense, partly offsetting lower yields on loans, securities and other earning assets.
- The ACL on LHFI was $122.0 million, or 1.24% of LHFI, versus $84.3 million, or 0.90%, at year-end. The separate allowance for off-balance-sheet exposures was $39.7 million. CECL adoption produced a $19.9 million after-tax reduction to opening retained earnings.
- Trustmark reviewed $1.8 billion of loans to pandemic-affected borrowers and downgraded approximately $156.1 million to criticized risk categories. At September 30, it reported $1.32 billion of loans modified under COVID-related relief guidance; these modifications were not treated as TDRs under applicable guidance.
- Nonperforming assets were $70.1 million, down 15.0% from year-end, mainly reflecting lower other real estate. Nonaccrual LHFI was $53.9 million. Reported TDRs totaled $25.4 million.
- The board declared a $0.23 quarterly dividend, payable December 15, 2020. Share repurchases were suspended in March to preserve capital during the pandemic. The company completed a $5.0 million insurance-agency acquisition in May and announced executive succession plans effective in 2021.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said the pandemic’s duration and its effect on borrowers and local economies remained uncertain. It warned that prolonged low rates could pressure net interest income, margins and profitability; the reported rate-sensitivity analysis estimated that a 100-basis-point decline would reduce one-year net interest income by 5.7%, while a 100-basis-point increase would raise it by 7.3%.
Key risks include further deterioration among hotel, restaurant, retail and energy borrowers; uncertainty in credit-loss estimates and government support measures; mortgage servicing right valuation sensitivity; LIBOR transition costs and execution; and potential PPP-related litigation or SBA guarantee denials. Trustmark disclosed Stanford-related lawsuits and a Madison Timber-related suit involving its bank subsidiary. Management said, based on legal counsel, that losses were not considered probable and reasonably estimable, and that the proceedings were being vigorously contested. Goodwill was not considered impaired in the September evaluation, but management will continue monitoring it.
Important facts for investors to verify
- Whether mortgage banking gains and refinancing volumes remain strong, and how their normalization affects earnings.
- Changes in loan downgrades, payment modifications, nonaccruals, charge-offs and both on- and off-balance-sheet credit allowances as pandemic support measures evolve.
- PPP forgiveness, deferred-fee recognition and any SBA eligibility or guarantee disputes.
- Deposit mix and funding costs, loan growth, and the effect of low rates on net interest margin.
- Developments in the Stanford and Madison Timber litigation, LIBOR transition planning, and capital allocation, including any resumption of share repurchases.