Trustmark Corporation (NASDAQ: TRMK) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Trustmark is a regional financial services company operating in Alabama, Florida, Mississippi, Tennessee and Texas.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $119.4 million | $105.0 million | $221.8 million | $209.0 million |
| Noninterest income | $56.4 million | $69.5 million | $117.0 million | $134.8 million |
| Total revenue | $175.8 million | $174.5 million | $338.8 million | $343.7 million |
| Net income | $48.0 million | $32.2 million | $99.9 million | $54.4 million |
| Diluted EPS | $0.76 | $0.51 | $1.57 | $0.85 |
| Net interest margin, fully taxable equivalent | 3.16% | 3.12% | 2.99% | 3.31% |
- Q2 return on average assets was 1.13% and return on average tangible equity was 13.96%; for the first half, these were 1.20% and 14.75%, respectively.
- At June 30, total assets were $17.10 billion, LHFI were $10.15 billion, and deposits were $14.63 billion. Since year-end 2020, LHFI grew $328.3 million (3.3%) and deposits grew $583.3 million (4.2%).
- Cash and due from banks were $2.27 billion, versus $1.95 billion at December 31, 2020. First-half operating cash flow was $188.1 million, investing cash flow was negative $388.4 million, and financing cash flow was positive $515.0 million.
- Allowance for credit losses on LHFI was $104.0 million, or 1.02% of loans, down from $117.3 million and 1.19% at year-end. Nonperforming assets were $60.9 million, or 0.58% of loans, LHFS and other real estate, down from $74.8 million and 0.73%.
- Borrowings included $157.2 million of federal funds purchased and repurchase agreements, $117.2 million of other borrowings, $122.9 million of subordinated notes and $61.9 million of junior subordinated debt. Trustmark reported regulatory capital ratios of 11.76% CET1, 12.25% Tier 1 and 14.10% total capital; it and its bank subsidiary met well-capitalized standards.
Material changes versus comparable periods
- Q2 net income rose about 49% year over year, while first-half net income rose about 84%. Q2 total revenue increased 0.8%, but first-half total revenue declined 1.4%.
- Net interest income increased, helped by lower deposit costs and PPP loan fees. The Q2 NIM improved 4 basis points year over year; first-half NIM fell 32 basis points. Excluding PPP loans and Federal Reserve balances, NIM was 2.94% for Q2 and 2.96% for the first half, down 41 and 48 basis points, respectively, year over year.
- Mortgage banking revenue fell 48.6% in Q2 and 37.7% for the first half, principally reflecting lower gains on loan sales. First-half noninterest expense increased 4.7%, including higher compensation and services costs.
- Credit-loss provisions shifted substantially: Trustmark recorded a negative $14.5 million provision on LHFI for the first half, versus a $38.8 million provision in the prior-year period. Management attributed the release mainly to improved economic forecasts and credit quality, while introducing portfolio-level probability-of-default and loss-given-default floors.
- First-half net recoveries were $1.2 million, compared with net charge-offs of $2.6 million in the prior-year period. Nonaccrual LHFI declined 18.5% from year-end, partly due to paydown and charge-off of a large energy-related credit and a commercial loan returning to accrual.
Outlook, commentary, risks and unusual items
- On June 30, Trustmark sold approximately $354.2 million of PPP loans, substantially all originated in 2021, to The Loan Source. The transaction accelerated recognition of $18.6 million of net unamortized origination fees into Q2; management said this principally brought revenue forward from future periods. Trustmark had $166.1 million of PPP loans remaining at quarter-end.
- Management described economic activity as improving but emphasized uncertainty about COVID-19’s duration and effects, including on borrowers in restaurants, hotels, retail and energy. Remaining COVID-related loan concessions were $19.0 million, down from $34.2 million at year-end.
- Management noted that prolonged low interest rates may pressure net interest income, margins and profitability. Its static-balance sensitivity model estimated that a 200-basis-point rate increase would raise one-year net interest income 21.8%, while a 100-basis-point decrease would lower it 7.9%; management cautioned actual results may differ.
- Liquidity sources include deposits, securities, federal funds lines, FHLB capacity and the Federal Reserve Discount Window. Trustmark reported $2.87 billion of additional FHLB of Dallas borrowing or letter-of-credit capacity, about $818 million of unencumbered agency securities and about $872 million of Discount Window collateral capacity.
- Trustmark resumed share repurchases in January 2021 and repurchased $25.0 million during the first half. The quarterly dividend was $0.23 per share; management indicated a 2021 annual dividend of $0.92 per share.
- Material legal matters include Stanford Financial Group-related litigation and a Madison Timber Properties-related receiver action. Trustmark said it is contesting the cases and that losses were not currently considered probable and reasonably estimable; it could not predict outcomes or timing.
- The filing identifies LIBOR transition as a risk: most U.S. LIBOR term rates were scheduled to end June 30, 2023, and inadequate transition management could adversely affect the company. Management said it had established a transition working group.
- No specific earnings or financial guidance was provided. Management stated that interim results are not necessarily indicative of full-year or future results.
Important facts for investors to verify
- How much of Q2 earnings growth reflects the $18.6 million PPP fee acceleration, and how revenue and margin trends develop after that timing benefit.
- Whether mortgage banking income continues to normalize and how loan production, sale gains and mortgage servicing rights perform.
- Whether credit quality and reserve releases remain supportable as pandemic assistance and loan concessions expire; monitor criticized loans, nonaccruals, charge-offs and the adequacy of the new reserve floors.
- Deposit growth composition and persistence, loan growth and exposure to commercial real estate and other COVID-affected industries.
- Interest-rate sensitivity, LIBOR contract conversion, liquidity capacity and capital levels alongside continued dividends and repurchases.
- Developments in Stanford and Madison Timber litigation, for which the filing did not provide a clear estimate of potential losses.