Trustmark Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Trustmark is a Mississippi-based financial services company operating 180 offices in Alabama, Florida, Mississippi, Tennessee and Texas through General Banking, Wealth Management and Insurance segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $152.4 million | $179.9 million | $491.2 million | $523.6 million |
| Net interest income | $98.3 million | $106.2 million | $320.0 million | $315.2 million |
| Net income | $21.2 million | $54.4 million | $121.1 million | $108.8 million |
| Diluted EPS | $0.34 | $0.86 | $1.92 | $1.71 |
| Net interest margin, FTE | 2.57% | 3.03% | 2.84% | 3.21% |
| Return on average assets | 0.49% | 1.37% | 0.96% | 0.97% |
Q3 earnings fell sharply as mortgage banking income declined and expenses rose; lower credit-loss provisions partly offset these pressures. Nine-month net income increased despite lower total revenue, supported by a substantially lower provision for credit losses and recognition of PPP loan fees. Management reported adjusted Q3 net income of $30.5 million, or $0.49 diluted EPS, excluding the retirement program and regulatory settlement; this is a non-GAAP measure.
Financial position, cash flow and capital
- At September 30, total assets were $17.36 billion, loans held for investment were $10.17 billion, deposits were $14.92 billion, and shareholders’ equity was $1.77 billion.
- Compared with December 31, 2020, loans held for investment grew 3.6% and deposits grew 6.2%. Noninterest-bearing deposits rose 14.7%.
- Cash and due from banks totaled $2.18 billion. Nine-month cash flows were $247.2 million from operating activities, negative $780.6 million from investing activities, and $755.9 million from financing activities; cash increased $222.6 million.
- At quarter-end, federal funds purchased and repurchase agreements were $146.4 million, other borrowings were $94.9 million, subordinated notes were $123.0 million, and junior subordinated debt securities were $61.9 million. The filing describes additional borrowing capacity through the FHLB and Federal Reserve Discount Window.
- Trustmark and its bank subsidiary were well-capitalized. Trustmark’s CET1 ratio was 11.68%, total risk-based capital ratio 14.01%, and Tier 1 leverage ratio 8.92%.
Material changes and unusual items
- Q3 mortgage banking income fell 61.6% year over year to $14.0 million; nine-month mortgage banking income fell 46.6% to $52.1 million. Lower loan-sale gains were the principal driver.
- Q3 noninterest expense increased 10.8% to $129.6 million. It included $5.6 million in expenses for a voluntary early-retirement program and a $5.0 million regulatory settlement charge related to fair-lending allegations in the Memphis area, as well as related commitments to expand credit opportunities.
- The company sold approximately $354.2 million of 2021-originated PPP loans in Q2 and recognized $18.6 million of deferred net fees earlier than otherwise expected. PPP loans outstanding declined to $46.5 million at September 30.
- The ACL on loans declined to $104.1 million from $117.3 million at year-end, mainly reflecting improved macroeconomic forecasts and credit-risk ratings. Net recoveries on loans were $3.8 million for the first nine months.
- Nonperforming assets were $72.5 million, or 0.69% of loans and other real estate, versus $74.8 million, or 0.73%, at year-end. Nonaccrual loans rose to $66.2 million, including a $16.7 million commercial credit in Texas placed on nonaccrual during Q3.
Outlook, risks and contingencies
The filing provides no specific earnings or growth guidance. Management described ongoing balance-sheet growth, strong credit quality and disciplined expense management, while noting that low interest rates pressure margins. Its interest-rate simulation estimated net interest income would rise 10.7% under a 100-basis-point increase and decline 6.7% under a 100-basis-point decrease; these are modeled scenarios, not forecasts.
Management cautioned that COVID-19’s duration and economic effects remain uncertain, particularly for restaurants, hotels, retail and energy borrowers. Other key risks include local economic and real-estate conditions, interest-rate and deposit behavior, competition, and the transition from LIBOR. Trustmark said it believes potential losses in the disclosed Stanford-related and Madison Timber litigation are not probable and cannot be reasonably estimated; it recorded no litigation accrual on that basis. Management stated pending proceedings are not expected to have a material adverse effect, while noting outcomes cannot be predicted.
Trustmark declared a quarterly dividend of $0.23 per share, payable December 15, 2021. It repurchased approximately $34.7 million of shares in the first nine months of 2021. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether mortgage banking revenue and margins can hold up as unusually strong prior-year mortgage activity normalizes.
- Whether the reduced loan-loss allowance remains adequate as pandemic-related support and borrower concessions unwind, especially for the Texas nonaccrual credit and exposed industries.
- The sustainability of deposit growth and the effects of interest-rate changes on net interest margin, funding costs and securities values.
- The full cost and execution of the Memphis fair-lending settlement commitments, and developments in the disclosed litigation.
- The earnings contribution from PPP fee acceleration and the timing of remaining PPP loan forgiveness.