Trustmark Corporation — Q2 2020 Form 10-Q
Business and period: Trustmark is a Mississippi-based bank holding company operating 187 offices across Alabama, Florida, Mississippi, Tennessee and Texas. This filing covers the quarter and six months ended June 30, 2020; balance-sheet comparisons are to December 31, 2019 unless otherwise noted. The company adopted the CECL expected-credit-loss standard on January 1, 2020, so some credit-loss comparisons with 2019 use different accounting methods.
Financial performance and condition
| Metric | Q2 2020 | Prior comparable period / change |
|---|---|---|
| Net interest income | $105.0 million | Down 2.5% from Q2 2019 |
| Net interest margin, fully taxable equivalent | 3.12% | Down 52 basis points from Q2 2019 |
| Noninterest income | $69.5 million | Up 40.0%; mortgage banking was the main driver |
| Noninterest expense | $118.7 million | Up 11.8% |
| Provision for credit losses | $18.2 million on loans; $6.2 million on off-balance-sheet exposures | Loan provision was $2.5 million in Q2 2019; off-balance-sheet allowance began with CECL |
| Net income and diluted EPS | $32.2 million; $0.51 | Net income was $42.1 million and diluted EPS $0.65 in Q2 2019 |
| Total revenue | $174.5 million | Up 10.9% from Q2 2019 |
For the first six months, net income was $54.4 million, down from $75.5 million in 2019; diluted EPS was $0.85 versus $1.16. Total revenue rose 13.2% to $343.7 million. Net interest margin was 3.31%, down 32 basis points year over year. Mortgage banking income increased to $61.2 million from $13.7 million, reflecting higher loan-sale gains and positive net hedge ineffectiveness. The six-month results included $4.3 million of pretax expense for a voluntary early-retirement program.
At June 30, total assets were $15.69 billion, including $9.66 billion of loans held for investment (LHFI), $939.8 million of net PPP loans and $1.03 billion of cash. Deposits were $13.51 billion, up 20.1% from year-end, including growth in both noninterest-bearing and interest-bearing accounts. Shareholders’ equity was $1.67 billion. Borrowings included $70.3 million of federal funds purchased and repurchase agreements, $152.9 million of other borrowings and $61.9 million of junior subordinated debt securities.
Six-month cash flows were $15.6 million provided by operating activities, $1.37 billion used in investing activities and $2.02 billion provided by financing activities; cash and cash equivalents rose $667.7 million to $1.03 billion. The filing reports regulatory capital ratios of 11.42% CET1, 11.94% Tier 1, 13.00% total risk-based capital and 9.08% Tier 1 leverage for Trustmark. Trustmark and its bank subsidiary met the filing’s well-capitalized criteria.
Material changes and credit quality
- CECL adoption produced a $19.9 million after-tax reduction to opening retained earnings. At June 30, the loan ACL was $119.2 million, or 1.23% of LHFI, versus $84.3 million at year-end under the prior accounting basis. The allowance for off-balance-sheet exposures was $42.7 million.
- Management attributed increased credit provisions principally to COVID-19 effects in its economic forecasts. Six-month total credit-loss expense was $51.8 million. Net charge-offs were $2.6 million for the half-year; Q2 had net recoveries of $0.4 million.
- Nonperforming assets declined 17.2% from year-end to $68.3 million. Nonaccrual LHFI was $50.0 million; other real estate was $18.3 million. These measures do not eliminate the risk of later deterioration.
- Mortgage loan production and sales increased substantially amid low rates and refinancing activity. Mortgage servicing rights fell to $57.8 million from $79.4 million at year-end, mainly reflecting market changes and runoff.
- Trustmark issued 9,693 PPP loans; gross principal was $969.7 million and the balance-sheet amount, net of deferred fees and costs, was $939.8 million. The loans are fully SBA-guaranteed and carry a 1% contractual rate if not forgiven.
Outlook, risks and contingencies
Management provided no specific earnings or margin guidance. It said PPP loans and related processing fees would likely significantly affect asset mix and net interest margin for the remainder of 2020, but it could not predict the amount or timing of loan forgiveness or the precise margin impact. Management expects the effects of the pandemic to remain uncertain and warned that credit-loss estimates could be materially and adversely affected.
Trustmark had modified about 2,692 loans with aggregate principal of $1.422 billion under COVID-19 relief provisions, generally using 90-day interest-only periods or payment deferrals. The filing states more modifications may occur in Q3. Management identified restaurants, hotels, retail real estate and energy as exposed industries; it reported $370 million in hotel loan balances, $480 million in retail real-estate balances and $113.7 million in energy-related LHFI, among other exposures.
Federal Reserve rate cuts may pressure asset yields and profitability. Management’s one-year simulation estimated net interest income changes of +10.9% for a 200-basis-point increase, +5.5% for a 100-basis-point increase and −5.1% for a 100-basis-point decrease; a 200-basis-point decrease was not modeled because rates were already low. Management cautioned that actual results may differ and simulations exclude possible balance-sheet changes.
The company reported pending Stanford-related litigation and a separate lawsuit concerning Madison Timber Properties. It is vigorously contesting the matters, but damages were not quantified; Management said losses were not considered probable and reasonably estimable at filing. Trustmark also noted mortgage-servicing representation-and-warranty exposure and other ordinary-course litigation. A COVID-triggered goodwill review found no impairment at June 30, though monitoring will continue.
Trustmark suspended share repurchases on March 9, 2020 to preserve capital during the pandemic. It maintained a $0.23 quarterly dividend and declared the same amount payable September 15, 2020. Management said liquidity was adequate, citing deposits, liquid securities and borrowing capacity; it reported $2.565 billion of additional FHLB Dallas advance or letter-of-credit capacity and approximately $913.9 million of Discount Window collateral capacity.
Most important facts for investors to verify
- Whether subsequent quarters confirm the adequacy of the $119.2 million loan ACL and $42.7 million off-balance-sheet allowance as pandemic-related borrower stress develops.
- Performance of loan-modification borrowers, including the reported modification count and balances, and exposure in hotels, retail, restaurants and energy.
- Whether deposit growth persists and how PPP forgiveness, fee amortization and the 1% loan yield affect net interest income and margin.
- Mortgage banking earnings’ sustainability, including loan-sale volumes, hedge performance and further MSR valuation changes.
- Progress and potential financial exposure from Stanford-related and Madison Timber litigation; the filing provides no quantified damages estimate.
- Capital and liquidity after pandemic support, and whether the dividend and suspended repurchase policy change.