TRUSTMARK CORP annual report, FY2021

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Trustmark Corporation — FY2021 Form 10-K

Business context and reporting period. Trustmark is a regional financial services company headquartered in Jackson, Mississippi, operating primarily through Trustmark National Bank across Alabama, Florida, Mississippi, Tennessee and Texas. Its businesses include commercial and consumer banking, mortgage banking, insurance and wealth management. The filing covers the fiscal year ended December 31, 2021; amounts below are U.S. dollars.

Financial performance and condition

  • FY2021 earnings: Net income was $147.4 million, down 7.9% from $160.0 million in 2020. Diluted EPS was $2.34 versus $2.51. Revenue, defined as net interest income plus noninterest income, fell 8.7% to $640.3 million.
  • Fourth quarter: Net income was $26.2 million, or $0.42 per diluted share, compared with $51.2 million, or $0.81, in Q4 2020. Revenue declined 16.0% to $149.1 million. The filing attributes the declines principally to lower mortgage banking income and PPP loan interest and fees.
  • Interest income and margins: FY net interest income was $418.4 million, down 1.9%. Fully taxable-equivalent net interest margin fell 43 basis points to 2.76%; excluding PPP loans and Federal Reserve Bank balances, it was 2.91%, down 38 basis points.
  • Other income and expenses: Noninterest income decreased 19.2% to $221.9 million, mainly as mortgage banking income fell 49.3% to $63.8 million after unusually strong 2020 mortgage activity. Noninterest expense increased 4.9% to $489.3 million. The reported year included $5.7 million of early-retirement costs and a $5.0 million fair-lending settlement charge.
  • Credit quality: The 2021 provision for credit losses on held-for-investment loans was a $21.5 million benefit, compared with $36.1 million of expense in 2020; the off-balance-sheet provision was a $2.9 million benefit. Management cited improved forecasts and credit quality. Net recoveries were $3.7 million; nonperforming assets were $67.3 million, down 10.1%, and nonaccrual loans were $62.7 million. The loan allowance was $99.5 million, or 0.97% of held-for-investment loans.
  • Balance sheet and funding: Total assets rose 6.3% to $17.60 billion. Held-for-investment loans rose 4.3% to $10.25 billion; deposits rose 7.4% to $15.09 billion, including $4.77 billion of noninterest-bearing deposits. Securities increased 41.6% to $3.58 billion. Shareholders’ equity was essentially unchanged at $1.74 billion.
  • Debt and capital: Year-end borrowings included $238.6 million of federal funds purchased and repurchase agreements, $91.0 million of other borrowings, $123.0 million of subordinated notes and $61.9 million of junior subordinated debt securities. Trustmark’s CET1, Tier 1 and total risk-based capital ratios were 11.29%, 11.77% and 13.55%; its leverage ratio was 8.73%. TNB was also above applicable minimums and classified as well-capitalized.
  • Cash flow and liquidity: Operating cash flow was $348.8 million; investing cash flow was negative $1.005 billion and financing cash flow was positive $970.6 million. Cash and due from banks ended at $2.27 billion. Management cited deposits, liquid securities and borrowing access as sources of liquidity, including $3.45 billion of additional FHLB Dallas borrowing capacity and $876.8 million of Discount Window collateral capacity.
  • Shareholder returns: Trustmark paid $0.92 per share in dividends for 2021 and repurchased about 1.9 million shares for $61.8 million. A new $100 million repurchase authorization took effect January 1, 2022; the Board declared a $0.23 quarterly dividend payable in March 2022.

Material changes versus the prior comparable period

  • Lower mortgage banking revenue was the largest driver of the annual revenue decline: 2021 gain on loan sales was $56.0 million versus $110.9 million in 2020. Mortgage production declined 6.1% to $2.80 billion as refinancing slowed from 2020’s record levels.
  • Net interest margin continued to contract in the low-rate environment. Lower loan and securities yields reduced interest income, partly offset by lower deposit costs and PPP fee recognition.
  • Net income declined despite a substantial swing from credit-loss expense in 2020 to a credit-loss benefit in 2021. Loan balances and deposits grew, while securities expanded sharply and nonperforming assets declined.
  • The AOCI balance shifted to a $32.6 million loss from a $1.1 million loss, primarily reflecting the decline in fair value of available-for-sale securities.

Outlook, commentary, risks and unusual items

  • Management did not provide specific earnings or revenue guidance. It described priorities including customer-relationship growth, profitable revenue, adapting delivery channels and expense efficiency.
  • Trustmark’s static-balance interest-rate model estimated net interest income would rise 9.7% under a 100-basis-point rate increase and 20.1% under a 200-basis-point increase, but fall 6.7% under a 100-basis-point decrease. These are modeled scenarios, not forecasts; actual results may differ.
  • The Federal Reserve had announced plans to begin raising rates and winding down securities purchases in March 2022. Management noted uncertainty around COVID-19, Omicron, supply-chain disruption, labor costs and economic conditions, as well as persistent interest-rate and margin risk.
  • Trustmark sold approximately $354.2 million of PPP loans in June 2021 and accelerated recognition of $18.6 million of related deferred fees. The transaction accelerated revenue otherwise expected in future periods. At year-end, PPP loans outstanding were $33.8 million; $605.5 million had been forgiven during 2021.
  • COVID-related loan concessions fell to $1.1 million from $34.2 million at year-end 2020. Management cautioned that pandemic effects and related credit-loss estimates remain uncertain.
  • Trustmark settled fair-lending allegations concerning the Memphis metropolitan area, recording a $5.0 million charge and committing to enhance credit opportunities in majority-Black and Hispanic neighborhoods. Separately, several Stanford Financial Group-related lawsuits and a Madison Timber-related action remained pending. Management said losses on pending legal proceedings were not considered probable and reasonably estimable; outcomes are uncertain.
  • Trustmark transitioned new variable-rate loans, derivatives, borrowings and other instruments to SOFR beginning January 1, 2022, while existing LIBOR-linked contracts remain a transition risk. Other significant risks include cyber incidents, competition, real-estate and energy exposure, regulatory changes and natural disasters.

Important facts for investors to verify

  • Whether core revenue and profitability stabilize as PPP fees and elevated mortgage activity fade, and how net interest margin responds to rate changes.
  • Whether loan growth is accompanied by stable credit quality, particularly in commercial real estate, hotels, retail, construction and energy; review criticized loans, reserves and subsequent charge-offs.
  • Whether the 2021 credit-loss benefit and lower nonperforming assets persist as pandemic relief recedes and economic conditions evolve.
  • The timing and financial or reputational consequences of the Stanford-related and Madison Timber litigation, and compliance with the Memphis fair-lending settlement commitments.
  • The effect of higher interest rates on securities values, AOCI, deposit pricing, liquidity and modeled earnings sensitivity, as well as execution of the LIBOR-to-SOFR transition.
  • Capital and liquidity after dividends and share repurchases, including actual use of the 2022 repurchase authorization and the bank subsidiary’s capacity to upstream dividends.