Trustmark Corporation (NASDAQ: TRMK) — 2020 Form 10-K
Business context and reporting period. Trustmark is a Mississippi-based bank holding company operating through Trustmark National Bank and subsidiaries in Alabama, Florida, Mississippi, Tennessee and Texas. It provides commercial and consumer banking, mortgage banking, insurance, wealth management and trust services. This filing reports the fiscal year ended December 31, 2020; fourth-quarter figures are also summarized below.
Financial performance and condition
| Metric | 2020 | 2019 | Change or context |
|---|---|---|---|
| Total revenue | $701.1 million | $613.6 million | Up 14.3%; defined as net interest income plus noninterest income |
| Net interest income | $426.5 million | $426.6 million | Essentially flat |
| Noninterest income | $274.6 million | $187.0 million | Up 46.8%, chiefly from mortgage banking |
| Net income | $160.0 million | $150.5 million | Up 6.4% |
| Diluted EPS | $2.51 | $2.32 | Up from prior year |
| Provision for credit losses | $36.1 million | $10.8 million | Higher amid COVID-19-related economic uncertainty; accounting presentation changed with CECL adoption |
| Noninterest expense | $475.2 million | $429.0 million | Up 10.8%, including higher compensation, services and off-balance-sheet credit loss expense |
| Net interest margin, fully taxable equivalent | 3.19% | 3.62% | Down 43 basis points |
| Return on average assets | 1.05% | 1.11% | Lower |
| Return on average equity | 9.52% | 9.28% | Higher |
Fourth quarter
- Net income was $51.2 million, or $0.81 per diluted share, versus $33.9 million, or $0.53, in fourth-quarter 2019.
- Revenue was $177.5 million, up 15.9% year over year. Net interest income rose 5.5% to $111.4 million; noninterest income increased 39.0% to $66.1 million, mainly on mortgage banking gains.
- Provision for credit losses was a negative $4.4 million, compared with a $3.7 million loan-loss provision in fourth-quarter 2019. Management attributed the reduction to improved economic forecasts and macroeconomic factors.
Balance sheet, cash flow and capital
- At year-end, total assets were $16.552 billion, up 22.6%; deposits were $14.049 billion, up 24.9%; and LHFI were $9.825 billion, up 5.2% excluding the accounting transfer of acquired loans. Total loans including PPP loans and loans held for sale were $10.882 billion.
- Cash and due from banks ended the year at $1.953 billion, versus $358.9 million a year earlier. Cash flow was $65.3 million from operating activities, negative $1.218 billion from investing activities and positive $2.746 billion from financing activities. The deposit surge was the principal financing source.
- Year-end shareholders’ equity was $1.741 billion. Trustmark’s CET1, Tier 1 and total risk-based capital ratios were 11.62%, 12.11% and 14.12%; TNB’s were 11.75%, 11.75% and 12.73%. Both were reported above applicable minimums; TNB was well-capitalized.
- Trustmark issued $125 million of 3.625% fixed-to-floating subordinated notes due 2030; the notes qualify as Tier 2 capital. Other year-end borrowings included $164.5 million of federal funds purchased and repurchase agreements, $168.3 million of other borrowings and $61.9 million of junior subordinated debt securities.
- Cash dividends remained $0.92 per share for the year. Share repurchases were suspended in March 2020 to preserve capital and resumed in January 2021.
Material changes versus the prior comparable period
- Mortgage banking, net increased to $125.8 million from $29.8 million. Mortgage production rose 69.4% to $2.985 billion, supported by low rates and refinancing; net gains on loan sales and hedge results also increased.
- Net interest income was nearly unchanged despite lower asset yields: lower deposit interest expense and $26.6 million of PPP loan interest and fees largely offset reduced interest on loans and securities. The FTE margin fell 43 basis points to 3.19%.
- Deposits increased $2.803 billion, reflecting customer balances from line draws, PPP loans and other pandemic-related stimulus. Noninterest-bearing deposits rose 50.4%.
- Nonperforming assets declined 9.3% to $74.8 million, helped by lower other real estate, but nonaccrual LHFI increased 18.6% to $63.1 million. Net charge-offs were low at 0.02% of average loans, versus 0.06% in 2019.
- Trustmark adopted CECL on January 1, 2020. The adoption reduced retained earnings by $19.9 million net of tax and established an initial $29.6 million allowance for off-balance-sheet credit exposures. Prior-period credit-loss measures use the previous accounting method and may not be directly comparable.
Outlook, risks and unusual items
- COVID-19 and credit: The company said the pandemic’s ultimate financial effect was unknown. It reviewed $969.7 million of borrower balances in affected or concession-related populations and downgraded approximately $32 million to criticized risk ratings. Loan modifications during 2020 totaled $1.266 billion under applicable relief guidance; some modifications were not classified as troubled debt restructurings.
- Industry exposures: Year-end LHFI exposure included $395 million in hotel loans, $452 million in retail commercial real estate and $116 million in restaurant loans. Energy-related LHFI was $102.3 million, or 1.0% of LHFI; the company reported no exposure dependent on realizing value from energy reserves.
- PPP: TNB had 7,398 PPP loans totaling $623 million outstanding at year-end, or $610.1 million net of deferred fees and costs. Management expected PPP loans and processing fees to affect 2021 asset mix and net interest margin, but did not quantify the impact or forgiveness timing.
- Rates: Management warned that historically low rates could pressure net interest income and margins. Its static-balance model estimated net interest income would increase 10.8% under a 100-basis-point rate increase and decrease 5.7% under a 100-basis-point decrease; these are model scenarios, not guidance.
- Liquidity: Management said liquidity and capital were sufficient for presently known needs. Available borrowing capacity included $2.725 billion at the FHLB of Dallas and approximately $893.5 million at the Federal Reserve Discount Window, subject to collateral and facility terms.
- Unusual items and legal matters: A voluntary early-retirement program generated a $4.4 million pre-tax charge. Pending litigation includes Stanford Financial Group-related cases and a Madison Timber-related case. Management said losses were not considered probable and reasonably estimable, but outcomes could not be predicted.
- Leadership: Duane Dewey became president and CEO on January 1, 2021, succeeding Gerard Host, who became executive chairman. The CFO transition was scheduled for March 1, 2021.
- Guidance: The filing provides no specific numerical earnings or revenue guidance. Management emphasized uncertainty, expense discipline, customer support, profitable growth and adapting delivery channels.
Important facts for investors to verify
- Whether mortgage banking’s exceptional 2020 contribution is sustainable as refinance activity, loan-sale margins and hedging results change.
- How pandemic-related borrower concessions perform after relief periods end, particularly in hotels, retail, restaurants and other stressed sectors; also track criticized and nonaccrual loans and future credit-loss provisions.
- How PPP forgiveness, fee amortization and subsequent PPP originations affect reported loan balances, revenue and net interest margin.
- Whether deposit balances remain elevated and how deposit pricing and asset yields affect margins as market rates change.
- Progress on the LIBOR-to-SOFR transition, including effects on contracts, pricing, models and hedges.
- Developments in the Stanford and Madison Timber litigation, and any change in management’s assessment of potential loss or legal costs.
- The effect of CECL estimates and forecasts on credit reserves and regulatory capital as the temporary regulatory transition phase-in proceeds.
Audit note: Crowe LLP issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2020. The allowance for credit losses and its economic forecasts were identified as a critical audit matter.