Trustmark Corporation (TRMK) — Q1 2021 Form 10-Q
Business context and reporting period
Trustmark is a bank holding company headquartered in Jackson, Mississippi, operating banking, wealth management and insurance businesses across five states. This unaudited report covers the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020 unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2021 | Comparable / prior period |
|---|---|---|
| Net income; diluted EPS | $52.0; $0.82 | Q1 2020: $22.2; $0.35 |
| Total revenue (net interest income plus noninterest income) | $162.9 | Q1 2020: $169.2, down 3.7% |
| Net interest income | $102.3 | Q1 2020: $104.0, down 1.6% |
| Net interest margin, fully taxable equivalent | 2.81% | Q1 2020: 3.52% |
| Provision for credit losses | $(10.5) benefit | Q1 2020: $20.6 expense |
| Noninterest income / expense | $60.6 / $112.2 | Q1 2020: $65.3 / $123.8 |
| Operating cash flow | $83.3 provided | Q1 2020: $79.2 used |
Net income rose substantially year over year despite lower revenue. Lower credit-loss provisions and expense, including a $9.4 million credit-loss benefit for off-balance-sheet exposures, were important contributors. Mortgage banking income declined 24.3% to $20.8 million, while bank card and other fees rose 76.9% to $9.5 million. Lower deposit interest expense partly offset reduced loan and securities yields.
At March 31, total assets were $16.88 billion, up from $16.55 billion at year-end. Loans held for investment (LHFI) were $9.98 billion, up 1.6%; deposits were $14.38 billion, up 2.4%, including an 8.2% rise in noninterest-bearing deposits. Cash and due from banks totaled $1.77 billion. Shareholders’ equity was $1.76 billion. Total investment securities were $2.83 billion.
Credit quality and capital: the LHFI allowance for credit losses was $109.2 million, or 1.09% of LHFI, down from $117.3 million and 1.19% at year-end. Nonperforming assets were $74.2 million, or 0.71% of loans, loans held for sale and other real estate; nonaccrual LHFI was $63.5 million. Net recoveries were $2.4 million. Trustmark reported a 11.71% common equity Tier 1 ratio, 14.07% total risk-based capital ratio and 9.11% Tier 1 leverage ratio, and stated that it and its bank subsidiary were well-capitalized.
Borrowings at quarter-end included $161.0 million of federal funds purchased and repurchase agreements, $146.0 million of other borrowings, $122.9 million of subordinated notes and $61.9 million of junior subordinated debt securities. Financing activities provided $306.5 million, while investing activities used $567.8 million; cash and cash equivalents decreased $178.0 million during the quarter. Management reported $2.75 billion of additional FHLB of Dallas borrowing or letter-of-credit capacity against qualifying collateral, about $962 million of available unencumbered agency securities and $872 million of Discount Window collateral capacity.
Material changes versus comparable periods
- Net income more than doubled year over year, while total revenue fell 3.7% and net interest margin contracted 71 basis points.
- Interest expense fell 56.6%, chiefly reflecting lower deposit costs; interest income declined 9.1% as yields on loans and securities fell.
- Credit-loss expense shifted to a benefit, which management attributed mainly to improved macroeconomic forecasts. The LHFI allowance declined, although commercial and industrial provisioning increased for specific reserves related to one borrower.
- Mortgage production increased: Q1 originations were $766.6 million, up 67.7%, and residential mortgage loan sales were $659.4 million. Mortgage banking income nevertheless declined, primarily due to lower hedge ineffectiveness and greater mortgage-servicing-rights run-off.
- Trustmark resumed share repurchases in January 2021 after suspending them during the pandemic; it repurchased approximately 145,000 shares for $4.2 million. The quarterly dividend remained $0.23 per share.
Outlook, commentary, risks and contingencies
Management described loan and deposit growth, strong mortgage banking activity and a solid capital position, and emphasized long-term revenue growth, customer support, delivery-channel changes and efficiency initiatives. The filing provides no specific earnings or revenue guidance. Management cautioned that PPP loans and their fees could materially affect asset mix and net interest margin during 2021; forgiveness timing and the eventual margin impact were uncertain.
COVID-19’s duration and full economic effects remained uncertain. Trustmark identified restaurants, hotels, retail and energy as exposed sectors. Remaining loans under COVID-related concessions totaled $28.1 million, down from $34.2 million at year-end. The company reported exposure of $396 million to hotels, $453 million to retail commercial real estate, $105 million to restaurants and $106.4 million to energy loans; management warned that economic weakness could adversely affect credit estimates.
Interest rates remained historically low, pressuring yields and margins. Trustmark’s modeled one-year net interest income sensitivity at March 31 indicated +24.4% for a 200-basis-point rate increase, +12.8% for a 100-basis-point increase and -8.4% for a 100-basis-point decrease; management cautioned actual outcomes may differ. The LIBOR transition presents operational, contractual and financial risks; most LIBOR term rates were scheduled to cease publication by June 30, 2023.
Legal matters include Stanford Financial Group-related litigation and a Madison Timber Properties-related complaint. Trustmark said the proceedings were being vigorously contested and that, based on counsel and management’s assessment, loss was not considered probable and could not reasonably be estimated; no material adverse effect was expected based on its current evaluation and insurance coverage. The filing also notes that pandemic-related changes in economic conditions may make credit-loss model estimates less representative and that future allowance changes could be significant.
Important facts for investors to verify
- How much of Q1 earnings improvement came from credit-loss releases, and whether the reserve benefit is repeatable as forecasts and borrower performance evolve.
- Whether loan growth, deposit mix and net interest margin can be sustained, particularly with low-yielding PPP loans and excess reserves.
- Trends in criticized loans, nonaccruals, delinquencies, COVID-19 concessions and exposures to hotels, retail, restaurants and energy.
- Mortgage banking profitability and mortgage servicing rights valuation, including sensitivity to prepayment speeds and discount rates.
- Developments in Stanford and Madison Timber litigation, as well as Trustmark’s LIBOR transition progress and any changes to its liquidity or capital position.