Trustmark Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. Trustmark is a bank holding company operating 188 offices across Alabama, Florida, Mississippi, Tennessee and Texas. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2020 / Mar. 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $22.2; $0.35 | Q1 2019: $33.3; $0.51 |
| Total revenue | $169.2 | Q1 2019: $146.3; up 15.7% |
| Net interest income | $104.0 | Q1 2019: $104.8; down 0.8% |
| Net interest margin, FTE | 3.52% | Q1 2019: 3.63% |
| Provision for credit losses | $20.6 on loans; $6.8 on off-balance-sheet exposures | Q1 2019 loan-loss provision: $1.6; prior presentation is not fully comparable after CECL adoption |
| Noninterest income / expense | $65.3 / $123.8 | Q1 2019: $41.5 / $106.0 |
| Loans held for investment; deposits | $9,567.9; $11,575.8 | Dec. 31, 2019: $9,335.6; $11,245.6 |
| Total assets; shareholders’ equity | $14,019.8; $1,652.4 | Dec. 31, 2019: $13,497.9; $1,660.7 |
| Cash and due from banks | $404.3 | Dec. 31, 2019: $358.9 |
| Nonperforming assets | $77.8; 0.78% of loans, loans held for sale and ORE | Dec. 31, 2019: $82.5; 0.86% |
Mortgage banking drove much of the revenue increase: income rose to $27.5 from $3.4, reflecting higher loan-sale gains and favorable net hedge ineffectiveness. Net income fell 33.4% year over year as credit costs and expenses increased. Return on average assets was 0.66% versus 1.01%; return on average tangible equity was 7.34% versus 11.55%. The quarter included $4.3 million of early-retirement-program expense; adjusted net income excluding this item was $25.5 million, or $0.40 diluted EPS, on a company-defined non-GAAP basis.
Operating cash flow was negative $79.2 million, versus positive $14.9 million in Q1 2019; investing cash flow was negative $327.6 million and financing cash flow positive $452.1 million. Net cash increased $45.4 million during the quarter. Mortgage-loan originations and purchases exceeded proceeds from sales, contributing to negative operating cash flow.
Deposits funded most liabilities. Federal funds purchased and securities sold under repurchase agreements totaled $421.8 million, other borrowings $84.2 million, and junior subordinated debt $61.9 million. Trustmark reported $3.196 billion of available FHLB Dallas collateral capacity and approximately $1.002 billion of Discount Window collateral capacity. It said liquidity and capital resources were sufficient for presently known cash-flow needs. Trustmark and its bank subsidiary were well-capitalized; Trustmark’s CET1 ratio was 11.35% and Tier 1 leverage ratio 10.21%.
Material changes and credit quality
- Trustmark adopted CECL on January 1, 2020. The adoption reduced retained earnings by $19.9 million net of tax, reflecting the transition adjustment for loan and off-balance-sheet credit allowances. The loan ACL was $100.6 million at quarter-end, up from $84.3 million at year-end; the separate off-balance-sheet ACL was $36.4 million.
- Management attributed higher credit reserves primarily to COVID-19-related deterioration in economic forecasts. Net charge-offs were $3.1 million, up from $1.9 million in Q1 2019. Nonaccrual loans were $53.0 million; other real estate was $24.8 million.
- Loan balances grew 2.5% from year-end, including $72.6 million of acquired loans transferred into LHFI upon CECL adoption. Excluding that transfer, LHFI growth was 1.7%. Deposits increased 2.9%; short-term federal funds and repurchase-agreement funding also rose.
- Noninterest expense rose 16.8%, including the new $6.8 million off-balance-sheet credit-loss expense, early-retirement costs, higher services and fees, and higher compensation.
Outlook, risks and unusual items
- Management said the pandemic’s duration and financial effects were unknown. It expected net interest income and noninterest income to decline and credit-related losses to increase for an uncertain period. Lower market rates could pressure margins and profitability; the filing provides no quantified earnings guidance.
- COVID-19-sensitive exposures included $366.0 million in hotel loans, $505.0 million in retail commercial real estate, $116.0 million in restaurant loans and $131.7 million in energy-related loans. Management noted that energy loans had no repayment source tied to energy-reserve values, but prolonged lower oil prices could prompt downgrades.
- Through April 23, 2020, Trustmark had modified 1,978 loans totaling $976.2 million; these are subsequent-period figures. Through March 31, it had modified 503 loans totaling $344.3 million. Most concessions were 90-day interest-only periods or payment deferrals.
- As of April 23, TNB had SBA commitments for about 6,000 PPP customer requests totaling more than $800 million. These were subsequent-period commitments, not Q1-end balances. Management said PPP loans and fees could significantly affect 2020 asset mix and net interest margin; forgiveness and related impacts were uncertain. The filing also identifies potential PPP processing litigation and risk that SBA guarantees could be denied if origination or servicing deficiencies are found.
- Trustmark suspended share repurchases on March 9 to preserve capital for customers during the pandemic. The board declared a $0.23-per-share quarterly dividend, payable June 15, 2020. The company’s stated 2020 indicated dividend was $0.92 per share.
- Trustmark disclosed Stanford Financial Group-related lawsuits and a Madison Timber-related receiver action, among other litigation. Management said losses were not considered probable or reasonably estimable and no litigation accrual was recorded; it could not predict eventual outcomes.
- Mortgage servicing rights fell to $56.4 million from $79.4 million at year-end, including a $24.0 million fair-value decline from market changes. Mortgage banking gains were partly offset by this valuation pressure and are sensitive to interest rates and prepayment assumptions.
Most important facts to verify
- How COVID-19 borrower performance, loan modifications and subsequent delinquencies affect the CECL allowance, charge-offs and nonperforming assets.
- Whether the $800 million-plus PPP commitments were funded, forgiven or affected by guarantee eligibility, and the resulting fee and margin contribution.
- Whether mortgage banking gains and favorable hedge results persist, and how MSR valuations respond to rates and prepayments.
- Whether deposit growth and available borrowing capacity remain adequate as loan funding needs and customer liquidity demands change.
- Developments in the Stanford and Madison Timber litigation, including any change to management’s assessment of loss probability or estimability.