Trustmark(TRMK) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Q1 2020 financial statements reflect lower net income due to increased credit loss provisions from CECL adoption and COVID-19, alongside asset growth Consolidated Balance Sheets Total assets increased to $14.02 billion by March 31, 2020, driven by loan and deposit growth, while shareholders' equity slightly decreased due to CECL adoption Consolidated Balance Sheet Highlights ($ in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $14,019,829 | $13,497,877 | | Net LHFI and acquired loans | $9,467,356 | $9,323,137 | | Total Securities | $2,538,055 | $2,340,503 | | Total Liabilities | $12,367,430 | $11,837,175 | | Total Deposits | $11,575,764 | $11,245,557 | | Total Shareholders' Equity | $1,652,399 | $1,660,702 | - Effective January 1, 2020, Trustmark adopted FASB ASU 2016-13 (CECL) using the modified retrospective approach. As a result, prior period balances are presented under legacy GAAP and may not be directly comparable[11] Consolidated Statements of Income Q1 2020 net income decreased to $22.2 million due to a surge in credit loss provisions, despite stable net interest income and strong mortgage banking-driven noninterest income growth Q1 Performance Summary ($ in thousands, except per share data) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Interest Income | $103,952 | $104,808 | | Provision for credit losses (PCL) | $20,581 | $1,611 | | Total Noninterest Income | $65,264 | $41,491 | | Total Noninterest Expense | $123,810 | $106,021 | | Net Income | $22,218 | $33,339 | | Diluted EPS | $0.35 | $0.51 | - Mortgage banking income was a key driver of noninterest income, increasing to $27.5 million in Q1 2020 from $3.4 million in Q1 2019[14] - Noninterest expense increased, partly due to a new $6.8 million credit loss expense related to off-balance sheet credit exposures, a requirement under the newly adopted CECL standard[14] Notes to Consolidated Financial Statements Notes detail accounting policies, the impact of COVID-19 and CECL on credit losses, portfolio composition, legal contingencies, and segment performance Management's Discussion and Analysis (MD&A) MD&A details COVID-19's impact, including increased credit loss expenses and customer support, resulting in lower Q1 2020 net income despite strong mortgage banking, with capital preservation measures - The COVID-19 pandemic and the adoption of the CECL accounting standard were the most significant factors impacting Q1 2020 results, leading to a total credit loss expense of $27.4 million[236][252] - Trustmark is actively participating in the Paycheck Protection Program (PPP), securing over $800 million in SBA commitments for approximately 6,000 customers as of April 23, 2020[240] - In response to the pandemic, Trustmark modified 1,978 individual loans with aggregate principal balances of $976.2 million through April 23, 2020, providing concessions such as 90-day interest-only or full payment deferrals[238] Exposure to Stressed Industries (as of March 31, 2020) | Industry | Outstanding Balance | % of LHFI Portfolio | | :--- | :--- | :--- | | Restaurants | $116.0 million | 1.21% | | Hotels | $366.0 million | 3.83% | | Retail (CRE) | $505.0 million | 5.28% | | Energy | $131.7 million | 1.38% | Results of Operations Q1 2020 total revenue increased to $169.2 million, driven by strong noninterest income from mortgage banking, despite net interest margin compression and a surge in credit loss provisions - Net interest margin decreased by 11 basis points to 3.52% in Q1 2020 compared to Q1 2019, primarily due to lower yields on loans, partially offset by lower costs of interest-bearing deposits[274] - Mortgage banking net income increased significantly to $27.5 million from $3.4 million YoY, driven by a $9.9 million positive net hedge ineffectiveness and a $9.4 million increase in gain on sales of loans[287][288] - Salaries and employee benefits expense included a $4.3 million non-routine charge related to a voluntary early retirement program completed in Q1 2020[292] Financial Condition As of March 31, 2020, total assets reached $14.02 billion, driven by growth in loans and deposits, while the Allowance for Credit Losses increased due to CECL and COVID-19 - LHFI increased by $232.3 million in Q1 2020, which includes a $72.6 million transfer of acquired loans reclassified as purchased credit deteriorated (PCD) loans upon adoption of CECL[318] - The ACL for LHFI increased to $100.6 million (1.05% of LHFI) at March 31, 2020, from $84.3 million (0.90% of LHFI) at December 31, 2019, reflecting the impact of CECL and the COVID-19 economic outlook[329] - Nonperforming assets, excluding acquired loans, decreased by $4.6 million to $77.8 million, representing 0.78% of total loans and ORE, down from 0.86% at year-end 2019[253][336] Capital Resources and Liquidity Trustmark maintained a solid capital position with all regulatory ratios exceeding well-capitalized standards, but suspended share repurchases to preserve capital amidst the pandemic Regulatory Capital Ratios (Trustmark Corporation) | Ratio | March 31, 2020 | Minimum Requirement | | :--- | :--- | :--- | | Common Equity Tier 1 | 11.35% | 7.00% | | Tier 1 Capital | 11.88% | 8.50% | | Total Capital | 12.78% | 10.50% | | Tier 1 Leverage | 10.21% | 4.00% | - Trustmark suspended its share repurchase programs on March 9, 2020, to preserve capital in response to the COVID-19 pandemic[362] - The company elected the five-year phase-in transition period for the regulatory capital effects of adopting CECL, mitigating its immediate impact on capital ratios[356] PART II. OTHER INFORMATION Legal Proceedings Trustmark's subsidiary, TNB, faces multiple lawsuits, including those related to Stanford Financial Group, which the company is contesting, believing no material adverse effect is probable - The company is involved in multiple lawsuits stemming from the collapse of the Stanford Financial Group, which are currently in pre-trial stages[407][417] - A complaint was filed against TNB in December 2019 by the receiver for Arthur Lamar Adams and Madison Timber Properties, LLC, seeking damages for allegedly enabling fraudulent activities[418] - Management has determined that a loss in any of the pending legal proceedings is not probable and cannot be reasonably estimated at this time[421] Risk Factors New and heightened risks from COVID-19 include adverse impacts on business, increased credit losses, reduced net interest income from rate cuts, and litigation/credit risks from PPP participation - The COVID-19 pandemic poses a significant risk to business operations, customer financial health, loan demand, and could lead to increased credit losses and reduced net interest income[423][425] - Recent interest rate cuts by the Federal Reserve to near-zero are expected to adversely affect the company's net interest income, margins, and profitability, especially if prolonged[426][427] - Participation in the SBA's Paycheck Protection Program (PPP) introduces risks of litigation from customers over loan processing and potential credit losses if the SBA determines a deficiency in loan origination or servicing and denies its guaranty[429][431] Share Repurchases Trustmark repurchased 886,958 shares for $27.5 million in Q1 2020 but suspended all repurchase programs on March 9, 2020, to preserve capital amidst the COVID-19 pandemic Share Repurchases for Q1 2020 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 2020 | 357,062 | $33.51 | | Feb 2020 | 338,800 | $30.84 | | Mar 2020 | 191,096 | $26.82 | | Total | 886,958 | ~ $31.05 | - On March 9, 2020, Trustmark suspended its share repurchase programs to preserve capital to support customers during the COVID-19 pandemic[435]