Trustmark(TRMK) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents Trustmark Corporation's unaudited consolidated financial statements for the period ending March 31, 2021, including key statements and accompanying notes Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2021 ($ in thousands) | December 31, 2020 ($ in thousands) | | :--- | :--- | :--- | | Total Assets | 16,878,313 | 16,551,840 | | Net Loans Held for Investment (LHFI) | 9,874,513 | 9,707,218 | | Paycheck Protection Program (PPP) loans | 679,725 | 610,134 | | Total Deposits | 14,383,440 | 14,048,764 | | Total Liabilities | 15,118,608 | 14,810,723 | | Total Shareholders' Equity | 1,759,705 | 1,741,117 | Consolidated Statements of Income Consolidated Income Statement Highlights (Unaudited) | Account | Three Months Ended Mar 31, 2021 ($ in thousands) | Three Months Ended Mar 31, 2020 ($ in thousands) | | :--- | :--- | :--- | | Net Interest Income | 102,336 | 103,952 | | Provision for credit losses (PCL) | (10,501) | 20,581 | | Total Noninterest Income | 60,583 | 65,264 | | Total Noninterest Expense | 112,181 | 123,810 | | Net Income | 51,962 | 22,218 | | Diluted EPS | $0.82 | $0.35 | Consolidated Statements of Comprehensive Income - Comprehensive income was $36.5 million for the three months ended March 31, 2021, a decrease from $53.5 million in the prior year period, primarily due to a $15.5 million other comprehensive loss from net unrealized losses on available-for-sale securities[15] Consolidated Statements of Changes in Shareholders' Equity - Total shareholders' equity increased from $1.741 billion at January 1, 2021, to $1.760 billion at March 31, 2021, driven by $52.0 million net income, partially offset by $15.5 million other comprehensive loss and $14.7 million common stock dividends[18] - The company repurchased and retired 144,981 shares of common stock for $4.2 million during the first quarter of 2021[18] Consolidated Statements of Cash Flows Consolidated Cash Flow Highlights (Unaudited) | Activity | Three Months Ended Mar 31, 2021 ($ in thousands) | Three Months Ended Mar 31, 2020 ($ in thousands) | | :--- | :--- | :--- | | Net cash from operating activities | 83,343 | (79,163) | | Net cash from investing activities | (567,776) | (327,553) | | Net cash from financing activities | 306,470 | 452,141 | | Net change in cash and cash equivalents | (177,963) | 45,425 | Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies and methodologies used to prepare the financial statements, covering business operations, COVID-19 impact, portfolio composition, and regulatory capital Note 1 – Business and Basis of Presentation Trustmark operates as a bank holding company across five states, with financial statements prepared under U.S. GAAP, detailing the impact of COVID-19 and PPP loan participation - Trustmark operates as a financial services organization with 181 offices across Alabama, Florida, Mississippi, Tennessee, and Texas as of March 31, 2021[26] - The COVID-19 pandemic significantly impacted industries served by Trustmark, including restaurants, hotels, retail, and energy, potentially affecting expected credit loss estimates[30][31] - In Q1 2021, Trustmark originated 4,774 PPP loans totaling $301.5 million (net of fees), with $679.7 million outstanding as of March 31, 2021, for which no ACL was estimated due to SBA guarantees[34][35] Note 2 – Securities This note details Trustmark's high-quality securities portfolio, comprising available-for-sale and held-to-maturity categories, with no credit losses recognized as of March 31, 2021 Securities Portfolio Summary (March 31, 2021) | Category | Amortized Cost ($ in thousands) | Estimated Fair Value ($ in thousands) | | :--- | :--- | :--- | | Securities Available for Sale | 2,327,434 | 2,337,676 | | Securities Held to Maturity | 493,738 | 515,296 | - No credit loss was recognized on available-for-sale or held-to-maturity securities as of March 31, 2021, as no credit loss triggers were identified or expected losses were immaterial[40][42] - Unrealized losses of $17.1 million in the securities portfolio as of March 31, 2021, are due to market interest rate increases, not credit quality issues, with no intent to sell before cost recovery[46] Note 3 – Loans and Allowance for Credit Losses This note provides a comprehensive overview of Trustmark's Loans Held for Investment (LHFI) portfolio and its Allowance for Credit Losses (ACL), totaling $9.98 billion and $109.2 million respectively as of March 31, 2021 LHFI Composition | Loan Category | March 31, 2021 ($ in thousands) | December 31, 2020 ($ in thousands) | | :--- | :--- | :--- | | Loans secured by real estate | 4,986,834 | 4,813,778 | | Other loans secured by real estate | 2,032,236 | 2,011,383 | | Commercial and industrial loans | 1,323,277 | 1,309,078 | | Consumer loans | 155,356 | 164,386 | | State and other political subdivision loans | 1,036,694 | 1,000,776 | | Other commercial loans | 449,307 | 525,123 | | Total LHFI | 9,983,704 | 9,824,524 | - Total nonaccrual LHFI was $63.5 million at March 31, 2021, a slight increase from $63.1 million at December 31, 2020, with $2.6 million in loans past due 90 days or more and still accruing interest[54] Allowance for Credit Losses (ACL) Roll-Forward | ACL Activity ($ in thousands) | Three Months Ended Mar 31, 2021 | Three Months Ended Mar 31, 2020 | | :--- | :--- | :--- | | Balance at beginning of period | 117,306 | 84,277 | | Provision for credit losses (PCL) | (10,501) | 20,581 | | Net (charge-offs) recoveries | 2,386 | (3,077) | | Balance at end of period | 109,191 | 100,564 | - The negative provision for credit losses in Q1 2021 was primarily due to improvements in macroeconomic forecasting variables, such as unemployment rates and GDP[106] Note 12 – Contingencies This note outlines Trustmark's off-balance sheet credit exposures, including $4.71 billion in unused commitments, and ongoing legal proceedings related to the Stanford Financial Group, where a loss is not deemed probable - Trustmark had unused commitments to extend credit of $4.711 billion and letters of credit exposure of $107.5 million as of March 31, 2021[136][137] - The ACL on off-balance sheet credit exposures decreased to $29.2 million at March 31, 2021, resulting in a negative credit loss expense of $9.4 million for the quarter due to improved macroeconomic factors[140] - Trustmark's subsidiary, TNB, is vigorously contesting lawsuits related to the Stanford Financial Group collapse, believing a loss is not probable or reasonably estimable[142][158] Note 15 – Shareholders' Equity This note details Trustmark's strong regulatory capital position, with all ratios exceeding well-capitalized standards, and the resumption of its stock repurchase program in Q1 2021 Trustmark Corporation Regulatory Capital Ratios (Actual) | Ratio | March 31, 2021 | Minimum Requirement | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 11.71% | 7.00% | | Tier 1 Capital | 12.20% | 8.50% | | Total Capital | 14.07% | 10.50% | | Tier 1 Leverage | 9.11% | 4.00% | - Trustmark resumed its stock repurchase program in January 2021, repurchasing approximately 145,000 shares for $4.2 million in Q1 2021 under its $100 million authorization[165] Note 18 – Segment Information Trustmark operates in General Banking, Wealth Management, and Insurance segments, with General Banking being the largest net income contributor at $48.5 million in Q1 2021, driven by a negative provision for credit losses Net Income by Segment (Three Months Ended March 31) | Segment | 2021 ($ in thousands) | 2020 ($ in thousands) | | :--- | :--- | :--- | | General Banking | 48,539 | 20,664 | | Wealth Management | 1,126 | (527) | | Insurance | 2,297 | 2,081 | | Consolidated Net Income | 51,962 | 22,218 | Management's Discussion and Analysis (MD&A) Management provides a detailed analysis of Q1 2021 financial condition and results, highlighting loan and deposit growth, strong mortgage banking revenue, and a negative provision for credit losses due to improved economic outlook Executive Overview Management highlights strong Q1 2021 performance with solid loan and deposit growth, robust mortgage banking revenue, and a negative provision for credit losses, while maintaining a solid capital position - Q1 2021 financial performance was strong, with LHFI growing by $159.2 million (1.6%) and deposits by $334.7 million (2.4%)[209] - The company has significant exposure to COVID-19 stressed industries, including Restaurants ($105.0 million), Hotels ($396.0 million), Retail CRE ($453.0 million), and Energy ($106.4 million) as of March 31, 2021[217][222] - As of March 31, 2021, Trustmark had 7,456 outstanding PPP loans totaling $679.7 million (net of fees), with $239.2 million in PPP loans forgiven by the SBA during Q1 2021[221] Results of Operations Net income for Q1 2021 significantly increased to $52.0 million ($0.82 EPS), primarily driven by a positive swing in the provision for credit losses and decreased noninterest expense, despite a slight revenue decrease - Net interest income decreased 1.6% year-over-year to $102.3 million, as lower yields on loans and securities were not fully offset by reduced interest expense on deposits[225] - Noninterest income fell 7.2% year-over-year to $60.6 million, mainly due to a $6.7 million decrease in mortgage banking income and a $2.7 million drop in service charges, partially offset by a $4.1 million increase in bank card and other fees[226] - Noninterest expense decreased 9.4% year-over-year to $112.2 million, largely due to a negative $9.4 million credit loss expense for off-balance sheet exposures, compared to a $6.8 million expense in the prior year[227] - The provision for credit losses was a negative $10.5 million in Q1 2021, compared to a $20.6 million expense in Q1 2020, reflecting improvements in the macroeconomic forecast[228] Financial Condition As of March 31, 2021, total assets were $16.88 billion, with growth in high-quality securities and loans held for investment, while the Allowance for Credit Losses decreased due to improved economic forecasts - The securities portfolio is high quality, with 98.0% invested in GSE-backed obligations and other Aaa-rated securities as of March 31, 2021[283] - LHFI increased by $159.2 million (1.6%) during Q1 2021, primarily driven by net growth in loans secured by real estate across all five market regions[290] - The ACL on LHFI decreased by $8.1 million to $109.2 million at March 31, 2021, representing 1.09% of total LHFI, down from 1.19% at year-end 2020[310] - Nonperforming assets were stable at $74.2 million, or 0.71% of total loans and ORE, at March 31, 2021[230][318] Capital Resources Trustmark's capital position remained strong, with total shareholders' equity increasing to $1.76 billion in Q1 2021, exceeding all regulatory capital requirements and supporting continued dividends and share repurchases - Total shareholders' equity increased to $1.760 billion at March 31, 2021, up 1.1% from year-end 2020[332] - Trustmark and its bank subsidiary, TNB, exceeded all minimum capital standards to be considered well-capitalized as of March 31, 2021[333] - The company declared a quarterly cash dividend of $0.23 per common share for Q1 2021, consistent with the prior year[337] Liquidity Trustmark maintains a strong liquidity position, primarily funded by deposits, with significant access to external borrowing capacity from FHLB and the Federal Reserve Discount Window - Deposits are the primary funding source, with average deposits totaling $14.138 billion for Q1 2021[342] - As of March 31, 2021, Trustmark had significant available liquidity, including $2.750 billion in additional FHLB borrowing capacity and $872.3 million in collateral capacity at the Federal Reserve Discount Window[344][347] Asset/Liability Management Trustmark actively manages interest rate risk, with an asset-sensitive balance sheet projecting a 12.8% NII increase from a 100 basis point rate hike, and uses derivatives to hedge mortgage banking risks while managing the LIBOR transition - The company is managing the transition away from LIBOR, scheduled to end for most term rates on June 30, 2023, through an internal LIBOR Transition Working Group[353] Estimated Change in Net Interest Income (One-Year Horizon) | Change in Interest Rates | 2021 | 2020 | | :--- | :--- | :--- | | +200 basis points | 24.4% | 5.9% | | +100 basis points | 12.8% | 3.0% | | -100 basis points | -8.4% | -10.9% | - Trustmark uses exchange-traded derivatives to economically hedge changes in the fair value of its Mortgage Servicing Rights (MSR), with a notional amount of $379.0 million at March 31, 2021[357] PART II. OTHER INFORMATION Legal Proceedings This section references Note 12 for details on legal proceedings, where Trustmark believes a loss in any pending case is not probable or reasonably estimable, and no material adverse effect on financial condition is expected - Trustmark believes that a loss in any pending legal proceeding is not probable and a reasonable estimate cannot be made at this time, with no expected material adverse effect on its financial condition[381] Risk Factors No material changes in risk factors have been reported since Trustmark's 2020 Annual Report on Form 10-K - No material changes in risk factors were reported since the company's 2020 Annual Report[382] Share Repurchases This section details Trustmark's stock repurchase activity, which resumed in January 2021 under a $100 million authorization, with 144,981 shares repurchased during Q1 Common Stock Purchases (Q1 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | Value of Shares Remaining for Purchase ($ in thousands) | | :--- | :--- | :--- | :--- | | Jan 2021 | 16,000 | $27.84 | 99,555 | | Feb 2021 | 128,981 | $28.98 | 95,817 | | Mar 2021 | 0 | — | 95,817 | | Total | 144,981 | | 95,817 |