The following provides a narrative discussion and analysis of Trustmark
Corporation's (Trustmark) financial condition and results of operations. This
discussion should be read in conjunction with the unaudited consolidated
financial statements and the supplemental financial data included in Part I.
Item 1. - Financial Statements of this report.
Description of Business
Trustmark, a Mississippi business corporation incorporated in 1968, is a bank
holding company headquartered in Jackson, Mississippi. Trustmark's principal
subsidiary is Trustmark National Bank (TNB), initially chartered by the State of
Mississippi in 1889. At March 31, 2020, TNB had total assets of $14.018
billion, which represented approximately 99.99% of the consolidated assets of
Trustmark.
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Through TNB and its other subsidiaries, Trustmark operates as a financial
services organization providing banking and other financial solutions through
188 offices and 2,761 full-time equivalent associates (measured at March 31,
2020) located in the states of Alabama, Florida (primarily in the northwest or
"Panhandle" region of that state, which is referred to herein as Trustmark's
Florida market), Mississippi, Tennessee (in the Memphis and Northern Mississippi
regions, which are collectively referred to herein as Trustmark's Tennessee
market), and Texas (primarily in Houston, which is referred to herein as
Trustmark's Texas market). Trustmark's operations are managed along three
operating segments: General Banking Segment, Wealth Management Segment and
Insurance Segment. For a complete overview of Trustmark's business, see the
section captioned "The Corporation" included in Part I. Item 1. - Business of
Trustmark's Annual Report on Form 10-K for its fiscal year ended December 31,
2019 (2019 Annual Report).
COVID-19 Update
Trustmark has been proactive in responding to the novel coronavirus (COVID-19)
pandemic, and taken comprehensive action to support customers, associates and
the communities it serves. Trustmark activated its Pandemic Preparedness Plan to
protect the health and safety of its employees and customers, which included
temporarily limiting lobby hours at its branches, transitioning approximately
45% of Trustmark's workforce to work remotely and taking additional precautions
to ensure essential employees working within Trustmark's branches and offices
stay safe and healthy. Trustmark remains committed to serving its customers
through drive-through services offered at branches, access to its automated
teller machine (ATM) and interactive teller machine (ITM) network and robust
digital and mobile banking options which provide additional convenience for
Trustmark's customers. Trustmark has been proactive in reaching out to customers
to discuss challenges and solutions, provided waivers of certain fees and
charges, granted extensions, deferrals and forbearance as appropriate, paused
all foreclosures and repossessions and refrained from negative credit bureau
reporting for previously up-to-date customers. To date, Trustmark has not
incurred any significant disruptions to its business activities.
Exposure to Stressed Industries
The full impact of COVID-19 is unknown and rapidly evolving. It has caused
substantial disruption in international and the United States economies, markets
and employment. The outbreak may have a significant adverse impact on certain
industries Trustmark serves. The following provides a summary of Trustmark's
exposure to COVID-19 impacted industries within the loans held for investment
(LHFI) portfolio as of March 31, 2020:
• Restaurants: Aggregate outstanding balance of $116.0 million, credit
exposure of $124.0 million, 344 total loans, represents 1.21% of Trustmark's
outstanding LHFI portfolio, 74% of the loans are real estate secured, 55%
are full-service restaurants, 24% are limited-service restaurants, 19% are
carryout restaurants, and 2% are other.
• Hotels: Aggregate outstanding balance of $366.0 million, credit exposure of
$451.0 million, 95 total loans, represents 3.83% of Trustmark's outstanding
LHFI portfolio, 99% of the loans are real estate secured, consists of
experienced operators and carry secondary guarantor support, 91% operate
under a major hotel chain, pre COVID-19 (as of December 31, 2019) loan to
value was 54%, pre COVID-19 debt service coverage was 1.8x.
• Retail (Commercial Real Estate): Aggregate outstanding balance of $505.0
million, credit exposure of $635.0 million, 359 total loans, represents
5.28% of Trustmark's outstanding LHFI portfolio, 23% are stand-alone
buildings with strong essential services tenants, 3% are national grocery
store-anchored, 14% are investment grade anchored centers, mall exposure in
only one borrower with $5 million outstanding.
• Energy: Aggregate outstanding balance of $131.7 million, credit exposure of
$359.6 million, 134 total loans, represents 1.38% of Trustmark's outstanding
LHFI portfolio, no loans where repayment or underlying security ties to
realization of value from energy reserves.
• Higher Risk Commercial and Industrial: Aggregate outstanding balance of $3.0
million, credit exposure of $14.0 million, one loan.
During the first quarter of 2020, Trustmark incurred total credit loss expenses
of $27.4 million, primarily due to net changes in the economic forecast due to
the negative effects of the COVID-19 pandemic on the overall economy and
macroeconomic factors. Because of the significant uncertainties related to the
ultimate duration of the COVID-19 pandemic and its potential effects on clients
and prospects, and on the national and local economy as a whole, there can be no
assurances as to how the crisis may ultimately affect Trustmark's loan
portfolio.
Loan Concessions
On March 22, 2020, the federal banking agencies issued an "Interagency Statement
on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus". This guidance encourages financial
institutions to work prudently with borrowers that may be unable to meet their
contractual obligations because of the effects of COVID-19. The guidance goes on
to explain that in consultation with the Financial Accounting Standards Board
(FASB) staff that the federal banking agencies
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conclude that short-term modifications (e.g. six months) made on a good faith
basis to borrowers who were current as of the implementation date of a relief
program are not troubled debt restructurings (TDRs). On March 27, 2020, the
Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), a $2
trillion stimulus package intended to provide relief to businesses and consumers
in the United States struggling as a result of the pandemic, was signed into
law. Section 4013 of the CARES Act also addressed COVID-19 related modifications
and specified that COVID-19 related modifications on loans that were current as
of December 31, 2019 are not TDRs. On April 7, 2020, the federal banking
agencies revised its earlier guidance to clarify the interaction between the
March 22, 2020 interagency statement and section 4013 of the CARES Act, as well
as the agencies' views on consumer protection considerations. Through April 23,
2020, Trustmark had applied this guidance and modified 1,978 individual loans
with aggregate principal balances totaling $976.2 million. More of these types
of modifications are likely to be executed in the second quarter of
2020. Commercial concessions were primarily either interest only for 90 days or
full payment deferrals for 90 days. Consumer concessions were 90-day full
payment deferrals.
Paycheck Protection Program
A provision in the CARES Act included a $349 billion fund for the creation of
the Paycheck Protection Program (PPP) through the Small Business Administration
(SBA) and Treasury Department. The PPP is intended to provide loans to small
businesses to pay their employees, rent, mortgage interest and utilities. PPP
loans are forgivable, in whole or in part, if the proceeds are used for payroll
and other permitted purposes in accordance with the requirements of the
PPP. These loans carry a fixed rate of 1.00% per annum and a term of two years,
if not forgiven, in whole or in part. Payments are deferred for the first six
months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the
originating bank a processing fee ranging from 1.0% to 5.0%, based on the size
of the loan. The SBA began accepting submissions for these PPP loans on April 3,
2020 and reached the limit of funds originally available to disburse under this
program on April 16, 2020. Legislation providing an additional $320 billion in
funding for the PPP was signed into law on April 24, 2020. The SBA began
accepting applications for the new funding on April 27, 2020. Under the CARES
Act and interim final rules released by the federal banking agencies, PPP loans
receive a zero percent risk weight for regulatory capital purposes, and if
pledged as part of the Paycheck Protection Program Liquidity Facility (PPPLF),
are subtracted from the lender's tier 1 leverage ratio. The PPPLF was
established by the Federal Reserve Board (FRB) to provide a liquidity source to
PPP lenders, through non-recourse credit secured by PPP loans.
TNB is actively participating in the PPP on behalf of its customers. TNB began
submitting applications to the SBA on Saturday, April 4, 2020 and began funding
those loans on Monday, April 13, 2020. As of April 23, 2020, TNB had secured SBA
commitments for approximately 6,000 customer requests totaling over $800.0
million with an average loan size of $137 thousand. Trustmark cannot predict the
amount of PPP loans that will be forgiven in whole or in part by the SBA, nor
can it predict the magnitude and timing of the impact the PPP loans and related
fees will have on Trustmark's net interest margin. However, TNB's participation
in the PPP will likely have a significant impact on Trustmark's asset mix and
net interest margin for the remainder of 2020 as a result of the addition of
these low interest rate loans to the LHFI portfolio and the related processing
fees earned on these loans.
Executive Overview
Trustmark has been committed to meeting the banking and financial needs of its
customers and communities for over 130 years. During the COVID-19 pandemic,
Trustmark remains focused on providing support, advice and solutions to meet its
customers' unique needs. During the first three months of 2020, Trustmark
experienced strong growth in its fee businesses as noninterest income increased
$23.8 million, or 57.3%, when compared to the same time period in
2019. Trustmark continued to maintain and expand customer relationships as
reflected by growth in the LHFI portfolio of $232.3 million, or 2.5%, and growth
in deposits of $330.2 million, or 2.9%, during the first three months of
2020. Trustmark is committed to managing the franchise for the long term,
supporting investments to promote profitable revenue growth, realigning delivery
channels to support changing customer preferences as well as reengineering and
efficiency opportunities to enhance long-term shareholder value. Trustmark's
capital position remained solid, reflecting the consistent profitability of its
diversified financial services businesses. Trustmark's Board of Directors
declared a quarterly cash dividend of $0.23 per share. The dividend is payable
June 15, 2020, to shareholders of record on June 1, 2020.
Recent Economic and Industry Developments
On March 11, 2020, the World Health Organization declared the outbreak of
COVID-19 as a global pandemic, which continues to spread throughout the United
States and around the world. The COVID-19 pandemic has adversely affected, and
may continue to adversely affect economic activity globally, nationally and
locally. Actions taken around the world to help mitigate the spread of COVID-19
include restrictions on travel, quarantines in certain areas, and forced
closures for certain types of public places and businesses. COVID-19 and actions
taken to mitigate the spread of it have had and are expected to continue to have
an adverse impact on the economies and financial markets of many countries,
including the geographical area in which Trustmark operates.
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Additionally, the COVID-19 pandemic has significantly affected the financial
markets and has resulted in a number of actions by the FRB. Market interest
rates have declined significantly. On March 3, 2020, the ten-year Treasury yield
fell below 1.00% for the first time, and the FRB reduced the target federal
funds rate by 50 basis points to a range of 1.00% to 1.25%. On March 15, 2020,
the FRB further reduced the target federal funds rate by 100 basis points to a
range of 0.00% to 0.25% and announced a $700 billion quantitative easing program
in response to the expected economic downturn caused by the COVID-19 pandemic.
The FRB reduced the interest that it pays on excess reserves from 1.60% to 1.10%
on March 3, 2020, and then to 0.10% on March 15, 2020. Trustmark expects that
these reductions in interest rates, especially if prolonged, could adversely
affect its net interest income and margins and its profitability.
It is unknown how long the adverse conditions associated with the COVID-19
pandemic will last or what the complete financial effect will be to
Trustmark. It is reasonably possible that estimates made in the financial
statements could be materially and adversely impacted in the near term as a
result of these conditions, including expected credit losses on loans and
off-balance sheet credit exposures.
Financial Highlights
Trustmark reported net income of $22.2 million, or basic and diluted earnings
per share (EPS) of $0.35, in the first quarter of 2020, compared to $33.3
million, or basic and diluted EPS of $0.51, in the first quarter of 2019.
Trustmark's reported performance during the quarter ended March 31, 2020
produced a return on average tangible equity of 7.34%, a return on average
assets of 0.66%, an average equity to average assets ratio of 12.02% and a
dividend payout ratio of 65.71%, compared to a return on average tangible equity
of 11.55%, a return on average assets of 1.01%, an average equity to average
assets ratio of 11.83% and a dividend payout ratio of 45.10% during the quarter
ended March 31, 2019.
Total revenue, which is defined as net interest income plus noninterest income,
for the three months ended March 31, 2020 was $169.2 million, an increase of
$22.9 million, or 15.7%, when compared to the same time period in 2019. The
increase in total revenue for the three months ended March 31, 2020 when
compared to the same time period in 2019, was primarily due to the increase in
mortgage banking, net. These factors are discussed in further detail below.
Net interest income for the three months ended March 31, 2020 totaled $104.0
million, a decrease of $856 thousand, or 0.8%, when compared to the same time
period in 2019, as declines in interest income were largely offset by a decrease
in interest expense caused by a decline in interest on deposits resulting from
both lower average balances and interest rates. Interest income totaled $120.4
million for the three months ended March 31, 2020, a decline of $5.1 million, or
4.1%, when compared to the same time period in 2019, principally due to
decreases in interest and fees on acquired loans, as a result of the remaining
balance of acquired loans acquired in the BancTrust merger that were transferred
to LHFI as part of the adoption of FASB Accounting Standards Codifications (ASC)
Topic 326, "Financial Instruments - Credit Losses," and interest on securities,
principally due to a decline in average balances of securities held and lower
interest rates during the respective periods. Interest expense totaled $16.4
million for the three months ended March 31, 2020, a decrease of $4.2 million,
or 20.5%, when compared to the same time period in 2019, principally due to the
decline in interest on deposits.
Noninterest income for the three months ended March 31, 2020 totaled $65.3
million, an increase of $23.8 million, or 57.3%, when compared to the same time
period in 2019. The increase in noninterest income for the first quarter of 2020
when compared to the same time period in 2019 was primarily due to an increase
in mortgage banking, net. Mortgage banking, net totaled $27.5 million for the
three months ended March 31, 2020, an increase of $24.0 million when compared to
the same time period in 2019, principally due to the positive net hedge
ineffectiveness and an increase in the gain on sales of loans, net.
Noninterest expense for the three months ended March 31, 2020 totaled $123.8
million, an increase of $17.8 million, or 16.8%, when compared to the same time
period in 2019, principally due to increases in salaries and employee benefits
and services and fees and the addition of the credit loss expense related to
off-balance sheet credit exposures as a result of adopting FASB ASC Topic
326. Salaries and employee benefits totaled $69.1 million for the first quarter
of 2020, an increase of $8.2 million, or 13.4%, when compared to the first
quarter of 2019. During the first quarter of 2020, Trustmark completed a
voluntary early retirement program and incurred $4.3 million of non-routine
salaries and employee benefits expense related to this program. Excluding these
non-routine expenses, salaries and employee benefits increased $3.9 million, or
6.4%, when the first quarter of 2020 is compared to the same time period in
2019, principally due to higher commissions expense resulting from improvements
in mortgage production and the insurance line of business as well as an increase
in salary expenses as a result of general merit increases. Services and fees
totaled $19.9 million for the three months ended March 31, 2020, an increase of
$3.0 million, or 17.5%, when compared to the same time period in 2019, primarily
due to increases in legal fees related to ongoing litigation matters and data
processing charges related to software.
Trustmark adopted FASB ASC Topic 326, in accordance with the amendments of FASB
Accounting Standard Update (ASU) 2016-13, "Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments," effective
January 1,
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2020. The guidance in FASB ASC 326 replaces Trustmark's previous incurred loss
methodology with a methodology that reflects the current expected credit losses
(often referred to as CECL) and requires consideration of a broader range of
reasonable and supportable information to determine credit losses. Trustmark's
allowance for credit losses (ACL) for LHFI is an estimate of expected credit
losses inherent within Trustmark's existing LHFI portfolio. The ACL, LHFI is
adjusted through the provision for credit losses and reduced by the charge off
of loan amounts, net of recoveries. FASB ASC Topic 326 also requires Trustmark
to estimate expected credit losses for off-balance sheet credit exposures which
are not unconditionally cancellable by Trustmark. Trustmark maintains a separate
allowance for credit losses for off-balance sheet credit exposures, including
unfunded commitments and letters of credit. Adjustments to the allowance for
credit losses on off-balance sheet credit exposures are recorded as noninterest
expense in credit loss expense related to off-balance sheet credit exposures.
Trustmark adopted FASB ASC Topic 326 using the modified retrospective approach
prescribed by the amendments of FASB ASU 2016-13; therefore, prior period loan
loss provision balances are presented under legacy GAAP and may not be
comparable to current period credit loss presentation.
Trustmark's provision for credit losses for the three months ended March 31,
2020 totaled $20.6 million compared to a provision for loan losses, LHFI of $1.6
million for the three months ended March 31, 2019. Credit loss expense related
to off-balance sheet credit exposures for the three months ended March 31, 2020
totaled $6.8 million. The increase in the provision for credit losses and the
credit loss expense related to off-balance sheet credit exposures for the first
quarter of 2020 was primarily due to net changes in the economic forecast due to
the current and anticipated negative effects of the COVID-19 pandemic on the
overall economy and macroeconomic factors used in the quantitative calculation
of the ACL. Please see the section captioned "Provision for Credit Losses" for
additional information regarding the provision for credit losses.
At March 31, 2020, nonperforming assets totaled $77.8 million, a decrease of
$4.6 million, or 5.6%, compared to December 31, 2019, reflecting declines in
both nonaccrual LHFI and other real estate. Nonaccrual LHFI totaled $53.0
million at March 31, 2020, a decrease of $234 thousand, or 0.4%, relative to
December 31, 2019, primarily due to reductions, pay-offs and charge-offs of
nonaccrual LHFI in Trustmark's Mississippi and Tennessee market regions, which
were largely offset by LHFI placed on nonaccrual status in the Mississippi and
Alabama market regions during the first quarter of 2020. Other real estate
totaled $24.8 million at March 31, 2020, a decline of $4.4 million, or 15.0%,
compared to December 31, 2019, principally due to properties sold and
write-downs on foreclosed properties in Trustmark's Alabama, Mississippi and
Florida market regions.
LHFI totaled $9.568 billion at March 31, 2020, an increase of $232.3 million, or
2.5%, compared to December 31, 2019. On January 1, 2020, Trustmark transferred
$72.6 million, the remaining balance of the loans acquired in the BancTrust
merger, from acquired impaired loans to LHFI as purchased credit deteriorated
(PCD) loans as part of its adoption of FASB ASC Topic 326. For additional
information regarding the acquired loans transferred to LHFI, see the section
captioned "Acquired Loans." Excluding the transferred acquired loans, LHFI
increased $159.7 million, or 1.7%, compared to December 31, 2019. The increase
in LHFI, excluding the transferred acquired loans, during the first three months
of 2020 was primarily due to net growth in LHFI secured by real estate in
Trustmark's Texas, Mississippi and Florida market regions as well as increases
in other commercial loans in the Mississippi and Tennessee market regions,
partially offset by declines in state and other political subdivision loans in
Trustmark's Mississippi market region. For additional information regarding
changes in LHFI and comparative balances by loan category, see the section
captioned "LHFI."
Management has continued its practice of maintaining excess funding capacity to
provide Trustmark with adequate liquidity for its ongoing operations. In this
regard, Trustmark benefits from its strong deposit base, its highly liquid
investment portfolio and its access to funding from a variety of external
funding sources such as upstream federal funds lines, FHLB advances and, on a
limited basis, brokered deposits. See the section captioned "Liquidity" for
further discussion of the components of Trustmark's excess funding capacity.
Total deposits were $11.576 billion at March 31, 2020, an increase of $330.2
million, or 2.9%, compared to December 31, 2019. During the first three months
of 2020, noninterest-bearing deposits increased $85.8 million, or 3.0%,
primarily due to growth in all categories of noninterest-bearing deposit
accounts. Interest-bearing deposits increased $244.4 million, or 2.9%, during
the first three months of 2020, primarily due to growth in public and commercial
interest checking accounts and commercial money market deposit accounts.
Recent Legislative and Regulatory Developments
On March 27, 2020, President Trump signed the CARES Act, which established a $2
trillion economic stimulus package, including cash payments to individuals,
supplemental unemployment insurance benefits and $349 billion to fund the PPP, a
loan program administered by the SBA. Under the PPP, small businesses, sole
proprietorships, independent contractors and self-employed individuals may apply
for loans from existing SBA lenders and other approved regulated lenders that
enroll in the program, subject to numerous limitations and eligibility criteria.
TNB is participating as a lender in the PPP.
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In addition, the CARES Act and related guidance from the federal banking
agencies provide financial institutions the option to temporarily suspend
requirements under GAAP related to classification of certain loan modifications
as TDRs to account for the current and anticipated effects of COVID-19.
The CARES Act permits financial institutions to defer temporarily the use of
FASB ASU 2016-13, also known as CECL, for a limited period of time, but
Trustmark has elected not to apply such a deferral. Relatedly, the federal bank
regulatory agencies issued an interim final rule effective March 31, 2020 that
allows banking organizations that implement CECL this year to elect to mitigate
the effects of the CECL accounting standard on their regulatory capital for two
years. This two-year delay is in addition to the three-year transition period
that the agencies had already made available (five-year phase-in transition
period). Trustmark has elected to defer the regulatory capital effects of CECL
in accordance with the interim final rule, which will largely delay the effects
of the adoption of CECL on its regulatory capital for the next two years, after
which the effects will be phased-in over a three-year period from January 1,
2022 through December 31, 2024.
The CARES Act also includes a range of other provisions designed to support the
U.S. economy and mitigate the impact of COVID-19 on financial institutions and
their customers, including through the authorization of various programs and
measures that the U.S. Department of the Treasury, the FRB and other federal
agencies may or are required to implement. Under section 4022 of the CARES Act,
a mortgage servicer must grant up to two 180-day forbearances to any borrower
with a federally backed mortgage loan who affirms that he or she is experiencing
financial hardship during the COVID-19 emergency. Additionally, servicers of
federally backed mortgage loans are prohibited from initiating judicial or
non-judicial foreclosures, other than with respect to vacant or abandoned
property, for at least 60 days beginning March 18, 2020. Under section 4023 of
the CARES Act, a servicer of a multifamily mortgage loan must grant up to three
30-day forbearances to a multifamily borrower that was current on payments as of
February 1, 2020, requests forbearance, and affirms that the borrower is
experiencing a financial hardship during the COVID-19 emergency. This provision
applies from the date of enactment until the earlier of (i) the termination date
of the national emergency declared by the President on March 13, 2020, or (ii)
December 31, 2020. Further, in response to the COVID-19 outbreak, the FRB has
implemented or announced a number of facilities to provide emergency liquidity
to various segments of the U.S. economy and financial markets.
For additional information regarding legislation and regulation applicable to
Trustmark, see the section captioned "Supervision and Regulation" included in
Part I. Item 1. - Business of Trustmark's 2019 Annual Report.
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