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 September 30, 2020, TNB had total assets of $15.556
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
187 offices and 2,807 full-time equivalent associates (measured at September 30,
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 in
March 2020 to protect the health and safety of its employees and customers, and
continues to take additional precautions as recommended by the Centers for
Disease Control and Prevention and mandated by government ordinances. Trustmark
remains committed to serving its customers through its branches, actively
promoting digital touchpoints including its automated teller machine (ATM) and
interactive teller machine (ITM) network and robust digital and mobile banking
options. 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 has had and may continue to 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 September 30, 2020:
• Restaurants: Aggregate outstanding balance of $119.0 million, credit
exposure of $131.0 million, 337 total loans, represents 1.2% of Trustmark's
outstanding LHFI portfolio, 85% of the loans are real estate secured, 35%
are full-service restaurants, 63% are limited-service restaurants and 2% are
other.
• Hotels: Aggregate outstanding balance of $380.0 million, credit exposure of
$442.0 million, 97 total loans, represents 3.9% 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.
• Retail (Commercial Real Estate): Aggregate outstanding balance of $473.0
million, credit exposure of $560.0 million, 330 total loans, represents 4.8%
of Trustmark's outstanding LHFI portfolio, 21% are stand-alone buildings
with strong essential services tenants, 2% are national grocery
store-anchored, 19% are investment grade anchored centers, mall exposure in
only one borrower with $5 million outstanding.
• Energy: Aggregate outstanding balance of $109.5 million, credit exposure of
$347.1 million, 127 total loans, represents 1.1% 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
$11.0 million, credit exposure of $14.0 million, one borrower.
During the nine months ended September 30, 2020, Trustmark incurred total credit
loss expenses of $50.5 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. During the third quarter of 2020, Trustmark
conducted a review of significantly impacted borrowers that received one or more
payment concessions and other borrowers in industries significantly impacted by
the COVID-19 pandemic. Collectively, an aggregate outstanding balance of $1.8
billion was reviewed, which included approximately 80% of borrowers receiving
payment concessions, 96% of outstanding hotel loans, 86% of outstanding
restaurant loans and 94% of outstanding retail commercial real estate loans. As
a result of this review, approximately $156.1 million of the outstanding
balances reviewed were downgraded to a criticized risk rating category,
including $68.0 million in hotel loans, $5.0 million in restaurant loans and
$15.0 million in retail commercial real estate loans. 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.
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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 conclude that short-term
modifications (e.g., six months) made on a good faith basis to borrowers that
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. As of September 30, 2020, Trustmark had
2,776 individual loans with aggregate principal balances totaling $1.324 billion
which were modified under this guidance, compared to 2,646 individual loans with
aggregate principal balances of $1.419 billion at June 30, 2020. In addition,
Trustmark had 36 individual loans with aggregate principal balances totaling
$2.6 million at September 30, 2020 which were not eligible under this guidance,
but were not classified as a TDR under Trustmark's existing policies, compared
to 46 individual loans with aggregate principal balances of $2.6 million at June
30, 2020. More of these types of modifications are likely to be executed in the
fourth 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. If
not forgiven, in whole or in part, these loans carry a fixed rate of 1.00% per
annum with payments deferred until the date the SBA remits the borrower's loan
forgiveness amount to the lender (or, if the borrower does not apply for loan
forgiveness, ten months after the end of the borrower's loan forgiveness covered
period). Originally, the loans carried a term of two years under SBA rules
implemented by the CARES Act, but a June 5, 2020 amendment to the CARES Act
provided for a five-year minimum loan term for loans made beginning as of such
date, and permitted lenders and borrowers to mutually agree to amend existing
two-year loans to have terms of five years. 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 and stopped accepting applications on August 8, 2020. The SBA and
Treasury Department have released a series of rules, guidance documents and
processes governing all aspects of the PPP, including a streamlined process for
loan forgiveness of PPP loans of $50 thousand or less. Under the CARES Act and
interim and 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. The PPPLF will
expire on December 31, 2020 unless it is extended by the FRB and Treasury
Department.
TNB began submitting applications to the SBA on behalf of its customers on
Saturday, April 4, 2020 and began funding those loans on Monday, April 13,
2020. Through the PPP, TNB had 9,691 loans totaling $970.0 million with an
average loan size of $100 thousand outstanding as of September 30, 2020. Net of
deferred fees and costs of $25.7 million, PPP loans totaled $944.3 million at
September 30, 2020. Due to the amount and nature of the PPP loans, these loans
are not included in Trustmark's LHFI portfolio and are presented separately in
the accompanying consolidated balance sheet. At September 30, 2020, TNB had $4.0
million of outstanding PPP loans pledged as collateral at the PPPLF. 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 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
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needs. During the first nine months of 2020, Trustmark experienced strong growth
in its fee businesses as noninterest income increased $69.0 million, or 49.5%,
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 $512.1 million, or 5.5%, and growth in deposits of $1.977 billion, or 17.6%,
during the first nine 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 continued to invest in its insurance
business with the completion of the acquisition of another Mississippi-based
agency during the second quarter of 2020. 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 December 15, 2020, to
shareholders of record on December 1, 2020.
Executive Officer Succession Plans
On October 27, 2020, the Boards of Directors of Trustmark and TNB announced that
Gerard R. Host will become Executive Chairman of Trustmark and TNB effective
January 1, 2021. Duane A. Dewey, President and Chief Operating Officer of TNB,
will succeed Mr. Host as President and Chief Executive Officer (CEO) of
Trustmark and CEO of TNB effective January 1, 2021. Granville Tate, Jr., who
serves as Executive Vice President, Chief Risk Officer and General Counsel of
TNB, will assume additional responsibilities as TNB's Chief Administrative
Officer effective January 1, 2021. He remains Secretary of the Boards of
Directors of Trustmark and TNB. Additionally, Trustmark announced the retirement
of Louis E. Greer, Treasurer and Principal Financial Officer of Trustmark and
Chief Financial Officer of TNB, effective March 1, 2021. Thomas C. Owens, who
has served as Executive Vice President and Bank Treasurer of TNB since 2013,
will succeed Mr. Greer as Treasurer and Principal Financial Officer of Trustmark
and Chief Financial Officer of TNB effective March 1, 2021. George T. ("Tom")
Chambers, Jr., who has served as Controller of TNB since 2007, will become
Principal Accounting Officer of Trustmark and Executive Vice President and Chief
Accounting Officer of TNB effective March 1, 2021. Maria L. Sugay, who serves as
Executive Vice President and Co-Treasurer of TNB, will succeed Mr. Owens as Bank
Treasurer effective March 1, 2021.
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 regions,
including the geographical area in which Trustmark operates and industries in
which Trustmark regularly extends credit. For additional information regarding
Trustmark's exposure to industries impacted by the COVID-19 pandemic, please see
the section captioned "Exposure to Stressed Industries."
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 to historical lows. 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.
In the October 2020 "Summary of Commentary on Current Economic Conditions by
Federal Reserve District," the twelve Federal Reserve Districts' reports
suggested that economic activity during the reporting period (covering the
period from August 25, 2020 through October 9, 2020) increased across all
Districts at a slight to modest pace; however, changes in economic activities
varied greatly by sector. Reports by the twelve Federal Reserve Districts noted
the following during the reporting period:
• Consumer spending growth remained positive, though some Districts reported a
leveling off of retail sales and a slight increase in tourism
activity. Demand for automobiles remained steady, but low inventories
constrained sales to varying degrees. Reports on agriculture conditions were
mixed, as some Districts experienced drought conditions. Restaurateurs in
many Districts expressed concerns that cooler weather would slow sales, as
they have relied on outdoor dining.
• Manufacturing activity generally increased at a moderate pace. Prices rose
modestly across all Districts. Input costs increased at varying degrees,
mostly led by increases in material costs, particularly steel and
lumber. Input costs generally increased faster than consumer prices;
however, some sectors, such as construction, manufacturing, retail and
wholesale, were able to pass along the higher costs to consumers. Multiple
Districts reported that firms continued to incur additional costs due to the
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COVID-19 pandemic, including personal protective equipment, sanitation
equipment, testing equipment and technology needed for remote work.
• Residential housing markets continued to experience steady demand for new
and existing homes, with activity constrained by low inventories. Commercial
real estate conditions continued to decline in many Districts, with the
exception of warehouse and industrial space where construction and leasing
activity remained steady.
• Employment increased in almost all Districts, though growth remained
slow. Most Districts continued to report tight labor markets, attributing
this trend to workers' health and childcare concerns, with many firms
consequently offering increased schedule flexibility. Wages increased
slightly in most Districts.
• Banking contacts cited increased demand for mortgages as the key driver of
overall loan demand. Banking contacts in many Districts expressed concern
that delinquency rates may rise in coming months, citing various reasons.
• Outlook remained generally optimistic or positive, but with a considerable
degree of uncertainty, particularly with regard to the presidential election
and the unknown trajectory of the COVID-19 pandemic.
Reports by the Federal Reserve's Sixth District, Atlanta (which includes
Trustmark's Alabama, Florida and Mississippi market regions), Eighth District,
St. Louis (which includes Trustmark's Tennessee market region), and Eleventh
District, Dallas (which includes Trustmark's Texas market region), noted similar
findings for the reporting period as those discussed above. The Federal
Reserve's Eleventh District also noted that energy activity remained depressed,
but started to show signs of improvement.
It is unknown what the complete financial effect of the COVID-19 pandemic will
be on Trustmark. It is reasonably possible that estimates made in the financial
statements, including the expected credit losses on loans and off-balance sheet
credit exposures, could be materially and adversely impacted in the near term as
a result of the adverse conditions associated with the COVID-19 pandemic.
Financial Highlights
Trustmark reported net income of $54.4 million, or basic and diluted earnings
per share (EPS) of $0.86, in the third quarter of 2020, compared to $41.0
million, or basic and diluted EPS of $0.64, in the third quarter of 2019.
Trustmark's reported performance during the quarter ended September 30, 2020
produced a return on average tangible equity of 16.82%, a return on average
assets of 1.37%, an average equity to average assets ratio of 10.75% and a
dividend payout ratio of 26.74%, compared to a return on average tangible equity
of 13.31%, a return on average assets of 1.21%, an average equity to average
assets ratio of 12.14% and a dividend payout ratio of 35.94% during the quarter
ended September 30, 2019.
Trustmark reported net income of $108.8 million, or basic and diluted EPS of
$1.71, for the first nine months of 2020, compared to $116.5 million, or basic
and diluted EPS of $1.80, for the first nine months of 2019. Trustmark's
reported performance during the first nine months of 2020 produced a return on
average tangible equity of 11.57%, a return on average assets of 0.97%, an
average equity to average assets ratio of 11.13% and a dividend payout ratio of
40.35%, compared to a return on average tangible equity of 13.01%, a return on
average assets of 1.15%, an average equity to average assets ratio of 11.92% and
a dividend payout ratio of 38.33% during the first nine months of 2019.
Total revenue, which is defined as net interest income plus noninterest income,
for the three and nine months ended September 30, 2020 was $179.9 million and
$523.6 million, an increase of $23.1 million, or 14.7%, and $63.2 million, or
13.7%, respectively, when compared to the same time periods in 2019. The
increase in total revenue for the three and nine months ended September 30, 2020
when compared to the same time periods 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 and nine months ended September 30, 2020
totaled $106.2 million and $315.2 million, respectively, a decrease of $2.3
million, or 2.1%, and $5.8 million, or 1.8%, respectively, when compared to the
same time periods in 2019, as declines in interest income were largely offset by
a decrease in interest on deposits resulting from lower interest rates. Interest
income totaled $114.4 million and $349.4 million for the three and nine months
ended September 30, 2020, respectively, a decline of $15.9 million, or 12.2%,
and $36.4 million, or 9.4%, respectively, when compared to the same time periods
in 2019, principally due to declines in interest and fees from LHFI and LHFS as
a result of lower interest rates during the respective periods and interest and
fees from acquired loans, which were reclassified to LHFI upon the adoption of
FASB ASC Topic 326 "Financial Instruments - Credit Losses", partially offset by
increases in interest and fees from PPP loans. Interest expense totaled $8.2
million and $34.3 million for the three and nine months ended September 30,
2020, respectively, a decrease of $13.6 million, or 62.5%, and $30.6 million, or
47.2%, respectively, when compared to the same time periods in 2019, principally
due to the decline in interest on deposits as a result of lower interest rates.
Noninterest income for the three and nine months ended September 30, 2020
totaled $73.7 million and $208.5 million, respectively, an increase of $25.4
million, or 52.5%, and $69.0 million, or 49.5%, respectively, when compared to
the same time periods in 2019. The
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increase in noninterest income for the three and nine months ended September 30,
2020 when compared to the same time periods in 2019 was primarily due to an
increase in mortgage banking, net. Mortgage banking, net totaled $36.4 million
and $97.7 million for the three and nine months ended September 30, 2020,
respectively, an increase of $28.3 million and $75.8 million, respectively, when
compared to the same time periods in 2019, principally due to an increase in the
gain on sales of loans, net and the net positive hedge ineffectiveness.
Noninterest expense for the three and nine months ended September 30, 2020
totaled $114.0 million and $356.4 million, respectively, an increase of $7.1
million, or 6.7%, and $37.5 million, or 11.7%, respectively, when compared to
the same time periods in 2019. The increase in noninterest expense for when the
third quarter of 2020 is compared to the same time period in 2019 was
principally due to increases in salaries and employee benefits and services and
fees. The increase in noninterest expense for when the first nine months of 2020
is compared to the same time period in 2019 was 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 $67.3
million and $202.6 million for the three and nine months ended September 30,
2020, respectively, an increase of $4.8 million, or 7.8%, and $17.2 million, or
9.3%, respectively, when compared to the same time periods in 2019. The increase
in salaries and employee benefits when the third quarter of 2020 is compared to
the same time period in 2019 was principally due to higher commissions expense
resulting from improvements in mortgage production as well as an increase in
salary expenses as a result of general merit increases as well as an increase in
the general incentives accrual. 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 $12.9 million, or 7.0%, when the first nine months of 2020 is compared
to the same time period in 2019. The increase in salaries and employee benefits
expense, excluding the non-routine expenses, for the nine months ended September
30, 2020 was principally due to higher commissions expense resulting from
improvements in mortgage production as well as an increase in salary expenses as
a result of general merit increases, an increase in overtime pay and the
COVID-19 pandemic, as a result of temporary compensation adjustments and
one-time payments to front-line associates. Services and fees totaled $21.0
million and $61.5 million for the three and nine months ended September 30,
2020, respectively, an increase of $2.2 million, or 11.4%, and $7.7 million, or
14.3%, respectively, when compared to the same time periods 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, 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 and nine months ended
September 30, 2020 totaled $1.8 million and $40.5 million, respectively,
compared to a provision for loan losses, LHFI of $3.0 million and $7.1 million
for the three and nine months ended September 30, 2019, respectively. Credit
loss expense related to off-balance sheet credit exposures totaled a negative
$3.0 million for the three months ended September 30, 2020 and $10.0 million for
the nine months ended September 30, 2020. The increase in the provision for
credit losses and the credit loss expense related to off-balance sheet credit
exposures for the first nine months of 2020 was primarily due to net changes in
the economic forecast due to the 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 September 30, 2020, nonperforming assets totaled $70.1 million, a decrease of
$12.4 million, or 15.0%, compared to December 31, 2019, primarily due to a
decline in other real estate. Nonaccrual LHFI totaled $53.9 million at September
30, 2020, an increase of $630 thousand, or 1.2%, relative to December 31, 2019,
primarily due to LHFI placed on nonaccrual status in Trustmark's Tennessee,
Mississippi and Alabama market regions, which were largely offset by reductions,
pay-offs and charge-offs of nonaccrual LHFI in Trustmark's Mississippi and
Tennessee market regions. Other real estate totaled $16.2 million at September
30, 2020, a decline of $13.0 million, or 44.4%, compared to December 31, 2019,
principally due to properties sold in Trustmark's Mississippi, Alabama, Florida
and Tennessee market regions.
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LHFI totaled $9.848 billion at September 30, 2020, an increase of $512.1
million, or 5.5%, 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 $439.5 million, or 4.7%, compared to December 31, 2019. The
increase in LHFI, excluding the transferred acquired loans, during the first
nine months of 2020 was primarily due to net growth in LHFI secured by real
estate across all five market regions as well as increases in other commercial
loans in the Mississippi and Tennessee market regions, partially offset by
declines in commercial and industrial LHFI in the Alabama, Texas and Tennessee
market regions. 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 $13.222 billion at September 30, 2020, an increase of $1.977
billion, or 17.6%, compared to December 31, 2019, reflecting increases in both
noninterest-bearing and interest-bearing deposit accounts as customers deposited
proceeds from line draws, PPP loans and other COVID-19 related stimulus
programs. During the first nine months of 2020, noninterest-bearing deposits
increased $1.073 billion, or 37.1%, primarily due to growth in commercial and
consumer noninterest-bearing deposit accounts. Interest-bearing deposits
increased $904.0 million, or 10.8%, during the first nine months of 2020,
primarily due to growth in public and consumer interest checking accounts,
commercial and consumer money market deposit accounts and consumer savings
accounts, partially offset by declines in consumer time deposits.
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. Congress appropriated an additional
$320 billion to the PPP on April 24, 2020, and amended the PPP on June 5, 2020
to make the terms of the PPP loans and loan forgiveness more flexible.
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,
followed by an identical final rule on September 30, 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 and final rules, 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.
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Many of these facilities, including the PPPLF, were set to expire on September
30, 2020, but have been extended at least through December 31, 2020.
On May 20, 2020, the Office of the Comptroller of the Currency (OCC) released a
final rule revising its regulations implementing the Community Reinvestment Act
(CRA). Among other things, the final rule establishes a new evaluation framework
to assess the distribution of an OCC-supervised institution's retail loans in
major retail lending business lines within each assessment area and the value of
the institution's qualifying CRA activities relative to its retail domestic
deposits, and clarifies the types of loans, investments, and services that are
qualifying CRA activities. The final rule becomes effective on October 1, 2020,
and requires institutions of TNB's size to comply with its most significant
changes beginning January 1, 2023. Management is reviewing the potential impact
of the final rule on TNB.
In October 2017, the CFPB issued a final rule generally requiring lenders that
make certain covered short-term loans, longer-term balloon-payment loans, or
longer-term loans with certain costs and features, to reasonably determine that
a borrower of a covered loan has the ability to repay such a loan, make certain
disclosures to the borrower before attempting to withdraw payment from the
borrower's account, forego from making three consecutive attempts to withdraw
payments and report covered loans to registered information systems. On July 7,
2020, the CFPB rescinded the rule's requirements for a lender to determine a
consumer's ability to repay a covered loan and report covered loans to
registered information systems, and retained the rule's other
requirements. Based on TNB's current credit portfolio, any covered loans made by
TNB are considered exempt "accommodation loans" under the CFPB's 2017 final
rule, and accordingly, Trustmark does not expect that the 2017 final rule, or
the July 7, 2020 rescission of the rule's underwriting and reporting
requirements, will have a material impact on its operations.
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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