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, 2021, TNB had total assets of $16.876
billion, which represented approximately 99.99% of the consolidated assets of
Trustmark.
Through TNB and its other subsidiaries, Trustmark operates as a financial
services organization providing banking and other financial solutions through
181 offices and 2,793 full-time equivalent associates (measured at March 31,
2021) 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,
2020 (2020 Annual Report).
Executive Overview
Trustmark has been committed to meeting the banking and financial needs of its
customers and communities for over 130 years, and remains focused on providing
support, advice and solutions to meet its customers' unique needs. Trustmark's
financial performance during the first quarter of 2021 reflect solid growth in
loans held for investment (LHFI) of $159.2 million, or 1.6%, and deposits of
$334.7 million, or 2.4%. Mortgage banking revenue remained strong during the
first quarter following record setting levels in the prior quarter. Improvement
in the economic outlook resulted in negative provision and expense for credit
losses, which also contributed to earnings for the first three months of
2021. 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
The COVID-19 pandemic and actions taken to mitigate the spread of it have had
and may continue to have an adverse impact on economic activity globally,
nationally and locally, 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 COVID-19
Stressed Industries." Economic activity during the first three months of 2021
increased as certain restrictions were lifted following the availability of the
COVID-19 vaccination; however, restrictions remain in place for many areas and
the long-term effectiveness of the vaccine and the full impact of the COVID-19
pandemic on economies and financial markets remains unknown.
Additionally, the COVID-19 pandemic has significantly affected the financial
markets and resulted in a number of actions by the FRB during 2020 and
continuing in 2021. Market interest rates declined to and remain at historical
lows. During 2020, the ten-year Treasury yield fell below 1.00% for the first
time, and the FRB reduced the target federal funds rate 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 0.10% during
2020. These rates have continued into the first quarter of 2021. The prolonged
reduction in interest rates has had and is expected to continue to have an
adverse effect on net interest income and margins and profitability for
financial institutions, including Trustmark.
In the April 2021 "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 February 22, 2021 through April 5, 2021) increased to a moderate
pace; however, changes in economic activities remained varied by sector. Reports
by the twelve Federal Reserve Districts (Districts) noted the following during
the reporting period:
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• Consumer spending strengthened. Reports on tourism were more optimistic,
bolstered by an increase in demand for leisure activities and travel, which
was attributed to spring break, an easing of pandemic-related restrictions,
increased vaccinations and recent stimulus payments among other
factors. Auto sales grew and nonfinancial service generally improved, partly
supported by strengthening demand for transportation, professional and
business, and leisure and hospitality services.
• Manufacturing activity continued to expand, despite widespread supply chain
disruptions, with half the Districts reporting robust growth, including each
of the Districts in which Trustmark operates. Activity in the energy sector
were mixed as coal production declined, while oil and gas drilling was flat
to up.
• Residential real estate activity remained strong, as sustained high demand
and tight supply of single-family homes further pushed up prices. Builders
noted ongoing production challenges, including rising costs. Reports on
commercial real estate and construction varied, with activity in the hotel,
office and retail segments generally remaining weak.
• Prices accelerated slightly, with many Districts reporting moderate price
increases and some reporting prices rose more robustly. Input costs rose
across the board, but especially in the manufacturing, construction, retail
and transportation sectors (specifically, metals, lumber, food and fuel
prices). Cost increases were partly attributed to ongoing supply chain
disruptions, temporarily exacerbated by winter weather events in some
cases. There were widespread reports of increased selling prices, but
typically not on pace with rising costs.
• Employment growth increased, with most Districts, including each of the
Districts in which Trustmark operates, noting modest to moderate increases
in headcounts. The pace of job growth varied by industry but was generally
strongest in manufacturing, construction and leisure and hospitality. Hiring
remained a widespread challenge, particularly for low-wage or hourly
workers, restraining job growth in some cases. Wage growth accelerated
slightly overall, with more significant wage pressures in industries like
manufacturing and construction where finding and retaining workers was
particularly difficult.
• Banking contacts in most Districts saw modest to moderate increases in loan
volumes.
• Outlooks were more optimistic, boosted in part by an acceleration in
COVID-19 vaccinations.
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 Sixth District also noted that banking conditions were steady, cash
balances continued to increase as deposits remained elevated, loan demand
weakened, net interest margins remained compressed, financial institutions
continued to add to their securities portfolios, loan balances remained flat
across most portfolios with commercial real estate balances declining slightly
and increases to loan loss reserves slowed as credit quality had not
deteriorated. The Federal Reserve's Eighth District also reported that banking
conditions improved moderately as outstanding loan volumes increased moderately,
noting strong growth in residential real estate lending and slight growth in
consumer and commercial loans, banks reported ample liquidity, high asset
quality and decreasing deferral requests on loan payments, and demand for the
second round of Paycheck Protection Program (PPP) loans was much lower than for
the first round. The Federal Reserve's Eleventh District also reported that
drilling and completion activity rose further, oil field services firms noted
improved margin outlooks and a pickup in hiring driven by higher demand,
exploration and production firms said they expect continued incremental
increases in drilling and completion activity in the second quarter, and
sentiment in the oil and gas industry was notably improved, however, contacts
remain anxious about the adverse impact of tighter federal regulations, ample
spare capacity and worsening COVID-19 statistics in Europe relating to demand,
profitability and pricing.
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.
Exposure to COVID-19 Stressed Industries
The full impact of COVID-19 is unknown and continues to evolve rapidly. It has
caused substantial disruption in international and the United States economies,
markets and employment. The pandemic 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 LHFI portfolio as of March 31, 2021:
• Restaurants: Aggregate outstanding balance of $105.0 million, credit
exposure of $116.0 million, 296 total loans, represents 1.0% of Trustmark's
outstanding LHFI portfolio, 86% of the loans are real estate secured, 40%
are full-service restaurants, 58% are limited-service restaurants and 2% are
other.
• Hotels: Aggregate outstanding balance of $396.0 million, credit exposure of
$425.0 million, 93 total loans, represents 4.0% of Trustmark's outstanding
LHFI portfolio, 99% of the loans are real estate secured, consists of
experienced operators and carry secondary guarantor support, 92% operate
under a major hotel chain.
• Retail (Commercial Real Estate): Aggregate outstanding balance of $453.0
million, credit exposure of $524.0 million, 307 total loans, represents 4.5%
of Trustmark's outstanding LHFI portfolio, 21% are stand-alone buildings
with strong essential
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services tenants, 1% 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 $106.4 million, credit exposure of
$324.0 million, 114 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.
COVID-19 Related 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 encouraged 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 went on
to explain that in consultation with the FASB staff that the federal banking
agencies concluded 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 were not TDRs. On March 27, 2020, the Coronavirus Aid, Relief,
and Economic Security Act (the CARES Act), a 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 were 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. At March 31, 2021, the balance of loans
remaining under some type of COVID-19 related concession totaled $28.1 million
compared to $34.2 million at December 31, 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 initial funds for the creation of the PPP
through the Small Business Administration (SBA) and Treasury Department. The PPP
is intended to provide loans to small businesses, sole proprietorships,
independent contractors and self-employed individuals 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. The loans are 100% guaranteed by
the SBA. The SBA and Treasury Department released a series of rules, guidance
documents and processes governing the PPP, including a streamlined process for
loan forgiveness of PPP loans of $150 thousand or less. The Consolidated
Appropriations Act, 2021, enacted on December 27, 2020, extended some of the
relief provisions in certain respects of the CARES Act, and appropriated an
additional funds to the PPP and permitted certain PPP borrowers to make "second
draw" loans. Subsequently, the American Rescue Plan Act of 2021, enacted on
March 11, 2021, expanded the eligibility criteria for both first and second draw
PPP loans and revised the exclusions from payroll costs for purposes of loan
forgiveness. The PPP Extension Act of 2021, enacted on March 30, 2021, extended
the PPP through May 31, 2021.
From April to August 2020, Trustmark originated PPP loans for qualified small
businesses and other borrowers. Trustmark resumed submitting PPP applications to
the SBA on behalf of qualified small businesses and other borrowers under the
CARES Act, as amended by the Consolidated Appropriations Act, 2021, in January
2021. During the first quarter of 2021, Trustmark originated 4,774 PPP loans
totaling $318.0 million ($301.5 million net of $16.5 million of deferred fees
and costs). At March 31, 2021, Trustmark had 7,456 PPP loans outstanding
totaling $701.8 million ($679.7 million net of $22.1 million of deferred fees
and costs), compared to 7,398 PPP loans outstanding totaling $623.0 million
($610.1 million net of 12.9 million of deferred fees and costs) at December 31,
2020. During the first three months of 2021, PPP loans totaling $239.2 million
were forgiven by SBA, compared to PPP loans totaling $346.9 million forgiven by
the SBA during the fourth quarter of 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. 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,
participation in the PPP will likely have a significant impact on Trustmark's
asset mix and net interest margin in 2021 as a result of the addition of these
low interest rate loans and the related processing fees earned on these loans.
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Financial Highlights
Trustmark reported net income of $52.0 million, or basic and diluted earnings
per share (EPS) of $0.82, in the first quarter of 2021, compared to $22.2
million, or basic and diluted EPS of $0.35, in the first quarter of 2020.
Trustmark's reported performance during the quarter ended March 31, 2021
produced a return on average tangible equity of 15.56%, a return on average
assets of 1.26%, an average equity to average assets ratio of 10.55% and a
dividend payout ratio of 28.05%, compared to 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% during the quarter
ended March 31, 2020.
Total revenue, which is defined as net interest income plus noninterest income,
for the three months ended March 31, 2021 was $162.9 million, a decrease of $6.3
million, or 3.7%, when compared to the same time period in 2020. The decrease in
total revenue for the three months ended March 31, 2021 when compared to the
same time period in 2020, resulted from a decline in noninterest income,
primarily due to decreases in mortgage banking, net and service charges on
deposit accounts, partially offset by an increase in bank card and other fees,
as well as a decline in net interest income, primarily due to declines in
interest and fees on LHFI and LHFS and interest on securities, partially offset
by an increase in interest and fees on PPP loans and a decline in interest on
deposits. These factors are discussed in further detail below.
Net interest income for the three months ended March 31, 2021 totaled $102.3
million, a decrease of $1.6 million, or 1.6%, when compared to the same time
period in 2020. Interest income totaled $109.5 million for the three months
ended March 31, 2021, a decline of $10.9 million, or 9.1%, when compared to the
same time period in 2020, principally due to declines in interest and fees from
LHFI and LHFS and interest on securities as a result of lower interest rates,
partially offset by an increase in interest and fees from PPP loans. Interest
expense totaled $7.1 million for the three months ended March 31, 2021, a
decrease of $9.3 million, or 56.6%, when compared to the same time period in
2020, principally due to the decline in interest on deposits as a result of
lower interest rates.
Noninterest income for the three months ended March 31, 2021 totaled $60.6
million, a decrease of $4.7 million, or 7.2%, when compared to the same time
period in 2020, primarily due to decreases in mortgage banking, net and service
charges on deposit accounts, partially offset by an increase in bank cards and
other fees. Mortgage banking, net totaled $20.8 million for the three months
ended March 31, 2021, a decrease of $6.7 million, or 24.3%, when compared to the
same time period in 2020, principally due to a decline in the net hedge
ineffectiveness and an increase in the MSR run-off partially offset by an
increase in the gain on sales of loans, net. Service charges on deposit accounts
totaled $7.4 million for the three months ended March 31, 2021, a decrease of
$2.7 million, or 26.7%, when compared to the same time period in 2020
principally due to a decline in the amount of non-sufficient funds (NSF) and
overdraft occurrences on consumer deposit accounts primarily as a result of
higher average customer account balances resulting from the various COVID-19
related stimulus programs. Bank card and other fees totaled $9.5 million for the
three months ended March 31, 2021, an increase of $4.1 million, or 76.9%, when
compared to the same time period in 2020 principally due to revenue from
customer derivatives.
Noninterest expense for the three months ended March 31, 2021 totaled $112.2
million, a decrease of $11.6 million, or 9.4%, when compared to the same time
period in 2020. The decrease in noninterest expense when the first three months
of 2021 is compared to the same time period in 2020 was principally due to a
decrease in the credit loss expense related to off-balance sheet credit
exposures partially offset by increases in salaries and employee benefits and
services and fees. Salaries and employee benefits totaled $71.2 million for the
three months ended March 31, 2021, an increase of $2.0 million, or 2.9%, when
compared to the same time period in 2020. The increase in salaries and employee
benefits when the first quarter of 2021 is compared to the same time period in
2020 was principally due to higher commissions expense resulting from
improvements in mortgage production, an increase in salary expenses as a result
of general merit increases and increases in incentive stock compensation and
other performance based incentives, partially offset by non-routine expenses
related to the voluntary early retirement program completed by Trustmark during
the first quarter of 2020. Trustmark incurred $4.3 million of non-routine
salaries and employee benefits expense during the first quarter of 2020 related
to this program. Excluding these non-routine expenses, salaries and employee
benefits increased $6.3 million, or 9.7%, when the first three months of 2021 is
compared to the same time period in 2020. Services and fees totaled $22.5
million for the three months ended March 31, 2021, an increase of $2.6 million,
or 12.8%, when compared to the same time period in 2020, primarily due to
increases in legal fees related to ongoing litigation matters, service fees
related to independent contractors and data processing charges related to
software.
Trustmark's provision for credit losses for the three months ended March 31,
2021 totaled a negative $10.5 million compared to a provision for credit losses
of $20.6 million for the same time period in 2020. Credit loss expense related
to off-balance sheet credit exposures totaled a negative $9.4 million for the
three months ended March 31, 2021 compared to $6.8 million for the same time
period in 2020. The decrease in both the provision for credit losses and the
credit loss expense related to off-balance sheet credit exposures for the first
three months of 2021 was primarily due to improvements in the macroeconomic
forecast used in the
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quantitative calculation of the allowance for credit losses (ACL). Please see
the section captioned "Provision for Credit Losses" for additional information
regarding the provision for credit losses.
At March 31, 2021, nonperforming assets totaled $74.2 million, a decrease of
$614 thousand, or 0.8%, compared to December 31, 2020, primarily due to a
decline in other real estate. Nonaccrual LHFI totaled $63.5 million at March 31,
2021, an increase of $386 thousand, or 0.6%, relative to December 31, 2020,
primarily due to LHFI placed on nonaccrual status largely offset by one large
commercial credit which was returned to accrual status as well as pay-offs of
nonaccrual LHFI in Trustmark's Mississippi market region. Other real estate
totaled $10.7 million at March 31, 2021, a decline of $1.0 million, or 8.6%,
compared to December 31, 2020, principally due to properties sold in Trustmark's
Mississippi, Alabama and Tennessee market regions.
LHFI totaled $9.984 billion at March 31, 2021, an increase of $159.2 million, or
1.6%, compared to December 31, 2020. The increase in LHFI during the first three
months of 2021 was primarily due to net growth in LHFI secured by real estate
across all five market regions, partially offset by declines in other commercial
LHFI in the Mississippi, Texas, Alabama and Florida 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 $14.383 billion at March 31, 2021, an increase of $334.7
million, or 2.4%, compared to December 31, 2020, primarily reflecting deposits
of proceeds from line draws, PPP loans and other COVID-19 related stimulus
programs. During the first three months of 2021, noninterest-bearing deposits
increased $357.0 million, or 8.2%, due to growth across all types of
noninterest-bearing deposit accounts. Interest-bearing deposits decreased $22.3
million, or 0.2%, during the first three months of 2021, primarily due to
declines in public interest checking accounts and all categories of certificates
of deposits, largely offset by growth in all other categories of
interest-bearing deposit accounts.
Recent Legislative and Regulatory Developments
On March 5, 2021, the United Kingdom Financial Conduct Authority (FCA), which
regulates London Interbank Offered Rate (LIBOR), confirmed that the publication
of most LIBOR term rates will end on June 30, 2023 (excluding 1-week U.S. LIBOR
and 2-month U.S. LIBOR, the publication of which will end on December 31,
2021). Additionally, on April 6, 2021, New York Governor Cuomo signed into law
legislation that provides for the substitution of an alternative reference rate,
the Secured Overnight Funding Rate (SOFR), in any LIBOR-based contract governed
by New York state law that does not include clear fallback language, once LIBOR
is discontinued. The Federal Reserve and other federal banking agencies have
continued to encourage banks to transition away from LIBOR as soon as
practicable. Given LIBOR's extensive use across financial markets, the
transition away from LIBOR presents various risks and challenges to financial
markets and institutions, including Trustmark. For additional information
regarding the transition from LIBOR and Trustmark's management of this
transition, please see the respective risk factor included in Part I. Item 1A. -
Risk Factors, of Trustmark's 2020 Annual Report.
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 2020 Annual Report.
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