TRMK - Trustmark Corporation Announces Second Quarter 2021 Financial Results

Performance Reflects Continued Balance Sheet Growth, Strong Credit Quality and Disciplined Expense Management

Trustmark Corporation (NASDAQGS: TRMK) reported net income of $48.0 million in the second quarter of 2021, representing diluted earnings per share of $0.76. This level of earnings resulted in a return on average tangible equity of 13.96% and a return on average assets of 1.13%. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share payable September 15, 2021, to shareholders of record on September 1, 2021.

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Second Quarter Highlights

• Pre-provision net revenue totaled $57.2 million, a linked-quarter increase of 38.2%. Please refer to the Consolidated Financial Information, Note 8 – Non-GAAP Financial Measures.
• Sale of $354.2 million of Paycheck Protection Program (PPP) loans originated in 2021 resulted in accelerated recognition of $18.6 million in origination fees, which is included in net interest income
• Credit quality remained solid; nonperforming assets declined 17.9% linked-quarter
• Continued steady growth in loans held for investment (HFI) and deposits
• Noninterest expense declined 2.4% linked-quarter

Duane A. Dewey, President and CEO, stated, “Our associates are focused on expanding existing customer relationships as well as demonstrating the value Trustmark can provide potential customers as their trusted financial partner. The success of these efforts is reflected in solid growth in our traditional banking and mortgage businesses as well as strong performance in our insurance and wealth management businesses. Earlier this year, we introduced redesigned digital channels to enhance the customer experience and provide expanded sales capabilities, including on-line account openings. Customers have embraced these offerings and we look forward to leveraging these new tools to expand relationships and profitably generate additional revenue.

“We are pleased to have been recognized during the second quarter by Forbes as the Best-in-State Bank in Mississippi in 2021, based upon independent customer satisfaction surveys. This is affirmation that our associates are providing the financial solutions and convenience our customers’ desire,” said Dewey

Balance Sheet Management

• Loans HFI totaled $10.2 billion, up 1.7% from the prior quarter and 5.1% year-over-year
• Investment securities totaled $3.0 billion, up 5.3% from the prior quarter and 17.2% year-over-year
• PPP loans totaled $166.1 million, down 75.6% from the prior quarter and 82.3% year-over-year
• Deposits totaled $14.6 billion, up 1.7% from the prior quarter and 8.3% year-over-year
• Maintained strong capital position with CET1 ratio of 11.76% and total risk-based capital ratio of 14.10%

Loans HFI totaled $10.2 billion at June 30, 2021, reflecting an increase of $169.2 million, or 1.7%, linked-quarter and $493.1 million, or 5.1%, year-over-year. The linked-quarter growth primarily reflects increases in municipal loans, 1-4 family mortgage loans, loans secured by nonfarm, nonresidential properties, and construction loans, which were offset in part by a decline in other real estate secured loans. Trustmark’s loan portfolio remains well-diversified by loan type and geography.

Deposits totaled $14.6 billion at June 30, 2021, up $248.6 million, or 1.7%, from the prior quarter and $1.1 billion, or 8.3%, year-over-year. Trustmark continues to maintain a strong liquidity position as loans HFI represented 69.4% of total deposits at June 30, 2021. Noninterest-bearing deposits represented 30.4% of total deposits at the end of the second quarter. Interest-bearing deposit costs totaled 0.19% in the second quarter, a decrease of 3 basis points from the prior quarter. The total cost of interest-bearing liabilities was 0.25% in the second quarter of 2021, a decrease of 3 basis points from the prior quarter.

During the second quarter, Trustmark repurchased $20.8 million, or approximately 630 thousand of its common shares. During the first six months of 2021, Trustmark repurchased $25.0 million, or approximately 775 thousand of its common shares. At June 30, 2021, Trustmark had $75.0 million in remaining authority under its existing stock repurchase program, which expires on December 31, 2021. The repurchase program, which is subject to market conditions and management discretion, will continue to be implemented through open market repurchases or privately negotiated transactions. At June 30, 2021, Trustmark’s tangible equity-to-tangible assets ratio was 8.31% while its total risk-based capital ratio was 14.10%. Tangible book value per share was $22.13 at June 30, 2021, up 2.5% linked-quarter and 9.7% year-over-year.

Credit Quality

• Allowance for credit losses (ACL) represented 537.35% of nonaccrual loans, excluding individually evaluated loans at June 30, 2021
• Net charge-offs totaled $1.2 million in the second quarter
• Loans remaining under a COVID-19 related concession represented approximately 19 basis points of loans HFI at June 30, 2021

Nonaccrual loans totaled $51.4 million at June 30, 2021, down $12.1 million from the prior quarter and up $1.5 million year-over-year. Other real estate totaled $9.4 million, reflecting a $1.2 million decrease from the prior quarter and decline of $8.8 million year-over-year. Collectively, nonperforming assets totaled $60.9 million at June 30, 2021, reflecting a linked-quarter decrease of $13.3 million and year-over-year decline of $7.4 million.

The provision for credit losses for loans HFI was a negative $4.0 million in the second quarter. Negative provisioning was primarily driven by decreases in individually analyzed reserves, qualitative reserves due to improvements in credit quality, and improving economic forecasts. The provision for credit losses for off-balance sheet credit exposures was $4.5 million in the second quarter. Off-balance sheet expense was primarily driven by an increase in off-balance sheet exposure as well as the implementation of probability of default and loss given default floors at a portfolio level to ensure appropriate risk is reflected as macroeconomic conditions improve. Collectively, the provision for credit losses totaled $537 thousand in the second quarter compared to negative $19.9 million in the prior quarter and expense of $24.4 million in the second quarter of 2020.

Allocation of Trustmark’s $104.0 million allowance for credit losses on loans HFI represented 1.04% of commercial loans and 0.98% of consumer and home mortgage loans, resulting in an allowance to total loans HFI of 1.02% at June 30, 2021. Management believes the level of the ACL is commensurate with the credit losses currently expected in the loan portfolio.

Revenue Generation

• Total revenue increased $12.9 million, or 7.9%, linked-quarter
• Net interest income (FTE) expanded $17.2 million, or 16.3%, linked-quarter
• Excluding PPP interest and fees, net interest income (FTE) increased $836 thousand linked-quarter
• Noninterest income totaled $56.4 million, representing 32.1% of total revenue in the second quarter
• Wealth Management revenue increased 6.3% linked-quarter and 18.2% year-over-year

Revenue in the second quarter totaled $175.8 million, an increase of $12.9 million, or 7.9%, from the prior quarter and $1.3 million, or 0.8%, from the same quarter in the prior year. The linked-quarter increase reflects $18.6 million of PPP loan origination fees attributable to the previously announced sale of $354.2 million in PPP loans during the second quarter.

Net interest income (FTE) in the second quarter totaled $122.4 million, resulting in a net interest margin of 3.16%, up 35 basis points from the prior quarter. The net interest margin, excluding PPP loans and Federal Reserve Bank balance, totaled 2.94% during the second quarter, a decrease of 5 basis points when compared to the prior quarter. Continued low interest rates decreased the yield on the loans HFI and held for sale portfolio as well as the securities portfolio, and were partially offset by lower costs on interest-bearing deposits.

Noninterest income in the second quarter totaled $56.4 million, a decrease of $4.2 million from the prior quarter and $13.1 million year-over-year. The linked quarter and year-over-year changes are principally attributable to lower mortgage banking revenue. Mortgage loan production in the second quarter totaled $736.8 million, down 3.9% from the prior quarter and 13.7% year-over-year. Mortgage banking revenue totaled $17.3 million in the second quarter, a decrease of $3.5 million from the prior quarter and $16.4 million year-over-year. The linked-quarter decline is principally attributable to reduced spreads which resulted in lower net gains on sales of mortgage loans in the secondary market.

Wealth management revenue totaled $8.9 million in the second quarter, an increase of $530 thousand, or 6.3%, from the prior quarter and $1.4 million, or 18.2%, year-over-year. The growth is attributable to increased trust and investment and brokerage business. Insurance revenue totaled $12.2 million in the second quarter, down 1.8%, or $228 thousand, from the prior quarter due to seasonality and up 2.9%, or $349 thousand, year-over-year. Service charges on deposit accounts increased $257 thousand, or 3.5%, from the prior quarter and $1.2 million, or 19.0%, year-over-year. Bank card and other fees decreased $1.2 million from the prior quarter and increased $584 thousand year-over-year. The linked-quarter decline reflects reduced customer derivative revenue.

Noninterest Expense

• Noninterest expense totaled $118.7 million in the second quarter, down $2.9 million, or 2.4%, from the prior quarter
• Adjusted noninterest expense, which excludes amortization of intangibles, ORE expenses and charitable contributions resulting in state tax credits, declined $3.9 million, or 3.3%, from the prior quarter; please refer to the Consolidated Financial Information, Note 8 – Non-GAAP Financial Measures
• Efficiency ratio improved to 64.31% in the second quarter

Adjusted noninterest expense in the second quarter was $116.3 million, down $3.9 million, or 3.3%, from the prior quarter. Salaries and employee benefits decreased $1.0 million linked-quarter principally due to the seasonality of payroll taxes in the prior quarter. Services and fees decreased $715 thousand and total equipment expense declined $677 thousand in the second quarter compared to the prior quarter. Total other expense in the second quarter declined $1.4 million, or 9.6%, from the prior quarter. Other real estate expense, net totaled $1.5 million in the second quarter compared to $324 thousand in the prior quarter, reflecting increased valuation allowances on other real estate.

“We continued to implement strategic initiatives designed to improve efficiency, accelerate growth and provide innovation while maintaining solid risk management and our corporate culture,” said Dewey. During the first six months of 2021, Trustmark continued to realign delivery channels and closed nine offices reflecting changing customer preferences and the continued migration to mobile and digital banking channels. Additionally, Trustmark opened three new offices, one each in the Birmingham, AL MSA, Jackson, MS MSA, and Memphis, TN MSA. Each of these offices features a design that integrates my Teller ^® interactive teller machine (ITM) technology as well as provides enhanced areas for customer interaction.

“In addition to branch realignment initiatives, we recently announced a voluntary early retirement program for eligible associates, who have until July 31, 2021, to elect to participate in the program. Most participants are expected to retire effective August 31, 2021. Based upon participation, we plan to redesign workflows and restructure the organization to leverage investments in technology, enhance the customer experience and improve efficiency. We anticipate providing additional information regarding this program in our third quarter earnings release,” said Dewey.

“Trustmark has a program to systematically invest in and upgrade technology. In recent years, investments in state-of-the-art technology were made in Trustmark’s insurance, wealth management and mortgage banking areas as well as in human resources and accounting systems. We also made significant upgrades to our mobile banking platform, ITM network and digital marketing programs. Collectively, these investments have well-positioned Trustmark for additional growth and expansion. Over the last 36 months, we have been working toward the implementation of a new core banking system for consumer and commercial loans, deposits and customer information. This implementation, which we have named Core Optimization for Relationship Enhancement (CORE), is a multi-year project, the first phase of which will occur later this year. These investments will better position Trustmark for continued growth, enhance efficiency, and improve the customers’ experience,” said Dewey.

Additional Information

As previously announced, Trustmark will conduct a conference call with analysts on Wednesday, July 28, 2021 at 8:30 a.m. Central Time to discuss the Corporation’s financial results. Interested parties may listen to the conference call by dialing (877) 317-3051 or by clicking on the link provided under the Investor Relations section of our website at www.trustmark.com . A replay of the conference call will also be available through Wednesday, August 11, 2021, in archived format at the same web address or by calling (877) 344-7529, passcode 10158119.

Trustmark is a financial services company providing banking and financial solutions through 180 offices in Alabama, Florida, Mississippi, Tennessee and Texas.

Forward-Looking Statements

Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “project,” “potential,” “seek,” “continue,” “could,” “would,” “future” or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements include, but are not limited to, statements relating to anticipated future operating and financial performance measures, including net interest margin, credit quality, business initiatives, growth opportunities and growth rates, among other things, and encompass any estimate, prediction, expectation, projection, opinion, anticipation, outlook or statement of belief included therein as well as the management assumptions underlying these forward-looking statements. You should be aware that the occurrence of the events described under the caption “Risk Factors” in Trustmark’s filings with the Securities and Exchange Commission (SEC) could have an adverse effect on our business, results of operations and financial condition. Should one or more of these risks materialize, or should any such underlying assumptions prove to be significantly different, actual results may vary significantly from those anticipated, estimated, projected or expected. Furthermore, many of these risks and uncertainties are currently amplified by and may continue to be amplified by or may, in the future, be amplified by, the novel coronavirus (COVID-19) pandemic, and also by the effectiveness of varying governmental responses in ameliorating the impact of the pandemic on our customers and the economies where they operate.

Risks that could cause actual results to differ materially from current expectations of Management include, but are not limited to, changes in the level of nonperforming assets and charge-offs, an increase in unemployment levels and slowdowns in economic growth, our ability to manage the impact of the COVID-19 pandemic on our markets and our customers, as well as the effectiveness of actions of federal, state and local governments and agencies (including the Board of Governors of the Federal Reserve System (FRB)) to mitigate its spread and economic impact, local, state and national economic and market conditions, conditions in the housing and real estate markets in the regions in which Trustmark operates and the extent and duration of the current volatility in the credit and financial markets, levels of and volatility in crude oil prices, changes in our ability to measure the fair value of assets in our portfolio, material changes in the level and/or volatility of market interest rates, the performance and demand for the products and services we offer, including the level and timing of withdrawals from our deposit accounts, the costs and effects of litigation and of unexpected or adverse outcomes in such litigation, our ability to attract noninterest-bearing deposits and other low-cost funds, competition in loan and deposit pricing, as well as the entry of new competitors into our markets through de novo expansion and acquisitions, economic conditions, including the potential impact of issues related to the European financial system and monetary and other governmental actions designed to address credit, securities, and/or commodity markets, the enactment of legislation and changes in existing regulations or enforcement practices or the adoption of new regulations, changes in accounting standards and practices, including changes in the interpretation of existing standards, that affect our consolidated financial statements, changes in consumer spending, borrowings and savings habits, technological changes, changes in the financial performance or condition of our borrowers, changes in our ability to control expenses, greater than expected costs or difficulties related to the integration of acquisitions or new products and lines of business, cyber-attacks and other breaches which could affect our information system security, natural disasters, environmental disasters, pandemics or other health crises, acts of war or terrorism, and other risks described in our filings with the SEC.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Except as required by law, we undertake no obligation to update or revise any of this information, whether as the result of new information, future events or developments or otherwise.