Trustmark Corporation — Q1 2018 Form 10-Q
Business context and period. Trustmark is a bank holding company headquartered in Jackson, Mississippi, operating banking, wealth management and insurance businesses across Alabama, Florida, Mississippi, Tennessee and Texas. This unaudited filing covers the quarter ended March 31, 2018; comparisons are with Q1 2017 unless otherwise stated. Trustmark reported 199 offices and 2,905 full-time-equivalent associates.
Financial results and position
- Revenue and earnings: Total revenue was $148.9 million, up 3.7%. Net income rose to $36.8 million from $31.2 million; diluted EPS was $0.54 versus $0.46. The quarterly dividend remained $0.23 per share.
- Interest income and margin: Net interest income increased to $102.1 million from $97.6 million. Net interest margin on a fully taxable-equivalent basis was 3.46%, down 3 basis points. Interest expense rose 85.2%, mainly reflecting higher deposit costs and average interest-bearing deposit balances.
- Noninterest items and expenses: Noninterest income increased 1.7% to $46.8 million, including mortgage banking income of $11.3 million, up 10.6%. Noninterest expense was $102.5 million, up 0.4%. Income before taxes was $42.3 million versus $40.4 million.
- Taxes and returns: Income tax expense fell to $5.5 million from $9.2 million; the effective tax rate was 13.0% versus 22.7%, primarily due to the Tax Cuts and Jobs Act. Return on average assets was 1.10% versus 0.95%; return on average tangible equity was 13.05% versus 11.39%.
- Balance sheet and lending: Total assets were $13.46 billion at quarter-end, down from $13.80 billion at December 31, 2017. Loans held for investment were $8.51 billion, down 0.7% from year-end but up 6.4% from March 31, 2017. Total deposits were $10.98 billion, up 3.8% from year-end.
- Credit quality: The allowance for loan losses on held-for-investment loans was $81.2 million, or 0.95% of those loans, versus $76.7 million and 0.90% at year-end. Q1 net recoveries were $0.5 million, compared with net charge-offs of $1.6 million a year earlier. Nonperforming assets, excluding acquired loans, were $108.3 million, or 1.24% of loans and other real estate; nonaccrual loans were $68.7 million. Troubled debt restructurings totaled $25.8 million, compared with $12.4 million a year earlier.
- Cash flow and liquidity: Operating cash flow was $57.8 million, compared with $39.9 million. Investing activities provided $263.1 million, versus $103.6 million used in Q1 2017; financing activities used $341.4 million, versus $115.6 million provided. Cash and cash equivalents ended the quarter at $315.3 million. Short-term borrowings fell to $717.5 million from $1.44 billion at year-end, while deposits increased. Management cited deposits, securities and access to federal funds lines, FHLB advances and the Federal Reserve Discount Window as liquidity sources.
- Capital and securities: Trustmark reported a 12.05% common equity Tier 1 ratio, 12.62% Tier 1 risk-based capital ratio and 13.44% total risk-based capital ratio; the company and bank were classified as well-capitalized. Shareholders’ equity was $1.57 billion. Available-for-sale securities declined to $2.10 billion; their net unrealized losses increased to $51.5 million from $23.5 million at year-end, primarily reflecting market-rate changes.
Material changes versus comparable periods
- Higher loan interest income and mortgage banking revenue supported revenue growth; Trustmark attributed loan interest growth chiefly to portfolio expansion. Loans held for investment were $509.3 million higher year over year.
- Higher deposit interest expense partly offset asset-yield gains; the reported margin declined modestly, including an approximately 6-basis-point effect from the lower tax-equivalent adjustment after tax reform.
- Lower taxes materially supported net income growth. The loan-loss provision also increased: total provision was $4.1 million, versus $1.2 million in Q1 2017, when acquired-loan provision was a benefit.
- Quarter-end borrowing balances declined substantially as maturing FHLB advances were not fully replaced and deposit growth and securities cash flows improved funding needs.
- Accumulated other comprehensive loss widened to $67.9 million from $39.7 million at year-end, reflecting securities valuation changes and an $8.5 million tax-effect reclassification to retained earnings under early adoption of ASU 2018-02.
Outlook, commentary, risks and unusual items
- Management described economic activity as moderately improving, while noting uncertainty around interest rates, crude oil prices, trade tariffs, global markets and government policies. It emphasized profitable revenue growth, investment, reengineering and expense efficiency; no broad earnings or margin guidance was provided.
- For Q2 2018, management expected acquired loan balances to decline by approximately $15 million to $25 million and the acquired-loan yield, excluding recoveries, to be about 6% to 7%. It cautioned that income from this portfolio would decline as balances ran off.
- Interest-rate sensitivity modeling estimated net interest income changes of -1.0% under a +200-basis-point shock, -0.5% at +100 basis points and -3.4% at -100 basis points. Management cautioned that actual results may differ and the model excludes potential strategic balance-sheet changes.
- Energy-related loans were $195.2 million, or 2.3% of held-for-investment loans; management warned prolonged lower oil prices could lead to downgrades. Loan and deposit pricing competition, deposit withdrawals, regional real estate conditions, cyber risks and regulatory changes were among the disclosed risks.
- Three Stanford Financial Group-related lawsuits involving Trustmark National Bank remained in pretrial stages. Plaintiffs had not quantified certain claims; management stated a loss was not considered probable and reasonably estimable and did not expect the pending matters to materially adversely affect consolidated financial condition.
- Trustmark early adopted revenue-recognition guidance and ASU 2018-02 in Q1; management reported no material financial-statement impact from revenue-standard adoption. The filing also notes ongoing preparation for CECL, planned for Q1 2020.
Important facts for investors to verify
- Whether loan growth, deposit pricing and the net interest margin develop as interest rates rise.
- Whether the increase in troubled debt restructurings and provision expense signals worsening credit performance; monitor nonaccrual loans, classified loans, charge-offs and reserve adequacy.
- How securities valuation losses and accumulated other comprehensive loss affect reported equity and tangible capital, noting that accumulated other comprehensive loss is excluded from regulatory capital calculations as disclosed.
- Whether liquidity remains adequate as deposits, wholesale funding costs and collateral availability change; review the decline in available unencumbered agency securities.
- Developments in the Stanford-related litigation and the eventual implementation impact of CECL and other pending accounting or regulatory changes.