Trustmark Corporation (NASDAQ: TRMK) — Q1 2019 Form 10-Q
Business context and reporting period. Trustmark is a Mississippi-based financial services company operating banking, wealth management and insurance businesses across Alabama, Florida, Mississippi, Tennessee and Texas. This unaudited filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. The company operated 195 offices and reported $13.48 billion in assets at quarter-end.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $146.3 million | $148.9 million in Q1 2018; down 1.7% |
| Net interest income | $104.8 million | $102.1 million; up 2.7% |
| Net interest margin, fully taxable equivalent | 3.63% | 3.46%; up 17 basis points |
| Net income / diluted EPS | $33.3 million / $0.51 | $36.8 million / $0.54 |
| Noninterest income | $41.5 million | $46.8 million; down 11.3% |
| Noninterest expense | $106.0 million | $102.5 million; up 3.5% |
| Provision for loan losses | $1.7 million | $4.1 million |
| Net cash from operating activities | $14.9 million | $57.8 million |
| Total assets / shareholders’ equity | $13.48 billion / $1.59 billion | $13.29 billion / $1.59 billion at December 31, 2018 |
| Loans held for investment (LHFI) | $9.00 billion | Up 1.8% from December 31, 2018; up 5.6% year over year |
| Total deposits | $11.53 billion | Up 1.5% from December 31, 2018 |
- Profitability and margins: Return on average assets was 1.01%, return on average equity 8.50%, and return on average tangible equity 11.55%. The effective tax rate was 13.6%.
- Credit: Nonperforming assets, excluding acquired loans, were $88.6 million, or 0.96% of loans including loans held for sale plus other real estate, versus $96.3 million and 1.07% at year-end. Nonaccrual LHFI declined to $56.4 million from $61.6 million. The allowance for LHFI was $79.0 million, or 0.88% of LHFI. Q1 net charge-offs were $1.9 million, compared with net recoveries of $0.5 million in Q1 2018.
- Cash, funding and debt: Cash and due from banks was $454.0 million. The cash-flow statement reports a $104.5 million increase in cash and cash equivalents during the quarter. Deposits remain the primary funding source. Other borrowings were $83.3 million and junior subordinated debt was $61.9 million; federal funds purchased and repurchase agreements were $46.9 million. Management said it maintained excess funding capacity, including $2.91 billion of available FHLB Dallas borrowing capacity and $1.06 billion of Discount Window collateral capacity.
- Capital and shareholder returns: Trustmark reported an 11.88% common equity Tier 1 ratio, 12.45% Tier 1 risk-based capital ratio, 13.21% total risk-based capital ratio and 10.05% Tier 1 leverage ratio. Trustmark and its bank subsidiary were categorized as well-capitalized. The company paid a $0.23 per-share quarterly dividend and repurchased 1.17 million shares for $36.9 million.
Material changes versus the prior comparable period
- Net income fell 9.5% and diluted EPS declined from $0.54 to $0.51. Higher noninterest expense and lower total revenue more than offset the lower loan-loss provision and higher net interest income.
- Mortgage banking income declined $7.8 million to $3.4 million, principally reflecting $4.7 million of net negative hedge ineffectiveness in Q1 2019 versus $3.3 million of net positive ineffectiveness in Q1 2018. Mortgage servicing rights also had an $8.9 million fair-value decline from market changes.
- Deposit interest expense rose $10.1 million as rates and average interest-bearing deposit balances increased. Net interest margin nevertheless improved, supported by higher loan yields, securities runoff and a favorable funding mix.
- Loan growth was concentrated in real estate, particularly construction and development; construction, land development and other land LHFI increased 14.5% from year-end. Noninterest-bearing deposits decreased 2.4%, while interest-bearing deposits increased 2.9%.
- Q1 operating cash flow declined to $14.9 million from $57.8 million. Investing cash flow was an outflow of $23.0 million, versus an inflow of $263.1 million in Q1 2018, reflecting among other items the change in net loan activity. Financing cash flow was an inflow of $112.7 million, compared with an outflow of $341.4 million.
Outlook, management commentary, risks and unusual items
- Management emphasized profitable growth, balance-sheet optimization, disciplined expense management, investment in customer-facing and efficiency initiatives, and capital deployment. It gave no formal quantitative earnings or revenue guidance in the filing.
- Management expected acquired loan balances to decline approximately $10 million in Q2 2019, excluding debt settlements, and projected a 6%–7% yield on those loans, excluding recoveries. It noted that income from this runoff portfolio is expected to decline over time.
- The Federal Reserve did not raise its target rate in Q1 and indicated no further increase for the remainder of 2019. Management cited low rates, rising deposit-cost competition, market and economic uncertainty, crude-oil volatility, trade and policy uncertainty, and real estate conditions as relevant risks. A modeled +200-basis-point rate shock indicated a 2.0% increase in one-year net interest income; a -100-basis-point scenario indicated a 1.8% decline. These are estimates, not forecasts.
- Trustmark faces three Stanford Financial Group-related lawsuits involving its subsidiary, TNB. Claims include alleged fraudulent transfers and other allegations; damages were not quantified. The company said loss was not considered probable or reasonably estimable and stated the proceedings were being vigorously contested.
- Trustmark adopted the new lease accounting standard on January 1, 2019, recording $33.9 million of operating-lease right-of-use assets and $34.9 million of operating lease liabilities, as well as $11.2 million of finance-lease assets and liabilities. Management said the adoption was not material to the consolidated financial statements.
- The existing $100 million repurchase authorization was completed by March 31, 2019. A new $100 million program took effect April 1, 2019 and runs through March 31, 2020. The indicated 2019 dividend was $0.92 per share.
- The filing identifies expected-credit-loss standard CECL adoption planned for Q1 2020; Trustmark was developing its model with a third-party vendor and said implementation work was on schedule. Actual impact was still being evaluated.
Most important facts for investors to verify
- Whether loan growth, improved net interest margin and deposit growth continue to offset higher deposit costs and expense growth.
- Whether mortgage banking results normalize after the large year-over-year swing in hedge ineffectiveness and MSR valuation.
- Credit performance, including net charge-offs, construction and commercial real estate exposures, and the concentration of nonaccrual loans in Mississippi. Energy-related LHFI was $152.8 million, or 1.7% of LHFI; management noted prolonged lower oil prices could lead to downgrades.
- Whether the allowance remains adequate as loan balances and portfolio mix change, and the eventual effect of CECL adoption.
- Developments in the Stanford-related litigation and any change in management’s assessment of probability, estimability or potential financial impact.
- Execution of the new share repurchase program, capital levels, and liquidity capacity under changing market conditions.