Trustmark Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Trustmark is a bank holding company operating through banking, wealth management and insurance businesses across Alabama, Florida, Mississippi, Tennessee and Texas.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $156.8 million | $154.1 million | $460.5 million | $455.5 million |
| Net interest income | $108.5 million | $107.0 million | $321.0 million | $314.2 million |
| Net income | $41.0 million | $36.3 million | $116.5 million | $112.9 million |
| Diluted EPS | $0.64 | $0.54 | $1.80 | $1.67 |
| FTE net interest margin | 3.66% | 3.59% | 3.64% | 3.54% |
- For Q3, revenue rose 1.8% and net income rose about 13.2% year over year. Nine-month revenue increased 1.1% and net income increased about 3.2%.
- Q3 return on average assets was 1.21%, versus 1.07% a year earlier; return on average tangible equity was 13.31%, versus 12.26%.
- Nine-month operating cash flow was negative $18.0 million, compared with positive $141.7 million in 2018. Investing cash flow was positive $40.9 million and financing cash flow positive $113.8 million. Cash and cash equivalents ended at $486.3 million.
Balance sheet, funding and capital
- At September 30, total assets were $13.585 billion, loans held for investment (LHFI) were $9.224 billion, deposits were $11.254 billion and shareholders’ equity was $1.645 billion.
- LHFI increased $387.8 million, or 4.4%, from year-end 2018; growth was principally in real estate lending. Total deposits declined $110.2 million, or 1.0%. Noninterest-bearing deposits increased $126.5 million, while interest-bearing deposits fell $236.8 million.
- Federal funds purchased and repurchase agreements rose to $376.7 million from $50.5 million at year-end, including $325.0 million of upstream federal funds borrowing, primarily reflecting seasonal public-deposit declines. Other borrowings were $76.7 million; junior subordinated debt was $61.9 million.
- Management reported adequate liquidity and access to $3.055 billion of additional FHLB Dallas borrowing capacity, $979.2 million of Federal Reserve Discount Window capacity and approximately $429.0 million of unencumbered agency securities.
- Trustmark and its bank subsidiary were reported well-capitalized. Trustmark’s CET1, Tier 1, total risk-based capital and Tier 1 leverage ratios were 11.83%, 12.38%, 13.15% and 10.34%, respectively.
Material changes and credit quality
- Provision for LHFI losses fell to $3.0 million in Q3 and $7.1 million for nine months, from $8.7 million and $15.8 million, respectively. Nine-month net charge-offs were $3.2 million, down from $5.2 million.
- Nonperforming assets excluding acquired loans declined to $91.0 million from $96.3 million at year-end; nonaccrual LHFI was $59.0 million and other real estate was $32.0 million. The allowance for LHFI losses was $83.2 million, or 0.90% of LHFI.
- Nonaccrual troubled debt restructurings increased to $29.2 million from $16.7 million at year-end, although total TDRs were $30.5 million at September 2019 versus $36.0 million in September 2018.
- Mortgage banking income was $21.9 million for nine months, down 24.3% year over year. Mortgage servicing rights fell to $73.0 million from $95.6 million at year-end, primarily reflecting a $25.1 million adverse market-value change, partly offset by hedging. Net hedge ineffectiveness was negative $8.5 million for the first nine months.
- Available-for-sale securities were $1.554 billion and held-to-maturity securities $785.4 million. The portfolio declined $382.3 million from year-end, largely from maturities and paydowns. Net unrealized gains on available-for-sale securities were $0.3 million versus net unrealized losses of $42.7 million at year-end.
Management commentary, outlook and risks
- Management emphasized profitable growth, balance-sheet optimization, disciplined expense management, investment in customer experience and capital returns. The quarterly dividend was $0.23 per share; a $100 million repurchase authorization runs through March 31, 2020. Repurchases totaled $54.4 million in the first nine months.
- No specific earnings or financial guidance was provided. Management described economic activity as moderate but cited uncertainty around trade relations, global growth, oil prices and monetary policy. The Federal Reserve cut rates twice in Q3 and announced another cut in October; management noted low rates pressure margins, while rising rates can increase deposit costs.
- Key sensitivities include loan and real-estate credit conditions in its five regional markets, interest rates, deposit pricing and retention, mortgage prepayment speeds and MSR valuation, market volatility, cybersecurity, litigation and regulatory changes. Energy-related LHFI was $132.5 million, or 1.4% of LHFI; management said prolonged lower oil prices could prompt downgrades.
- Trustmark’s subsidiary faces multiple Stanford Financial Group-related lawsuits, including a complaint filed November 1, 2019, after quarter-end. Damages are generally unquantified; management said loss was not considered probable or reasonably estimable and the matters were being vigorously contested.
- Trustmark adopted lease accounting in 2019, recognizing $33.2 million of operating lease right-of-use assets and $34.3 million of operating lease liabilities at quarter-end. The company planned to adopt the CECL credit-loss standard in Q1 2020 and was developing its model; the impact was not yet quantified.
Important facts for investors to verify
- Whether loan growth can continue without weakening credit metrics, particularly in commercial real estate and construction lending.
- How deposit competition and funding costs affect net interest margin following rate cuts and seasonal borrowing increases.
- Whether mortgage banking and MSR valuations stabilize, and how effectively derivatives offset further rate-driven changes.
- The future credit-loss allowance impact of CECL adoption planned for Q1 2020.
- Developments, potential exposure and insurance coverage related to Stanford litigation, including the post-quarter Smith Complaint.
- Cash-flow trends: operating cash flow was negative for the first nine months, in part amid mortgage-loan originations and sales; confirm whether this pattern persists.