Business context and reporting period
Trustmark Corporation is a regional financial services holding company headquartered in Jackson, Mississippi. Through Trustmark National Bank and subsidiaries, it provides commercial and consumer banking, mortgage, insurance, and wealth-management services across Alabama, Florida, Mississippi, Tennessee, and Texas. This Form 10-K covers the fiscal year ended December 31, 2017; fourth-quarter figures are also summarized below. The bank represented approximately 99.98% of consolidated assets.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue (net interest income plus noninterest income) | $592.2 million | $561.5 million |
| Net interest income | $407.6 million | $387.5 million |
| Net income | $105.6 million | $108.4 million |
| Diluted earnings per share | $1.56 | $1.60 |
| Net interest margin, fully taxable equivalent | 3.48% | 3.53% |
| Return on average assets | 0.77% | 0.84% |
| Total assets at year-end | $13.798 billion | $13.352 billion |
| Loans held for investment at year-end | $8.570 billion | $7.851 billion |
| Deposits at year-end | $10.578 billion | $10.056 billion |
| Shareholders’ equity at year-end | $1.572 billion | $1.520 billion |
For Q4 2017, revenue was $148.0 million and net income was $15.8 million, or diluted EPS of $0.23, compared with $140.6 million and $28.9 million, or $0.43 per diluted share, in Q4 2016. Excluding specified nonroutine items, Q4 2017 net income was $32.7 million and diluted EPS was $0.48; these are company-presented non-GAAP measures.
- Credit: 2017 net provision for loan losses was $7.7 million, versus $14.7 million in 2016. Net charge-offs were $9.6 million, or 0.11% of average loans, compared with $7.3 million, or 0.10%. Nonperforming assets were $110.8 million, or 1.26% of loans and other real estate; nonaccrual loans rose to $67.6 million from $49.2 million. The allowance for LHFI was $76.7 million, 0.90% of LHFI.
- Cash flow: Operating activities provided $206.6 million; investing activities used $348.9 million; financing activities provided $150.3 million. Cash and cash equivalents increased $8.1 million to $335.8 million. These cash-flow measures reflect a bank’s lending, securities, and deposit activity and should be read in that context.
- Borrowings and liquidity: Year-end federal funds purchased and repurchase agreements were $469.8 million; short-term borrowings were $971.0 million; long-term FHLB advances were $0.9 million; and junior subordinated debt was $61.9 million. Trustmark reported $1.771 billion of additional FHLB of Dallas borrowing capacity, $1.299 billion of unencumbered agency securities, and $1.042 billion of Discount Window collateral capacity. Management said liquidity and capital resources were sufficient for known requirements.
- Capital: Trustmark’s CET1, Tier 1, and total risk-based capital ratios were 11.77%, 12.33%, and 13.10%; its Tier 1 leverage ratio was 9.67%. TNB was classified as well-capitalized.
- Shareholder returns: The annual dividend was $0.92 per share, unchanged from 2016; Trustmark made no share repurchases in 2017.
Material changes versus prior comparable period
- Revenue rose 5.5%, supported principally by higher loan interest and fees as the LHFI portfolio grew 9.2% (8.7% excluding $36.7 million reclassified from acquired loans). Deposit growth was 5.2%; excluding deposits from the Reliance acquisition, it was 3.6%.
- Net income fell 2.6% despite stronger revenue, as higher taxes and noninterest expense outweighed revenue growth and a lower acquired-loan provision. Net interest margin declined five basis points, as funding costs rose.
- Interest expense increased 72.1% to $42.2 million, mainly reflecting higher rates, deposit balances, and short-term FHLB funding. Noninterest expense increased 5.6% to $430.2 million.
- Nonaccrual LHFI increased 37.3%, principally after three large substandard credits moved to nonaccrual. Other real estate declined 30.3% to $43.2 million, helping keep total nonperforming assets broadly stable.
- Trustmark completed its acquisition of Reliance on April 7, 2017, adding seven Alabama offices for total consideration of approximately $24.8 million. The filing says the acquisition did not materially affect results; $3.2 million of transaction expenses were recorded.
Outlook, management commentary, risks, contingencies, and unusual items
- Management described credit quality and capital as solid and emphasized profitable growth, customer relationships, and expense efficiency. It did not provide specific company-wide earnings or revenue guidance.
- Management estimated a 2018 combined effective tax rate of approximately 12%–14%, primarily due to the Tax Cuts and Jobs Act. The 2017 reported effective rate was 31.6%; excluding the one-time tax effects, it was 20.6%.
- 2017 reported results included a $25.6 million deferred-tax remeasurement expense, an $8.7 million release of a prior-merger tax valuation allowance, a $17.6 million pension settlement expense, $3.2 million of Reliance merger expenses, and $4.9 million of nonroutine nontaxable life-insurance proceeds. Together, the company’s adjustments increased 2017 net income from $105.6 million to its non-GAAP $130.6 million.
- The terminated defined-benefit plan was funded and distributed in 2017; management expected annual pension expense to decline by $3.0–$4.0 million. The continuing acquired-plan obligation was $10.1 million against $4.6 million of assets at year-end.
- Federal Reserve rate increases and balance-sheet reduction, deposit-cost competition, economic weakness, real-estate and credit deterioration, and oil-price volatility are material risks. Energy-related LHFI was $226.5 million, or 2.6% of LHFI; $22.0 million was nonaccrual. A $1.1 million reserve increase was recorded for potential Hurricane Harvey exposure.
- Static-balance simulations estimated net interest income would decline 2.1% under a 200-basis-point rate increase, 1.0% under a 100-basis-point increase, and 4.2% under a 100-basis-point decrease. These are model estimates, not forecasts.
- Three Stanford Financial Group-related lawsuits remained in pretrial stages. A class-certification request was denied in one matter, while discovery was allowed to proceed. Management said loss was not probable and reasonably estimable and did not expect pending litigation to materially adversely affect consolidated financial condition.
- Other risks include cyber and vendor disruptions, regulatory and compliance costs, mortgage-loan repurchase claims, securities valuation losses, and acquisition integration. Gross unrealized securities losses were $42.1 million; management attributed them to market rates rather than credit quality and reported no other-than-temporary impairment.
- Management planned to adopt the expected-credit-loss standard (CECL) in Q1 2020 and was developing its model; the eventual impact was not yet quantified. The independent auditor reported fairly presented GAAP financial statements and effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported earnings to non-GAAP adjusted earnings, especially the Tax Act remeasurement, valuation-allowance release, pension settlement, and life-insurance proceeds.
- Track the increase in nonaccrual loans and provisions, including the large Mississippi and Texas credits, and the adequacy of the $76.7 million LHFI allowance.
- Monitor loan growth against deposit growth and the increased reliance on short-term FHLB advances, including repricing and maturities.
- Assess whether rising rates improve asset yields enough to offset deposit-cost increases and the modeled sensitivity to falling rates.
- Follow the 2018 effective tax rate, pension-cost reduction, Reliance integration, and any updates to the Stanford-related litigation.