Trustmark Corporation (NASDAQ: TRMK) — Q2 2019 Form 10-Q
Business context and reporting period
Trustmark is a Mississippi-based bank holding company operating through banking, wealth management and insurance businesses in Alabama, Florida, Mississippi, Tennessee and Texas. This unaudited report covers the quarter and six months ended June 30, 2019. Unless otherwise noted, amounts below are in millions.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $157.4 | $152.6 | $303.7 | $301.4 |
| Net interest income | $107.7 | $105.2 | $212.5 | $207.3 |
| Noninterest income | $49.6 | $47.4 | $91.1 | $94.2 |
| Provision for loan losses, including acquired loans | $2.6 | $2.7 | $4.3 | $6.8 |
| Noninterest expense | $106.1 | $103.8 | $212.1 | $206.3 |
| Net income | $42.1 | $39.8 | $75.5 | $76.6 |
| Diluted EPS | $0.65 | $0.59 | $1.16 | $1.13 |
| Net interest margin, fully taxable equivalent | 3.64% | 3.57% | 3.63% | 3.51% |
- Q2 revenue rose 3.2% and net income rose 5.8% year over year. First-half revenue increased 0.7%, while net income declined 1.5%; diluted EPS increased, with fewer weighted-average shares outstanding.
- Q2 returns on average assets and average tangible equity were 1.24% and 14.14%, respectively; first-half returns were 1.12% and 12.86%.
- At June 30, total assets were $13.549 billion and shareholders’ equity was $1.619 billion. Loans held for investment were $9.117 billion, up 3.2% from year-end 2018; total deposits were $11.567 billion, up 1.8%.
- Cash and cash equivalents ended the six-month period at $404.4 million, up $54.9 million. Net cash used in operating activities was $3.4 million, compared with $77.4 million provided in the first half of 2018; investing activities used $62.9 million and financing activities provided $121.1 million.
- Borrowings included $51.8 million of federal funds purchased and repurchase agreements, $79.0 million of other borrowings and $61.9 million of junior subordinated debt. Operating lease liabilities were $33.9 million. Trustmark reported adequate liquidity and excess funding capacity.
- Trustmark and its bank subsidiary were classified as well-capitalized. Trustmark’s CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 11.76%, 12.31%, 13.07% and 10.03%, respectively.
Material changes versus comparable periods
- Loan growth and higher loan yields supported net interest income; the first-half net interest margin increased 12 basis points. This was partly offset by higher deposit costs: first-half deposit interest expense increased 89.9% year over year.
- First-half noninterest income declined 3.2%, mainly because mortgage banking income fell 32.4%, including adverse mortgage-hedge results. Q2 mortgage banking income, by contrast, increased 13.8% year over year.
- Noninterest expense increased 2.8% for the first half, with higher compensation and services and fees partly offset by lower FDIC assessments. The allowance for loan losses on held-for-investment loans increased 1.4% from year-end to $80.4 million.
- Nonperforming assets, excluding acquired loans, decreased to $84.1 million from $96.3 million at year-end; nonaccrual loans declined to $52.9 million from $61.6 million. First-half net charge-offs increased to $3.0 million from $1.1 million, primarily reflecting a large commercial charge-off in Mississippi and lower recoveries.
- Available-for-sale securities increased in fair value, contributing to a $30.9 million first-half improvement in other comprehensive income, net of tax. Trustmark repurchased $49.9 million of stock in the first half and authorized a new $100 million repurchase program through March 31, 2020.
Outlook, commentary, risks and contingencies
- Management emphasized profitable growth, balance-sheet optimization, capital deployment and expense discipline. The filing gives no numerical earnings or revenue guidance. Management described economic activity as moderate but noted uncertainty around trade tensions, global growth, oil prices and monetary policy.
- Management warned that low or falling interest rates could pressure net interest margins, while rising rates could increase deposit-cost competition. Its interest-rate simulation estimated net interest income changes of +2.5% under a 200-basis-point rise, +1.3% under a 100-basis-point rise and -2.0% under a 100-basis-point decline; these are modeled estimates, not forecasts.
- Energy-related loans were $137.6 million, or about 1.5% of held-for-investment loans; $11.6 million were nonaccrual. Management said prolonged lower oil prices could result in downgrades and that it would continue monitoring exposure.
- Three lawsuits relating to the Stanford Financial Group remain in pre-trial stages. Trustmark said a loss was not considered probable or reasonably estimable and that the proceedings were not expected to have a material adverse effect on consolidated financial condition.
- Trustmark adopted lease accounting changes effective January 1, 2019, recognizing right-of-use assets and lease liabilities; management said adoption did not materially affect the financial statements. The company planned to adopt the expected-credit-loss standard (CECL) in the first quarter of 2020 and was developing its model and controls.
Important facts for investors to verify
- Whether loan growth and improved loan yields can continue to offset higher deposit costs and pressure on net interest margin.
- How mortgage banking results, including MSR valuation and hedge effectiveness, develop; MSR fair value was $79.3 million, down from $95.6 million at year-end.
- Credit trends behind higher first-half net charge-offs, Mississippi commercial exposures, TDRs and the allowance for loan losses.
- Progress and eventual financial impact of CECL adoption, and any changes in regulatory capital or liquidity capacity.
- Developments in the Stanford-related litigation and any change in management’s assessment of the potential loss contingency.