Trustmark Corporation — Q3 2018 Form 10-Q
Business context and period. Trustmark is a bank holding company headquartered in Jackson, Mississippi, operating 198 offices across Alabama, Florida, Mississippi, Tennessee and Texas through general banking, wealth management and insurance businesses. This filing covers the quarter and nine months ended September 30, 2018. Financial amounts below are approximate U.S. dollars in millions unless stated otherwise.
Financial performance and position
- Third-quarter results: Total revenue was $154.1 million, up 3.8% year over year. Net interest income was $107.0 million, up 3.0%; net income was $36.3 million, up 4.8%; and diluted EPS was $0.54 versus $0.51.
- Nine-month results: Total revenue was $455.5 million, up 2.5%. Net interest income was $314.2 million, up 3.5%; net income was $112.9 million versus $89.9 million; diluted EPS was $1.67 versus $1.32. The comparison benefited from lower 2018 expenses because 2017 included a $17.6 million pension-plan termination charge and $3.2 million of Reliance merger costs.
- Margins and revenue mix: Fully taxable-equivalent net interest margin was 3.59% for Q3, versus 3.47% a year earlier, and 3.54% for the first nine months, versus 3.48%. Loan growth and higher loan yields supported margin, while higher deposit costs were a partial offset. Noninterest income was $47.1 million for Q3 and $141.3 million for nine months; mortgage banking income rose 95.4% and 22.6%, respectively, year over year.
- Expenses and credit costs: Noninterest expense was $105.2 million in Q3, up 2.1%; for nine months it was $311.5 million, down 4.8% due largely to the prior-year unusual charges. Excluding those charges, nine-month expense increased 1.7%. Net loan-loss provision was $8.2 million in Q3 and $15.0 million for nine months, versus $2.0 million and $3.5 million, respectively, in 2017. Nine-month net charge-offs were $5.2 million, compared with $0.3 million.
- Loans and asset quality: Loans held for investment were $8.75 billion, up 2.1% from year-end 2017 and 4.0% from September 2017. Nonperforming assets excluding acquired loans were $104.3 million, down from $110.8 million at year-end; nonaccrual loans were $67.8 million, broadly unchanged from year-end. The allowance for loan losses was $88.9 million, or 1.02% of total LHFI. Troubled debt restructurings were $36.0 million, up from $24.4 million at September 2017.
- Balance sheet and funding: Total assets were $13.44 billion, down from $13.80 billion at December 2017. Deposits were $10.96 billion, up 3.6%; noninterest-bearing deposits fell 6.4%, while interest-bearing deposits rose 7.5%. Short-term borrowings declined to $676.9 million from $1.44 billion, primarily as maturing FHLB advances were not replaced. Junior subordinated debt securities were $61.9 million; long-term FHLB advances were $0.9 million.
- Cash flow and liquidity: For the first nine months, operating cash flow was $141.7 million, investing activities provided $395.5 million and financing activities used $440.5 million. Cash increased $96.7 million to $432.5 million. Management reported maintaining excess funding capacity; available capacity included $2.61 billion of additional FHLB Dallas advances and $1.07 billion at the Federal Reserve Discount Window.
- Capital and shareholder returns: Shareholders’ equity was $1.60 billion. Trustmark and its bank subsidiary met regulatory well-capitalized standards; Trustmark’s CET1 ratio was 12.20%, total risk-based capital ratio 13.61% and Tier 1 leverage ratio 10.41%. The quarterly dividend was $0.23 per share. Trustmark repurchased approximately 243,000 shares for $7.9 million during the first nine months.
- Other balance-sheet item: Accumulated other comprehensive loss widened to $79.9 million, principally reflecting unrealized losses on securities. Available-for-sale securities had net unrealized losses of $70.5 million, compared with $23.5 million at year-end 2017.
Material changes versus comparable periods
- Q3 net income increased despite a substantial increase in loan-loss provision; higher revenue and lower income taxes, principally following federal tax reform, supported the result.
- Nine-month net income rose substantially, but comparison with 2017 is affected by the pension termination and Reliance merger expenses recorded last year.
- Loan growth and higher loan yields lifted interest income, while deposit interest expense increased $21.2 million for the first nine months as rates and interest-bearing deposit balances rose.
- Investment securities declined $486.6 million from year-end, mainly from maturities, calls and paydowns; short-term borrowings also fell significantly as FHLB advances matured or were prepaid.
- Nonperforming assets declined, but higher provision expense, net charge-offs and TDR balances warrant continued credit-quality monitoring.
Outlook, commentary, risks and contingencies
- Management described the economy as expanding moderately and emphasized balance-sheet optimization, share repurchases, disciplined expense management and investment in profitable growth. The filing provides no company-wide earnings or revenue guidance.
- Management expected acquired loan balances to decline by approximately $20–$30 million in Q4 2018, with an acquired-loan yield of approximately 6.5%–7.5%; it cautioned that the portfolio’s income contribution would continue to diminish.
- Hurricane Michael struck the Florida Panhandle on October 10, 2018. Trustmark identified 1,787 loans totaling $239.7 million, with $282.1 million of exposure, in FEMA-designated disaster areas. Management was assessing damage and borrower needs but could not reasonably estimate the financial impact.
- Interest-rate risk remains relevant: modeled one-year net interest income sensitivity was -0.8% for a 200-basis-point increase, -0.4% for a 100-basis-point increase and -1.7% for a 100-basis-point decrease. Management cautioned that actual results may differ and that deposit competition and funding costs could intensify as rates rise.
- Other disclosed risks include regional economic and real-estate conditions, credit deterioration, deposit pricing and withdrawals, securities valuation, energy-sector exposure, regulatory and technology risks, and litigation. Energy-related loans were $183.8 million, or 2.1% of LHFI, at quarter-end.
- Trustmark’s subsidiary remained involved in three Stanford Financial Group-related lawsuits. The company said losses were not considered probable and could not be reasonably estimated; proceedings were being contested. Management believed the pending matters should not have a material adverse effect, while noting outcomes and timing cannot be predicted.
- Management stated there had been no material change in previously disclosed risk factors. No material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Hurricane Michael produces material borrower losses or changes in credit provisioning for the exposed $282.1 million portfolio.
- Whether higher deposit costs continue to offset loan-yield gains and constrain net interest margin.
- Trends in impaired credits, TDRs, charge-offs and the adequacy of the $88.9 million loan-loss allowance.
- The drivers and sustainability of mortgage banking income, including gains on loan sales and mortgage-servicing-rights valuation assumptions.
- The effect of securities unrealized losses on reported equity and whether further market-rate changes increase those losses.
- Developments in Stanford-related litigation and any change in management’s assessment of probability, estimability or potential loss.
- That nine-month earnings comparisons are interpreted in light of the $20.8 million of 2017 pension-termination and merger expenses, and the 2017 life-insurance proceeds that did not recur.