Trustmark Corporation (10-Q): Quarter ended June 30, 2018
Business context: Mississippi-based bank holding company operating through 198 offices in Alabama, Florida, Mississippi, Tennessee and Texas. Its businesses are General Banking, Wealth Management and Insurance. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $152.6 | $152.2 | $301.4 | $295.8 |
| Net interest income | $105.2 | $102.0 | $207.3 | $199.6 |
| Net income | $39.8 | $24.0 | $76.6 | $55.3 |
| Diluted EPS | $0.59 | $0.35 | $1.13 | $0.81 |
| Net interest margin, FTE | 3.57% | 3.49% | 3.51% | 3.49% |
| Return on average assets | 1.19% | 0.70% | 1.14% | 0.82% |
Revenue and expenses: Q2 revenue rose 0.2% year over year; six-month revenue rose 1.9%. Higher loan interest income and lower other borrowing expense were partly offset by higher deposit interest expense and lower noninterest income. Noninterest income fell 5.6% in Q2 and 2.1% for six months, mainly reflecting the absence of $4.9 million in nontaxable life-insurance proceeds recorded in Q2 2017. Noninterest expense declined 15.0% in Q2 and 8.0% for six months, largely because 2017 included a $17.6 million pension-plan termination charge and $3.2 million of Reliance merger expenses. Excluding those items, expense increased 2.6% in Q2 and 1.5% for six months.
Credit costs and taxes: Provision for LHFI losses was $3.2 million in Q2 and $7.1 million for six months, compared with $2.9 million and $5.7 million in 2017. Acquired-loan provision remained a credit, but was smaller: negative $0.4 million in Q2 and negative $0.3 million for six months, versus negative $2.6 million and negative $4.2 million, respectively, in 2017. Effective tax rates were 13.5% for Q2 and 13.2% for six months, down from 19.2% and 21.2%, primarily following federal tax reform.
Balance sheet and funding (June 30, 2018 versus December 31, 2017): Total assets were $13.53 billion, down from $13.80 billion. LHFI increased 1.3% to $8.68 billion; total deposits rose 4.7% to $11.07 billion, driven by interest-bearing deposits, while noninterest-bearing deposits decreased 0.7%. Cash was $387.1 million, compared with $335.8 million. Short-term borrowings, including federal funds purchased and repurchase agreements, totaled $664.5 million, down from $1.44 billion, mainly because Trustmark did not replace maturing FHLB advances. Long-term FHLB advances were $0.9 million and junior subordinated debt was $61.9 million.
Cash flow and liquidity: For the first six months, operating activities provided $77.4 million, investing activities provided $292.5 million, and financing activities used $318.5 million; cash increased $51.4 million. Management cited deposits, a liquid securities portfolio and external funding sources as liquidity support. Available capacity included $2.54 billion of additional FHLB Dallas advances against qualifying collateral, $997.8 million at the Federal Reserve Discount Window, and approximately $563.8 million of unencumbered agency securities.
Capital and shareholder returns: Shareholders’ equity was $1.58 billion. Trustmark’s regulatory ratios included 12.01% common equity Tier 1, 12.58% Tier 1, 13.39% total risk-based capital and 10.22% Tier 1 leverage; Trustmark and its bank subsidiary were reported well-capitalized. The quarterly dividend was $0.23 per share; management indicated a 2018 annual dividend of $0.92 per share, unchanged from 2017. The company repurchased approximately 243,000 shares for $7.9 million during the first half.
Material changes and key operating trends
- Loan interest and fees increased 13.8% in Q2 and 14.6% for six months, supported by loan growth and higher yields. LHFI was up 4.6% from June 2017.
- Deposit interest expense increased $7.0 million in Q2 and $12.6 million for six months year over year as interest rates and interest-bearing deposit balances rose. The six-month cost of interest-bearing deposits increased to 0.55% from 0.26%.
- Nonperforming assets, excluding acquired loans, declined to $101.0 million from $110.8 million at year-end; nonaccrual LHFI fell to $61.4 million from $67.6 million. The allowance for LHFI losses increased to $83.6 million, or 0.96% of LHFI, from $76.7 million, or 0.90%.
- Credit quality indicators were mixed: classified LHFI declined 16.7% and criticized LHFI declined 17.8% from year-end, while net charge-offs for the first half increased 41% to $1.1 million. TDRs totaled $34.5 million, versus $13.2 million at June 30, 2017; nonaccrual TDRs were $33.2 million.
- Available-for-sale securities declined to $1.97 billion from $2.24 billion. Accumulated other comprehensive loss widened to $73.7 million from $39.7 million, largely reflecting lower securities fair values amid higher market rates. Management attributed securities losses to rates, not credit impairment, and reported no other-than-temporary impairment.
Outlook, risks and unusual items
No broad earnings or revenue guidance is provided. Management described a focus on balance-sheet optimization, share repurchases, disciplined expense management, and investments and efficiency initiatives to support profitable growth. For Q3 2018, it expected acquired-loan balances to decline approximately $20 million to $30 million and the acquired-loan yield, excluding recoveries, to be approximately 6% to 7%; it also expects the acquired portfolio’s income contribution to decline as it runs off.
Management characterized credit quality as strong, but noted exposure to economic and real-estate conditions in its five markets, interest-rate and deposit-pricing competition, and uncertainty around market and regulatory developments. Energy-related loans were $214.7 million, or 2.5% of LHFI; $20.1 million were nonaccrual. Management said prolonged lower oil prices could lead to downgrades. Interest-rate simulations estimated one-year net interest income changes of negative 1.2% under a +100-basis-point shock, negative 2.2% under +200 basis points, and negative 2.0% under -100 basis points; a -200-basis-point scenario was not calculated. These are model estimates, not forecasts.
Trustmark disclosed three Stanford Financial Group-related lawsuits involving its bank subsidiary. Proceedings remained in pretrial stages; damages were not quantified in key actions. Management said a loss was not probable and reasonably estimable, so no litigation liability was accrued, and stated the pending matters were not expected to have a material adverse effect. Unused commitments to extend credit were $3.52 billion; maximum exposure under letters of credit was $105.1 million. Mortgage servicing putback reserves were $1.0 million, with management noting estimation uncertainty.
Accounting changes included adoption of revenue recognition guidance and other standards; management reported no material impact on consolidated financial statements. CECL adoption was planned for Q1 2020, with implementation work underway. The filing also identifies interest-rate risk, cyber and operational risks, competition, litigation and regulatory change among factors that could cause actual results to differ from forward-looking statements.
Most important facts for investors to verify
- How much of the earnings increase reflects recurring operating performance versus the unusual 2017 pension, merger and life-insurance items.
- Whether deposit costs continue to rise faster than loan yields, and the resulting effect on net interest margin and funding mix.
- Whether TDR growth, net charge-offs and specific reserves indicate deterioration not captured by headline nonperforming-asset trends.
- How securities valuation losses, interest-rate sensitivity and the planned CECL transition could affect capital and earnings.
- Developments in the Stanford-related litigation and any change in management’s assessment of probability, estimability or potential exposure.