Trustmark Corporation — FY 2019 Form 10-K
Business and period: Trustmark is a Mississippi-based financial services holding company operating through Trustmark National Bank and subsidiaries in Alabama, Florida, Mississippi, Tennessee and Texas. Its businesses include general banking, wealth management and insurance. This filing covers the fiscal year ended December 31, 2019; quarterly figures below compare Q4 2019 with Q4 2018. Amounts are U.S. dollars.
Financial performance and condition
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue (net interest income plus noninterest income) | $613.6 million | $604.3 million |
| Net interest income | $426.6 million | $419.4 million |
| Net income | $150.5 million | $149.6 million |
| Diluted EPS | $2.32 | $2.21 |
| Net interest margin, fully taxable equivalent | 3.62% | 3.54% |
| Operating cash flow | $116.4 million | $239.2 million |
FY 2019 investing activities used $74.2 million and financing activities used $32.9 million; cash and cash equivalents increased $9.4 million to $358.9 million.
Q4: Revenue was $153.2 million versus $148.7 million, while net income was $33.9 million versus $36.7 million and diluted EPS was $0.53 versus $0.55. Quarterly net interest income was $105.6 million versus $105.2 million.
Balance sheet and liquidity: At year-end, total assets were $13.50 billion, deposits $11.25 billion, shareholders’ equity $1.66 billion and total loans including held-for-sale and acquired loans $9.63 billion. Loans held for investment (LHFI) were $9.34 billion. Deposits declined 1.0% year over year, while LHFI grew 5.7%. Federal funds purchased and repurchase agreements totaled $256.0 million; other borrowings were $85.4 million and junior subordinated debt securities were $61.9 million. Trustmark reported $3.18 billion of additional FHLB of Dallas borrowing capacity, $982.7 million of discount-window collateral capacity and $546.0 million of unencumbered agency securities.
Credit and capital: Nonperforming assets, excluding acquired loans, were $82.5 million, or 0.86% of loans and other real estate, down from $96.3 million and 1.07% in 2018. Nonaccrual LHFI were $53.2 million. The LHFI allowance was $84.3 million, or 0.90% of LHFI. Trustmark’s CET1, Tier 1 and total risk-based capital ratios were 11.93%, 12.48% and 13.25%, respectively; its Tier 1 leverage ratio was 10.48%. The bank was categorized as well-capitalized.
Changes versus prior period
- Annual revenue rose 1.6% and net income rose 0.6%; diluted EPS increased from $2.21 to $2.32.
- Net interest margin increased 8 basis points. Higher loan balances and yields supported net interest income, while deposit interest expense rose 46.8% and securities balances and income declined.
- Annual LHFI provision expense fell 40.0% to $10.8 million; net charge-offs declined to $5.8 million from $17.0 million.
- Noninterest expense increased 3.3% to $429.0 million, driven mainly by salaries and benefits and services and fees. FDIC assessment expense fell 31.7% to $6.4 million.
- Mortgage banking income declined 14.0% to $29.8 million, despite higher mortgage production, largely due to negative MSR hedge ineffectiveness. The MSR fair value fell to $79.4 million from $95.6 million.
- Trustmark repurchased approximately 1.8 million shares for $56.6 million and paid $0.92 per share in dividends during 2019.
Outlook, risks and notable items
- Management provided no specific numerical earnings or growth guidance. It described near-term national conditions as modestly favorable but cited uncertainty in trade, global growth, energy markets and monetary policy. Management’s strategy emphasizes profitable revenue growth, balance-sheet optimization, expense discipline and adapting delivery channels to customer preferences.
- Interest-rate sensitivity modeling estimated that a 100-basis-point rate increase could raise one-year net interest income 3.0%, while a 100-basis-point decrease could reduce it 5.2%. These are static-balance estimates, not forecasts; management cautioned actual outcomes may differ.
- Key risks include credit deterioration, real estate and regional economic conditions, deposit competition and funding costs, interest-rate and liquidity risk, cyber and third-party risks, regulatory change, and the transition from LIBOR. Energy-related LHFI were $122.9 million, about 1.3% of LHFI; $10.6 million was nonaccrual.
- CECL became effective for Trustmark on January 1, 2020. Preliminary management estimates indicated an allowance increase of $10 million to $35 million, including expected losses on unfunded commitments; the estimate remained subject to refinement.
- TNB faced Stanford-related lawsuits and a December 2019 complaint concerning Madison Timber Properties. Damages were not quantified in the described complaints. Trustmark said the matters were being contested and that loss was not then considered probable and reasonably estimable; it cautioned that outcomes and timing could not be predicted.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The qualitative risk component of the LHFI allowance was identified as a critical audit matter. No goodwill impairment was identified in the 2019 annual test.
Important facts for investors to verify
- Whether deposit trends and higher deposit costs affect funding mix, net interest margin and loan growth.
- How the CECL adoption adjustment compares with the preliminary $10 million–$35 million estimate, including unfunded commitments and capital effects.
- Subsequent developments, potential exposure and insurance coverage for the Stanford and Madison Timber litigation.
- Whether improvement in reported credit metrics persists, particularly in commercial real estate, nonaccrual loans and energy-related exposures.
- Execution of the announced $100 million repurchase authorization for April 2020–December 2021, subject to market conditions and regulatory requirements.