Business context and reporting period
Trustmark Corporation is a Mississippi-based bank holding company whose principal subsidiary, Trustmark National Bank, accounted for nearly all consolidated assets. 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, 2018; quarterly figures below compare fourth-quarter 2018 with fourth-quarter 2017.
Financial performance and position
Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue (net interest income plus noninterest income) | $604.3 | $592.2 |
| Net interest income | $419.4 | $407.6 |
| Net income | $149.6 | $105.6 |
| Diluted earnings per share | $2.21 | $1.56 |
| Net interest margin, fully taxable equivalent | 3.54% | 3.48% |
| Return on average assets | 1.11% | 0.77% |
| Return on average equity | 9.43% | 6.77% |
| Net charge-offs / average loans | 0.19% | 0.11% |
- Fourth quarter: Revenue was $148.7 million versus $148.0 million; net income was $36.7 million versus $15.8 million, and diluted EPS was $0.55 versus $0.23. The 2017 quarter included $17.0 million of one-time tax expense; excluding the disclosed non-routine items, 2017 fourth-quarter net income was $32.7 million and diluted EPS was $0.48.
- Balance sheet at year-end: Assets were $13.286 billion, down 3.7%; loans held for investment were $8.836 billion, up 3.1%; deposits were $11.364 billion, up 7.4%; and shareholders’ equity was $1.591 billion, up 1.3%.
- Margins and costs: Net interest margin improved six basis points as loan yields and funding mix gains more than offset higher deposit costs and securities runoff. Interest expense rose 56.7% to $66.2 million, mainly because deposit interest expense increased $31.2 million.
- Credit: Nonperforming assets, excluding acquired loans, declined 13.1% to $96.3 million; nonperforming loans were 0.69% of loans, versus 0.77%. The allowance for loan losses on loans held for investment was $79.3 million, or 0.90% of those loans. Net charge-offs increased to $17.0 million, largely from three large commercial credits.
- Cash flow: Net cash provided by operating activities was $239.2 million; investing activities provided $438.8 million; financing activities used $664.2 million. Cash and cash equivalents increased $13.8 million to $349.6 million.
- Debt and liquidity: Year-end short-term borrowings were $79.0 million and federal funds purchased and repurchase agreements were $50.5 million; junior subordinated debt was $61.9 million and long-term FHLB advances were $0.9 million. No short-term FHLB advances or upstream federal funds were outstanding. Management cited $2.827 billion of additional FHLB of Dallas capacity and $1.012 billion of Discount Window collateral capacity.
- Capital and shareholder returns: Trustmark’s common equity Tier 1, Tier 1, and total risk-based capital ratios were 11.77%, 12.33%, and 13.07%; its leverage ratio was 10.26%. The company paid $0.92 per share in dividends and repurchased $62.4 million of stock during 2018.
Material changes versus the prior period
- Annual net income rose 41.6%, while revenue increased 2.0%. The earnings comparison reflects lower 2018 taxes and lower expenses: 2017 included a $25.6 million deferred-tax remeasurement charge, an $8.7 million valuation-allowance reversal, $17.6 million of pension-plan termination expense, and $3.2 million of Reliance merger costs. Management’s non-GAAP adjusted 2017 net income was $130.6 million, versus 2018 GAAP net income of $149.6 million.
- Noninterest expense fell 3.4% to $415.4 million, partly because 2017 contained pension termination and merger costs. Net interest income rose 2.9%; higher loan income was partly offset by sharply higher deposit costs and lower securities and acquired-loan income.
- Deposits grew faster than loans, allowing a $1.311 billion reduction in short-term borrowings. Securities declined 17.4% to $2.721 billion, principally from maturities, paydowns, and lower fair values.
- Loan growth slowed: loans held for investment grew 3.1% in 2018, compared with 8.4% in 2017 (based on reported year-end balances). Credit indicators improved in some areas, but net charge-offs and provision expense rose.
Outlook, commentary, risks, and unusual items
- Management described the economy as moderately improving but noted increased uncertainty around trade and political developments, oil prices, financial-market volatility, and interest rates. It emphasized profitable growth, balance-sheet optimization, disciplined expense management, customer-channel investment, and share repurchases. The filing does not provide specific earnings or revenue guidance.
- The Federal Reserve raised its target rate four times in 2018. Management noted pressure on deposit costs and net interest margins. Its static-balance model estimated net interest income would decline 0.9% under a 200-basis-point increase and 1.2% under a 100-basis-point decrease; actual results may differ.
- Energy-related loans were approximately 2.0% of loans held for investment ($172.1 million); $12.0 million were nonperforming or nonaccrual. Management reported no loans dependent on realization of energy reserves, but warned prolonged lower oil prices could weaken performance.
- Trustmark reported $64.4 million of gross unrealized losses on temporarily impaired securities, primarily attributed to market-rate changes; it recorded no other-than-temporary impairment. Goodwill was $379.6 million, and the 2018 impairment test found no impairment.
- Adoption of the expected-credit-loss standard (CECL) was planned for first-quarter 2020. Management warned the effect on reserves and capital could be material; the filing gives no clear quantified estimate.
- Three Stanford Financial Group-related lawsuits involving the bank remained pending, including claims for which damages were not quantified. Management said a loss was not considered probable and reasonably estimable and did not expect the pending proceedings to materially affect consolidated financial condition.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Separate recurring earnings improvement from tax benefits and 2017 non-routine charges; review the filing’s adjusted earnings reconciliation and effective tax rate.
- Track deposit pricing and funding costs against loan yields, net interest margin, and future rate changes.
- Review the commercial-credit charge-offs, criticized/classified loans, nonperforming assets, and adequacy of the allowance, including regional and energy exposures.
- Assess whether deposit growth and the reduced securities portfolio can support lending and liquidity needs without renewed reliance on wholesale funding.
- Monitor CECL implementation and its eventual effects on credit reserves, earnings, and regulatory capital.
- Follow the Stanford-related litigation and any change in management’s assessment of probability, estimability, or potential loss.
- Confirm the sustainability of dividends and repurchases in light of regulatory limits, capital needs, and the repurchase authorization’s March 31, 2019 expiration.