Trustmark(TRMK) - 2019 Q4 - Annual Report

Part I Item 1. Business Trustmark Corporation, a bank holding company, offers diversified financial services across five states, focusing on customer relationships and credit risk management in a regulated environment Description of Business - Trustmark Corporation is a bank holding company headquartered in Jackson, Mississippi, with its principal subsidiary, Trustmark National Bank (TNB), representing approximately 99.99% of its consolidated assets as of December 31, 2019[15] - The company operates as a financial services organization with 193 offices and 2,844 full-time equivalent associates across Alabama, Florida, Mississippi, Tennessee, and Texas[16] - Core services provided through TNB and its subsidiaries include Commercial Banking, Consumer Banking, Mortgage Banking, Insurance (via Fisher Brown Bottrell Insurance, Inc.), and Wealth Management (assisted by Trustmark Investment Advisors, Inc.)[17][18][19] Five-Year Financial Summary (2015-2019) | Metric | 2019 ($ in thousands) | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | 2015 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Assets | $13,497,877 | $13,286,460 | $13,797,953 | $13,352,333 | $12,678,896 | | Loans* | $9,408,229 | $8,942,800 | $8,831,484 | $8,123,460 | $7,481,796 | | Deposits | $11,245,557 | $11,364,411 | $10,577,512 | $10,056,012 | $9,588,230 | | Equity | $1,660,702 | $1,591,453 | $1,571,701 | $1,520,208 | $1,473,057 | | Revenue | $613,634 | $604,256 | $592,213 | $561,476 | $564,914 | Overview of Lending Business - Trustmark categorizes its loans into three main types: Loans Held for Investment (LHFI), Loans Held for Sale (LHFS), and Acquired Loans[27][29] - The company mitigates credit risk through conservative underwriting, collateral monitoring, and oversight of borrower financial performance[30] - Construction, land development, and other land loans are considered higher risk due to factors like the absence of full collateral value at inception and the borrower's ability to complete projects on time and within budget[31][32] - Commercial and industrial loans face credit risk from fluctuations in borrowers' financial conditions and market changes, while consumer loans generally pose heightened risks of collectability compared to other loan types[39][41] Recent Economic and Industry Developments - The U.S. economy showed moderate improvement in 2019, but concerns remain due to volatile crude oil prices, uncertain global growth, and potential monetary policy changes by the Federal Reserve[44] - Federal Reserve Districts where Trustmark operates reported modest to solid economic expansion, tight labor markets, and stable to improving banking conditions, though the energy sector in the Dallas district remained distressed[46][47] - The Federal Reserve lowered the federal funds rate three times in 2019, with persistently low interest rates continuing to pressure net interest margins[48] Competition - Trustmark faces significant competition from national, regional, and community banks, as well as nonbank financial institutions like credit unions, mortgage companies, and insurance companies[50][51] FDIC Deposit Market Share by State (as of June 30, 2019) | State | Deposit Market Share | | :--- | :--- | | Alabama | 1.66% | | Florida | 0.17% | | Mississippi | 13.92% | | Tennessee | 0.36% | | Texas | 0.06% | - As of June 30, 2019, Trustmark's deposit market share ranked in the top three in 55% of the 56 counties it served[52] Supervision and Regulation - Trustmark is a registered bank holding company supervised by the Federal Reserve Board (FRB), and its primary bank subsidiary, TNB, is a national bank regulated by the Office of the Comptroller of the Currency (OCC)[58][81] - The company is subject to stringent capital adequacy requirements under Basel III rules, and as of December 31, 2019, both Trustmark and TNB exceeded all minimum capital requirements and were considered well-capitalized[67][68][73] - As an institution with over $10 billion in assets, TNB is subject to supervision, examination, and enforcement by the Consumer Financial Protection Bureau (CFPB) regarding federal consumer financial laws[85] - Dividend payments from TNB to Trustmark are restricted by regulations, requiring OCC approval if total dividends in a calendar year exceed the sum of that year's net income and the retained net income from the preceding two years[84] Item 1A. Risk Factors Trustmark faces key risks including interest rate, credit, liquidity, regulatory, operational, and competitive factors that could adversely affect its financial condition - Interest Rate Risk: Profitability is highly dependent on net interest income, with a hypothetical 100 basis point decrease in interest rates estimated to decrease net interest income by 5.2% as of December 31, 2019[108][109] - Economic and Market Conditions: The business is susceptible to adverse conditions in financial markets and the general economy, including volatility in crude oil prices, which could impact loan performance and asset values[113][115] - Lending and Credit Risk: Inherent risks in lending activities could impact the adequacy of the allowance for loan losses, with energy-related loans representing approximately 1.3% of the total LHFI portfolio as of December 31, 2019[118][115] - Regulatory and Capital Risk: The company is subject to extensive government regulation and stringent capital requirements (Basel III), and the adoption of CECL is expected to result in earlier recognition of credit losses, potentially increasing reserves and decreasing capital[123][125][127] - Operational and Cybersecurity Risk: Trustmark is dependent on information systems and vulnerable to operational disruptions, system breaches, and cyber-attacks, which could jeopardize confidential information and lead to financial losses[146] Item 2. Properties Trustmark's principal offices are in Jackson, Mississippi, with 178 full-service branches, 236 ATMs, and 14 ITMs, owning most locations and leasing 32 sites - As of December 31, 2019, Trustmark operated 178 full-service branches, 15 limited-service branches, 236 ATMs, and 14 interactive teller machines (ITMs)[163] - The company leases 32 of its branch and other office locations, with the remainder being owned[163] Item 3. Legal Proceedings Trustmark's subsidiary, TNB, faces lawsuits related to Stanford Financial Group and Madison Timber Properties, with management contesting and not expecting a material adverse effect - Trustmark's subsidiary, TNB, is a defendant in multiple lawsuits related to the collapse of the Stanford Financial Group, with claims including fraudulent transfers and conspiracy[164][165] - In December 2019, TNB was named as a defendant in a complaint filed by the receiver for Arthur Lamar Adams and Madison Timber Properties, LLC, alleging that the bank's actions enabled fraudulent activities[176][177] - Management is vigorously contesting all legal proceedings and currently believes that a loss is not probable or reasonably estimable, and the outcomes are not expected to have a material adverse effect on the company's consolidated financial condition[179] Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Trustmark's common stock trades on Nasdaq under 'TRMK,' paid $0.92 per share in 2019 dividends, and repurchased 1.8 million shares for $56.6 million under active programs - Trustmark's common stock is listed on the Nasdaq Stock Market under the symbol "TRMK"[182] - The company paid quarterly cash dividends of $0.23 per share, totaling $0.92 per share for the full year 2019[182] - In 2019, Trustmark repurchased a total of approximately 1.8 million shares of its common stock for $56.6 million under two separate authorizations[184][185][186] - A new stock repurchase program was authorized on January 28, 2020, allowing for the acquisition of up to $100.0 million of common stock from April 1, 2020, through December 31, 2021[187] Item 6. Selected Financial Data This section summarizes Trustmark's five-year consolidated financial data (2015-2019), showing $613.6 million revenue, $150.5 million net income, and $2.32 diluted EPS in 2019 Consolidated Statements of Income Highlights (2015-2019) | Metric | 2019 ($ in thousands) | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | 2015 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $426,589 | $419,420 | $407,550 | $387,533 | $391,765 | | Noninterest Income | $187,045 | $184,836 | $184,663 | $173,943 | $173,149 | | Net Income | $150,460 | $149,584 | $105,630 | $108,411 | $116,038 | | Diluted EPS | $2.32 | $2.21 | $1.56 | $1.60 | $1.71 | Consolidated Balance Sheet Highlights (2015-2019) | Metric | 2019 ($ in thousands) | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | 2015 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $13,497,877 | $13,286,460 | $13,797,953 | $13,352,333 | $12,678,896 | | Total Loans (incl LHFS) | $9,634,576 | $9,096,599 | $9,011,996 | $8,299,387 | $7,641,985 | | Deposits | $11,245,557 | $11,364,411 | $10,577,512 | $10,056,012 | $9,588,230 | | Total Shareholders' Equity | $1,660,702 | $1,591,453 | $1,571,701 | $1,520,208 | $1,473,057 | Key Performance and Capital Ratios (2019) | Ratio | 2019 | 2018 | | :--- | :--- | :--- | | Return on Average Equity | 9.28% | 9.43% | | Return on Average Assets | 1.11% | 1.11% | | Net Interest Margin (FTE) | 3.62% | 3.54% | | Tier 1 Leverage Ratio | 10.48% | 10.26% | | Total Risk-Based Capital Ratio | 13.25% | 13.07% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, Trustmark achieved $150.5 million net income and $2.32 diluted EPS, driven by increased net interest income, reduced loan loss provision, and 5.7% LHFI growth 2019 vs. 2018 Financial Performance | Metric | 2019 ($ in millions) | 2018 ($ in millions) | Change | | :--- | :--- | :--- | :--- | | Net Income | $150.5 | $149.6 | +0.6% | | Diluted EPS | $2.32 | $2.21 | +5.0% | | Total Revenue | $613.6 | $604.3 | +1.5% | | Net Interest Income | $426.6 | $419.4 | +1.7% | | Provision for Loan Losses, LHFI | $10.8 | $18.0 | -40.0% | | Noninterest Expense | $429.0 | $415.4 | +3.3% | - Strategic focus in 2019 was on increasing revenue, optimizing the balance sheet, deploying capital via stock repurchases, and disciplined expense management[195] - Loans held for investment (LHFI) grew by $499.8 million, or 5.7%, during 2019, while nonperforming assets (excluding acquired loans) decreased by 14.4%[207][208] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Trustmark manages interest rate risk using financial simulation models, projecting a 100 basis point increase in rates to raise Net Interest Income by 3.0% as of December 31, 2019 Interest Rate Sensitivity Analysis (as of Dec 31, 2019) | Change in Interest Rates | Estimated % Change in Net Interest Income | Estimated % Change in Net Portfolio Value (EVE) | | :--- | :--- | :--- | | +200 basis points | 5.7% | 5.3% | | +100 basis points | 3.0% | 3.4% | | -100 basis points | -5.2% | -7.7% | - The primary tools for measuring interest rate exposure are financial simulation models that simulate cash flows and accrual characteristics of the balance sheet under various rate scenarios[376] - The fair value of Mortgage Servicing Rights (MSR) was $79.4 million at year-end 2019, with a 10% adverse change in prepayment speeds projected to decrease this value by approximately $3.5 million[383] Item 8. Financial Statements and Supplementary Data This section presents Trustmark's audited consolidated financial statements (2017-2019), with Crowe LLP issuing an unqualified opinion on financial statements and internal control effectiveness - The independent auditor, Crowe LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019[386] - The auditor identified the qualitative risk valuation allowance component of the Allowance for Loan Losses as a critical audit matter due to the significant and subjective judgment required by management[393][394] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes or disagreements with accountants on accounting principles, financial disclosure, or auditing matters occurred in the two years prior to December 31, 2019 - There has been no change of accountants within the two-year period prior to December 31, 2019[723] Item 9A. Controls and Procedures As of December 31, 2019, management, including the CEO and PFO, concluded that disclosure controls and internal control over financial reporting were effective - Management, including the CEO and Principal Financial Officer, concluded that disclosure controls and procedures were effective as of the end of the period[724] - Management assessed internal control over financial reporting as effective as of December 31, 2019, using the COSO framework[726] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the company's 2020 Proxy Statement[730] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the company's 2020 Proxy Statement[731] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans as of December 31, 2019, with other security ownership information incorporated by reference from the 2020 Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Number of securities to be issued upon exercise (a) | Weighted-average exercise price of outstanding options (b) | Number of securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 149,914 | $ — | 908,818 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 149,914 | $ — | 908,818 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the company's 2020 Proxy Statement[735] Item 14. Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the company's 2020 Proxy Statement[736] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists Form 10-K exhibits and financial statements, with consolidated statements in Part II, Item 8, and required schedules omitted as inapplicable - The consolidated financial statements are included in Part II, Item 8 of the report[739] - Financial statement schedules required by Regulation S-X have been omitted as they are inapplicable or not required[740]