Trustmark Corporation — Q2 2017 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2017; balance-sheet comparisons are primarily with December 31, 2016. Trustmark is a regional bank and financial services company operating 199 offices across Alabama, Florida, Mississippi, Tennessee and Texas. Its Reliance Bank acquisition closed April 7, adding seven Huntsville-area offices.
Financial performance and position
- Revenue and earnings: Q2 revenue was $152.2 million, up 8.2% year over year; net income was $24.0 million, or $0.35 per diluted share, versus $21.5 million, or $0.32. First-half revenue was $295.8 million, up 6.2%; net income was $55.3 million, or $0.81 diluted EPS, versus $48.5 million, or $0.72.
- One-time items: Q2 included a $17.6 million pension termination charge and $3.2 million of Reliance merger expenses, partly offset by $4.9 million of nontaxable life-insurance proceeds. Excluding these items, management reported non-GAAP net income of $32.0 million and diluted EPS of $0.47 for Q2; first-half adjusted net income was $63.3 million and diluted EPS $0.93.
- Interest income and margins: Q2 net interest income was $102.0 million, up 5.8%. Tax-equivalent net interest margin was 3.49%, down 7 basis points year over year. Loan growth supported income, while higher deposit and borrowing costs and lower acquired-loan yields pressured margin.
- Noninterest income and expense: Q2 noninterest income increased 13.5% to $50.2 million, including stronger mortgage banking and the life-insurance proceeds. Noninterest expense rose 10.8% to $122.1 million, principally reflecting the pension charge and merger costs. Excluding non-routine items, expense increased 0.3% year over year.
- Loans and credit: Loans held for investment were $8.296 billion, up $444.8 million, or 5.7%, from year-end; excluding $36.7 million reclassified from acquired loans, growth was 5.2%. The allowance was $76.2 million, or 0.92% of LHFI. First-half net charge-offs were $0.8 million.
- Asset quality: Nonperforming assets excluding acquired loans were $124.1 million, up from $111.3 million at year-end; the ratio was 1.45% versus 1.38%. Nonaccrual LHFI increased to $74.1 million from $49.2 million, mainly after a large energy credit and a healthcare credit moved to nonaccrual. Management said criticized and classified loans increased but remained at low levels and were appropriately reserved.
- Deposits, borrowings and liquidity: Deposits were $10.423 billion, up 3.7% from year-end (2.0% excluding Reliance deposits). Short-term borrowings, including federal funds and repurchase agreements, totaled $1.731 billion, up 32.2%, as loan growth exceeded deposit growth; short-term FHLB advances were a key driver. Management cited additional borrowing capacity of $1.357 billion at FHLB Dallas, approximately $1.450 billion through repurchase agreements and $1.007 billion at the Federal Reserve Discount Window.
- Cash flow and capital: First-half operating cash flow was $62.0 million, investing cash use was $397.6 million and financing cash inflow was $326.2 million. Cash and due from banks ended at $318.3 million. Shareholders’ equity was $1.562 billion. Trustmark’s CET1, Tier 1, total risk-based capital and leverage ratios were 11.73%, 12.30%, 13.11% and 9.56%; the company and bank were reported well-capitalized.
- Dividends: The quarterly dividend remained $0.23 per share. Management indicated a 2017 annual dividend of $0.92 per share, unchanged from 2016. No shares were repurchased in the first half.
Material changes and management commentary
- Reliance added $196.3 million of assets and $166.2 million of deposits at acquisition; its operations were included from April 7 and did not materially affect reported results. The consideration was $24.8 million, including payoff of preferred stock; $13.5 million of goodwill was recorded.
- The pension plan termination generated a $17.6 million one-time expense and funding contribution. Management expects annual pension expense to decline by $3 million to $4 million after the plan distribution.
- Acquired loans continued to run off. Management expected acquired-loan balances, excluding settlements, to decline by approximately $20 million to $30 million in Q3 2017, with a yield of approximately 5.5% to 6.5% excluding recoveries.
- Management described economic conditions in its markets as modestly improving, while noting uncertainty around oil prices, global conditions and interest-rate policy. No overall earnings or revenue guidance was provided. Management said higher rates can increase deposit funding costs; its modeled one-year net interest income effect was -0.7% under a 200-basis-point rise and -6.1% under a 100-basis-point decline.
Risks, contingencies and unusual matters
- Energy exposure was approximately $256.9 million, or 3.1% of LHFI; nonaccrual energy loans were $23.7 million. Management warned prolonged low oil prices could lead to further downgrades.
- Trustmark’s subsidiary remained involved in three Stanford Financial Group-related lawsuits, with claims unquantified or seeking contribution/indemnity. Management said loss was not probable and could not be reasonably estimated; it did not expect pending matters to materially adversely affect consolidated financial condition. A separate Mississippi trust litigation was settled and dismissed with prejudice in May 2017.
- Interest-rate risk, regional real estate conditions, deposit pricing and withdrawals, loan credit quality, litigation, regulatory changes, cybersecurity and integration risks are among the identified exposures. Previously disclosed risk factors were reported as unchanged.
- Management noted potential effects from CFPB arbitration and Department of Labor fiduciary rules, whose ultimate status or implementation remained uncertain.
Most important facts for investors to verify
- Whether loan growth continues to outpace deposits and require increased wholesale borrowing, and how funding costs affect net interest margin.
- Whether nonaccrual and criticized/classified loans—especially the energy and healthcare credits—stabilize, and whether allowance levels remain adequate.
- Actual post-termination pension expense savings and the final purchase-accounting adjustments and integration results for Reliance.
- How much reported earnings depend on one-time items, acquired-loan accretion and mortgage-hedge valuation effects; compare GAAP results with management’s non-GAAP adjustments.
- Developments in the Stanford litigation and regulatory matters, plus the company’s liquidity and capital position as loan and funding balances change.