Trustmark Corporation — Q3 2016 Form 10-Q
Business context and reporting period
Trustmark is a Mississippi-based bank holding company operating 194 offices across Alabama, Florida, Mississippi, Tennessee and Texas, alongside wealth management and insurance businesses. This unaudited filing covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015.
Financial results and position
- Q3 earnings: Net income was $31.0 million, or diluted EPS of $0.46, versus $28.4 million and $0.42 a year earlier. Revenue (net interest income plus noninterest income) was $142.3 million, down 0.9% year over year.
- Nine-month earnings: Net income was $79.5 million, or diluted EPS of $1.17, versus $88.2 million and $1.30 in 2015. Revenue was $420.9 million, down 1.2%.
- Interest income and margins: Q3 net interest income was $97.6 million, essentially flat year over year; nine-month net interest income was $288.7 million, down 1.1%. Tax-equivalent net interest margin fell to 3.52% in Q3 from 3.72%, and to 3.54% for nine months from 3.80%.
- Expenses and credit costs: Q3 noninterest expense declined 5.5% to $97.9 million, while nine-month expense rose 1.3% to $307.0 million. Total loan-loss provision was $5.0 million for Q3 and $11.7 million for nine months, compared with $3.8 million and $7.8 million, respectively, in 2015.
- Credit quality: Nine-month net charge-offs declined to $5.9 million from $9.3 million. Nonaccrual held-for-investment loans were $54.4 million, down from $55.3 million at year-end; nonperforming assets were $119.4 million, down from $132.5 million. The allowance was $70.9 million, or 0.95% of held-for-investment loans.
- Balance sheet and funding: Assets were $13.16 billion, up from $12.68 billion at year-end. Held-for-investment loans rose 5.8% to $7.50 billion; deposits increased 1.0% to $9.69 billion. Cash and due from banks was $383.9 million.
- Borrowings and capital: Short-term borrowings were $927.7 million, and long-term FHLB advances were $751.1 million, up from $501.2 million at year-end after a new $250 million advance. Shareholders’ equity was $1.535 billion. Trustmark’s CET1, total risk-based capital and leverage ratios were 12.35%, 13.82% and 9.92%; the company and bank were reported well-capitalized.
- Cash flow: For nine months, operating cash flow was $40.9 million, investing cash outflow was $307.1 million, and financing cash inflow was $372.4 million. Cash and cash equivalents increased $106.2 million to $383.9 million.
Changes versus the prior comparable period
- Q3 earnings increased despite slightly lower revenue, principally because noninterest expense fell, including lower other-real-estate expense and savings from the early retirement program.
- Nine-month earnings declined as lower acquired-loan income, higher loan-loss provision, higher borrowing costs and the retirement-program charge outweighed some expense savings and loan growth. Acquired-loan interest income fell 44.3% to $21.9 million for nine months as balances ran off and accretion and settlement recoveries declined.
- Loan growth supported interest income, but margin pressure persisted: average loan yields declined and funding costs increased. Noninterest income fell 1.2% for nine months, including a 12.0% decline in mortgage banking income.
- Classified and criticized loan balances increased year over year, primarily following downgrades of four performing energy-related credits in Texas and Mississippi. Energy-related loans were $255.7 million, or 3.4% of held-for-investment loans; nonaccrual energy loans were $12.3 million.
Outlook, risks and unusual items
- Management described moderate economic improvement but cited uncertainty around oil prices, global growth, interest rates and regional conditions. It provided no specific earnings or revenue guidance. It expected acquired loans, excluding settlements, to decline about $25–30 million in Q4 and their yield, excluding recoveries, to be about 5.5%–6.5%.
- The defined-benefit pension plan is scheduled to terminate December 31, 2016. Based on June 2016 information, Trustmark estimated about $67 million of additional funding and a one-time pension settlement expense of approximately $12 million in 2017; it expects annual pension expense to fall by about $3–4 million thereafter. The plan’s termination remains subject to the board’s reserved right to defer or revoke it.
- The 2016 voluntary early retirement program resulted in a $9.3 million Q2 charge. Management reported Q3 savings of $1.9 million in salaries and benefits. Excluding the program and pension de-risking costs, nine-month net income was $85.8 million, or diluted EPS of $1.27, versus reported net income of $79.5 million.
- Trustmark had $50 million of subordinated notes due December 15, 2016. The filing does not state how the notes will be repaid or refinanced. Liquidity sources included $1.455 billion of additional FHLB Dallas borrowing capacity, approximately $1.575 billion of repurchase-agreement capacity and $967.5 million of Federal Reserve Discount Window collateral capacity.
- Interest-rate simulations estimated a 6.8% decline in one-year net interest income under a 100-basis-point rate decrease, versus a 0.7% increase under a 100-basis-point increase. Management cautioned that actual results may differ and simulations exclude possible balance-sheet and management actions.
- Litigation includes Stanford-related actions and disputes involving two testamentary trusts. Management said losses were not both probable and reasonably estimable and did not accrue a liability. The filing identifies regional economic, credit, interest-rate, funding, mortgage-servicing, legal, regulatory, cyber and operational risks.
Most important facts for investors to verify
- Whether loan growth and deposit funding can support earnings as acquired-loan income declines and net interest margin remains under pressure.
- Whether criticized/classified credits, particularly energy exposures, lead to further downgrades, charge-offs or higher provisions.
- The final cash funding need, settlement expense and timing for the pension-plan termination, and the status of the $50 million notes due in December 2016.
- Developments in Stanford-related and trust litigation, and whether any matter becomes probable and reasonably estimable.
- Whether management’s liquidity capacity and reported capital ratios remain adequate as assets grow and wholesale borrowings increase.