Trustmark Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. Trustmark is a bank holding company headquartered in Jackson, Mississippi, operating 200 offices in Alabama, Florida, Mississippi, Tennessee and Texas through banking, wealth management and insurance businesses.
Financial results and position
Amounts below are in millions except per-share data and ratios.
| Metric | Q1 2016 | Comparable period / change |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $138.0 | $139.8; down 1.2% year over year |
| Net interest income | $94.7 | $97.4; down 2.7% |
| Net interest margin, fully taxable equivalent | 3.54% | 3.88%; down 34 basis points |
| Provision for loan losses | $3.6 | $2.1; up 66.6% |
| Noninterest income | $43.3 | $42.4; up 2.2%, including $0.3 million net security losses |
| Noninterest expense | $98.9 | $99.2; down 0.3% |
| Income before taxes | $35.5 | $38.4 |
| Net income / diluted EPS | $27.0 / $0.40 | $29.1 / $0.43 |
| Operating cash flow | $1.9 | $(2.8) |
- Management attributed lower earnings primarily to lower interest income on acquired loans and continued low rates. Acquired-loan interest income fell $8.1 million, partly offset by a $6.1 million increase in interest and fees on loans held for sale and investment.
- At March 31, total assets were $12.78 billion; loans held for investment (LHFI) were $7.27 billion, up 2.5% from year-end; total deposits were $9.63 billion, up 0.5%. Noninterest-bearing deposits declined $124.4 million while interest-bearing deposits increased $169.8 million.
- Cash and due from banks were $228.5 million. Securities totaled $3.54 billion. Shareholders’ equity was $1.51 billion, up 2.4% from December 31, 2015.
- Borrowings included $877.8 million of short-term liabilities, $501.1 million of long-term FHLB advances, $50.0 million of subordinated notes and $61.9 million of junior subordinated debt securities. The $50 million notes mature December 15, 2016.
- Regulatory capital remained strong: Trustmark’s common equity Tier 1 ratio was 12.41%, Tier 1 risk-based capital 13.04%, total risk-based capital 13.92%, and Tier 1 leverage 9.93%. Trustmark and its bank subsidiary met applicable well-capitalized guidelines.
Material changes and credit quality
- Nonaccrual LHFI increased to $70.7 million from $55.3 million at year-end, primarily reflecting credits moving to nonaccrual in Mississippi. Total nonperforming assets, excluding acquired loans and covered other real estate, rose to $142.5 million from $132.5 million; the ratio to loans and other real estate was 1.89%, versus 1.81%.
- The allowance for LHFI losses was $69.7 million, or 0.96% of LHFI, compared with $67.6 million at year-end. Net charge-offs were $0.2 million. Management cited loan growth, newly criticized loans and higher specific reserves, particularly in Mississippi, in explaining the higher provision.
- Classified and criticized LHFI balances declined year over year by 4.0% and 5.1%, respectively, while the quarter-end increase in nonaccruals underscores that credit performance was mixed.
- Energy-related LHFI was approximately $253 million, or 3.5% of total LHFI, up from $213 million and 3.0% at year-end. Management reported no repayment exposure tied to the value of energy reserves, but warned prolonged low oil prices could lead to downgrades.
- Net income included a $0.3 million net loss on securities sales. Available-for-sale securities recorded substantial unrealized gains, contributing to $23.8 million of other comprehensive income and the reduction in accumulated other comprehensive loss to $21.6 million from $45.4 million at year-end.
Liquidity, outlook, risks and contingencies
- Management said it maintains excess funding capacity and believes liquidity and capital are sufficient for presently known needs. Available capacity included $1.389 billion of additional FHLB of Dallas advances, about $1.145 billion of repurchase-agreement capacity and about $902 million of Federal Reserve Discount Window collateral capacity. These are reported capacities, not cash balances.
- Management expects acquired-loan balances, excluding debt settlements, to decline approximately $25–$30 million in Q2 2016 and the acquired-loan yield, excluding recoveries, to be approximately 5.5%–6.5%. It expects the portfolio’s income contribution to decline as it runs off. The filing gives no broader earnings or revenue guidance.
- Management described economic activity in its markets as modestly improving but noted risks from oil-price volatility, weakness in Houston and energy-related businesses, competition and the prolonged low-rate environment. Its one-year rate sensitivity model estimated net interest income down 6.2% for a 100-basis-point rate decline and up 0.1% for a 100-basis-point increase; the 200-basis-point-down scenario was not calculated.
- Trustmark planned to close six branches in Alabama, Florida and Mississippi during Q2 as part of retail-channel optimization. A $100 million share repurchase authorization was approved in March, available through March 31, 2019; no shares were repurchased in Q1. The quarterly dividend was $0.23 per share, with an indicated 2016 annual dividend of $0.92.
- Three Stanford-related lawsuits and consolidated trust-beneficiary litigation remained pending. Trustmark said losses were not both probable and reasonably estimable and, based on counsel and insurance, did not expect the pending proceedings to have a material adverse effect on consolidated financial condition. Outcomes remain uncertain.
- Management expected FDIC assessment expense to decline under a rule effective July 1, 2016, as lower regular rates and adjustments were expected to more than offset the surcharge.
Most important facts for investors to verify
- Whether the rise in Mississippi nonaccrual loans and specific reserves persists, and how energy-sector credits perform if oil prices remain weak.
- Whether core net interest income and margin stabilize as acquired loans run off and competitive loan pricing and funding costs evolve.
- Whether the stated Q2 acquired-loan runoff and yield expectations are realized, and how much earnings depend on recoveries or other acquired-loan cash-flow revisions.
- Actual liquidity availability and funding costs, including the maturity and repayment or refinancing of the $50 million subordinated notes in December 2016.
- Developments in Stanford-related and trust litigation, including any change in the company’s assessment of probability, estimability or potential financial exposure.
- Execution and financial effects of planned branch closures, the repurchase authorization and the dividend.