Trustmark Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Trustmark is a regional financial-services holding company, principally operating through Trustmark National Bank across Alabama, Florida, Mississippi, Tennessee and Texas. Its businesses include commercial and consumer banking, mortgage banking, insurance and wealth management.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $564.9 million | $578.5 million | Down 2.3% |
| Net interest income | $391.8 million | $405.3 million | Down 3.3% |
| Net income | $116.0 million | $123.6 million | Down 6.1% |
| Diluted earnings per share | $1.71 | $1.83 | Down $0.12 |
| Net interest margin, fully taxable equivalent | 3.78% | 4.03% | Down 25 basis points |
| Noninterest expense | $401.7 million | $409.0 million | Down 1.8% |
| Provision for loan losses, LHFI | $8.4 million | $1.2 million | Up $7.2 million |
For Q4 2015, revenue was $139.1 million, net income $27.9 million and diluted EPS $0.41, versus $140.9 million, $28.1 million and $0.42, respectively, in Q4 2014. Q4 revenue fell 1.3%; lower noninterest expense partly offset reduced revenue and higher loan-loss provision.
- Loans and credit: Loans held for investment (LHFI) rose 10.0% to $7.09 billion. Nonperforming assets, excluding acquired loans and covered other real estate, fell 22.9% to $132.5 million; nonaccrual LHFI declined 30.3% to $55.3 million. Net charge-offs were $10.4 million, compared with net recoveries of $2.0 million in 2014. The LHFI allowance was $67.6 million, or 0.95% of LHFI, versus 1.08% a year earlier.
- Deposits and liquidity: Deposits declined 1.1% to $9.59 billion. Noninterest-bearing deposits grew 9.1% to $3.00 billion, while interest-bearing deposits fell 5.2%. Cash and due from banks was $277.8 million. Management said liquidity was adequate and described access to deposit funding, securities, federal funds lines, FHLB advances and the Federal Reserve Discount Window.
- Debt and capital: Long-term FHLB advances increased to $501.2 million from $1.3 million, including a $500 million advance due in December 2017. Short-term borrowings were $412.6 million; federal funds purchased and repurchase agreements were $441.0 million. TNB had $50 million of subordinated notes due December 2016; junior subordinated debt securities were $61.9 million. Shareholders’ equity was $1.47 billion. Trustmark’s CET1, Tier 1 and total risk-based capital ratios were 12.57%, 13.21% and 14.07%; TNB was categorized as well-capitalized.
- Cash flow and shareholder returns: Operating cash flow was $171.9 million, investing cash outflow $527.3 million and financing cash inflow $317.2 million. Cash and cash equivalents decreased $38.2 million to $277.8 million. The annual dividend remained $0.92 per share; the Board declared a $0.23 quarterly dividend payable in March 2016.
Material changes and drivers
- Lower acquired-loan income was the principal revenue headwind: interest and fees on acquired loans declined $25.6 million as accretion income and recoveries fell with portfolio runoff. Growth in LHFI supported interest income but was offset by lower loan yields and competitive repricing.
- Noninterest income was broadly flat. Mortgage banking income increased 21.8% to $30.2 million, and insurance commissions rose 8.8% to $36.4 million; bank-card and other fees fell 14.2% to $28.3 million, partly reflecting interchange regulation.
- Expense reductions were led by lower other-real-estate and foreclosure costs and other expense. Salaries and benefits increased 1.5%.
- Management revised commercial and consumer loan-loss allowance methods during 2015. The revisions added approximately $9.5 million of provision expense, despite offsetting method changes; net LHFI provision for the year was $8.4 million.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue or margin guidance. Management described moderate economic improvement but noted uncertainty from low oil prices, global weakness, competition and the interest-rate environment. It emphasized customer and loan growth, diversified revenue, expense discipline, delivery-channel realignment and investment in mobile banking. The acquired-loan portfolio was expected to continue running off; management estimated first-quarter 2016 acquired-loan balances would decline $25–$30 million and yield approximately 5.5%–6.5%, excluding recoveries.
- Interest-rate models estimated net interest income would decline 0.5% under a 200-basis-point rate increase, 0.3% under a 100-basis-point increase and 6.7% under a 100-basis-point decrease, based on static year-end balances. These are model estimates, not forecasts.
- Energy-related LHFI was approximately $213 million, or 3.0% of LHFI, with no energy-related LHFI classified as nonperforming or nonaccrual at year-end. Management warned prolonged low oil prices could weaken demand or increase losses, particularly in Texas-related markets.
- Two Stanford Financial Group-related lawsuits and consolidated trust-beneficiary litigation remained pending. The filing says management did not consider a loss both probable and reasonably estimable and did not expect pending proceedings to materially adversely affect consolidated financial condition, while noting outcomes and timing are uncertain.
- Other sensitivities include real-estate and construction credit quality, allowance estimates, mortgage-servicing-right valuations and hedging, securities valuation, cyber and vendor risks, regulatory changes, and dividend capacity subject to bank capital and regulatory requirements.
Investor verification priorities
- Track whether loan growth continues without renewed increases in charge-offs, nonaccrual loans or other real estate, and assess the adequacy of the revised loan-loss methodology and allowance.
- Verify whether net interest margin stabilizes as acquired-loan income runs off and market rates, deposit costs and loan pricing change.
- Monitor deposit mix and the increased use and maturity profile of wholesale funding, including the $500 million FHLB advance and the $50 million subordinated notes due in 2016.
- Follow Texas and other market exposure to energy, commercial real estate and construction, as well as the progress and potential financial effects of pending litigation.
- Assess the sustainability of dividends against earnings, capital requirements, stress-test results and the bank subsidiary’s ability to upstream dividends.