Trustmark Corporation — Q1 2017 Form 10-Q
Business context and period: Trustmark is a bank holding company headquartered in Jackson, Mississippi, operating banking, wealth management and insurance businesses across Alabama, Florida, Mississippi, Tennessee and Texas. This summary covers the three months ended March 31, 2017; balance-sheet comparisons are primarily with December 31, 2016. Amounts are in U.S. dollars.
Financial performance and position
- Earnings and revenue: Net income was $31.2 million, or $0.46 per diluted share, versus $27.0 million and $0.40 a year earlier. Revenue, defined as net interest income plus noninterest income, rose 4.1% to $143.6 million. Pretax income was $40.4 million; the effective tax rate was 22.7%, compared with 24.0%.
- Interest income and margins: Net interest income increased 3.0% to $97.6 million. Fully taxable-equivalent net interest margin declined 5 basis points year over year to 3.49%, as higher deposit and borrowing costs and lower taxable-securities yields offset loan growth. Noninterest income increased 6.4% to $46.0 million; noninterest expense increased 3.1% to $102.1 million.
- Returns: Return on average assets was 0.95%, up from 0.85%; return on average tangible equity was 11.39%, up from 10.26%. The dividend remained $0.23 per share for the quarter.
- Cash flow: Operating activities provided $39.9 million, investing activities used $103.6 million and financing activities provided $115.6 million. Cash and cash equivalents ended the quarter at $379.6 million, up $51.9 million from year-end.
- Balance sheet and lending: Total assets were $13.49 billion, up from $13.35 billion at year-end. Loans held for investment (LHFI) were $8.00 billion, up 2.0% during the quarter; excluding $36.7 million reclassified from acquired loans, growth was 1.5%. Total loans, including loans held for sale and acquired loans, were $8.40 billion.
- Deposits, debt and liquidity: Deposits totaled $10.10 billion, up 0.5%; noninterest-bearing deposits rose 8.0% while interest-bearing deposits fell 2.7%. Short-term borrowings were $1.389 billion, including federal funds purchased and repurchase agreements of $524.3 million; long-term FHLB advances were $251.0 million and junior subordinated debt was $61.9 million. Management reported adequate liquidity and excess funding capacity, including $1.446 billion of additional FHLB Dallas borrowing capacity, $1.393 billion of repurchase capacity and $1.023 billion of Federal Reserve Discount Window collateral capacity.
- Capital: Shareholders’ equity was $1.538 billion. Trustmark reported a 12.19% common equity Tier 1 ratio, 12.79% Tier 1 risk-based capital ratio, 13.61% total risk-based capital ratio and 9.86% Tier 1 leverage ratio. Trustmark and its bank subsidiary met applicable “well-capitalized” guidelines.
- Credit quality: The LHFI allowance was $72.4 million, or 0.91% of LHFI. Net charge-offs were $1.6 million, versus $0.2 million a year earlier. Nonaccrual LHFI increased to $61.3 million from $49.2 million at year-end; nonperforming assets were $117.3 million, up from $111.3 million. Management attributed much of the nonaccrual increase to one large energy credit.
Material changes and notable items
- Loan growth and higher mortgage banking and insurance income contributed to higher revenue and earnings. Mortgage banking income rose 17.1% to $10.2 million, including higher loan-sale gains and net positive hedge ineffectiveness.
- Interest expense increased 24.9% year over year, principally because of higher deposit costs. Management noted that further rate increases could create competitive pressure on deposit pricing.
- Energy-related LHFI was approximately $256 million, or 3.2% of LHFI, at quarter-end. Nonaccrual energy loans were $22.8 million. Management said prolonged low oil prices could result in further downgrades.
- On April 7, 2017, after quarter-end, Trustmark completed its acquisition of RB Bancorporation, whose assets were $201.2 million at March 31. Trustmark paid approximately $23.7 million in cash consideration and expected approximately $3.0 million of one-time merger expenses. Acquisition-date fair values were still being determined.
- Trustmark expected a one-time pension settlement expense of approximately $17.5 million in Q2 2017 in connection with terminating its defined-benefit plan. After distributions, annual pension expense was expected to decrease by approximately $3.0 million to $4.0 million.
Outlook, risks and contingencies
- No broad earnings or revenue guidance was provided. For Q2 2017, management expected acquired loan balances to decline by approximately $10 million to $15 million and the acquired-loan yield, excluding recoveries, to be approximately 5.5% to 6.5%.
- Interest-rate sensitivity estimates showed little modeled net-interest-income change in rising-rate scenarios, but a 6.2% decline in a 100-basis-point falling-rate scenario. A 200-basis-point decline scenario was not calculated because of the low-rate environment. These are model estimates, not assurances of actual results.
- Key disclosed risks include credit deterioration and charge-offs, particularly in energy and regional real estate; deposit pricing and funding competition; interest-rate and securities-market volatility; economic conditions in Trustmark’s markets; mortgage servicing and valuation risks; cyber threats; regulation; and litigation.
- Trustmark disclosed Stanford-related lawsuits against its bank subsidiary and other ordinary-course litigation. Management said loss was not considered probable and reasonably estimable at the time, and believed pending proceedings should not materially adversely affect consolidated financial condition. The filing also reported a separate trust-related lawsuit settlement approved May 4, 2017, with terms not material to results or financial condition.
- Management described economic activity as modestly improving but cited uncertainty around oil prices, domestic and global conditions, and monetary policy. Forward-looking statements are subject to the risks described in the filing and prior SEC reports.
Important facts for investors to verify
- Whether loan growth, excluding the acquired-loan reclassification, continues and supports interest income without further margin compression.
- Whether nonaccrual loans, criticized credits, charge-offs and energy exposure stabilize or worsen, and whether reserves remain adequate.
- How deposit costs and wholesale funding needs develop relative to earning-asset yields and liquidity capacity.
- The final RB Bancorporation purchase accounting, integration costs and contribution to earnings after the April 7 closing.
- The final pension termination funding and settlement expense, expected in Q2, and the realized reduction in ongoing pension expense.