Trustmark Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless noted. Trustmark is a bank holding company headquartered in Jackson, Mississippi, operating 200 offices across Alabama, Florida, Mississippi, Tennessee and Texas through banking, wealth management and insurance businesses. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $143.6 | $149.1 | $425.8 | $437.5 |
| Net interest income | $97.6 | $106.2 | $291.9 | $306.4 |
| Net income | $28.4 | $33.6 | $88.2 | $95.5 |
| Diluted EPS | $0.42 | $0.50 | $1.30 | $1.41 |
| Net interest margin, FTE | 3.72% | 4.14% | 3.80% | 4.09% |
| Provision for loan losses, total | $3.8 | $4.2 | $7.8 | $7.6 |
| Noninterest income | $46.0 | $42.9 | $133.9 | $131.1 |
| Noninterest expense | $103.6 | $100.2 | $303.0 | $304.6 |
- Q3 revenue declined 3.7% and net income declined 15.4%. Management attributed the revenue decline chiefly to lower income on acquired loans as that portfolio paid down; higher loan interest income and mortgage banking income partly offset the decline. Q3 expense rose 3.4%, notably due to higher ORE/foreclosure expense and salaries.
- For the first nine months, revenue fell 2.7% and net income fell 7.7%. Lower acquired-loan income and bank-card fees were partly offset by mortgage banking and insurance growth, and lower deposit interest expense. Nine-month noninterest expense declined 0.5%.
- Q3 return on average assets was 0.92% (1.10% in Q3 2014); return on average tangible equity was 10.96% (13.70%). Nine-month figures were 0.97% and 11.62%, respectively, versus 1.06% and 13.52%.
- Cash dividends were $0.23 per share for Q3 and $0.69 per share for nine months, unchanged from 2014. The board declared a further $0.23 quarterly dividend, payable December 15, 2015.
Financial position, cash flow and capital
- At September 30, total assets were $12.390 billion, loans held for investment (LHFI) were $6.792 billion, and total shareholders’ equity was $1.477 billion. LHFI grew 5.3% from December 31, 2014; growth included construction, public-sector and other loans.
- Deposits were $9.412 billion, down 2.9% from year-end, mainly reflecting declines in interest-bearing and seasonal public deposits. Noninterest-bearing deposits rose 1.4% over the same period.
- Short-term borrowings were $1.244 billion, up 43.2% from year-end. The increase principally reflected greater FHLB borrowing; $650 million of short-term FHLB advances were outstanding at September 30. Management cited deposit strength, liquid securities and access to federal funds, FHLB, repurchase and Federal Reserve funding as liquidity sources.
- For the first nine months, operating cash flow was $93.2 million versus $159.6 million in 2014; investing cash outflow was $244.7 million versus $477.9 million, and financing cash inflow was $55.5 million versus $210.1 million. Cash and cash equivalents ended at $220.1 million, down $95.9 million from year-end.
- Trustmark and its bank subsidiary met regulatory “well-capitalized” guidelines. Trustmark’s September 30 ratios included common equity Tier 1 of 13.00%, Tier 1 capital of 13.66%, total capital of 14.66% and Tier 1 leverage of 10.09%.
Credit quality and notable changes
- Nonperforming assets, excluding acquired loans and covered other real estate, were $145.1 million, or 2.06% of loans and ORE, down from $171.9 million and 2.57% at December 31, 2014. Nonaccrual LHFI declined to $61.1 million from $79.3 million.
- Credit metrics were mixed: classified and criticized LHFI were down year over year, but nine-month net charge-offs were $9.3 million, compared with net recoveries of $1.1 million in 2014. Q3 net charge-offs were $8.1 million. The allowance for LHFI was $65.6 million, or 0.97% of LHFI, versus $69.6 million and 1.08% at year-end.
- Management revised consumer-loan allowance assumptions in Q3, recording an additional $2.2 million provision. First-quarter commercial allowance methodology revisions also affected provision expense. Management stated that the construction and land-development portfolio was appropriately risk-rated and reserved.
- Acquired loans continued to run off. Management expected acquired loan balances to decline by approximately $30–$40 million in Q4 2015, excluding any settlement of debt, and expected a Q4 yield of approximately 5.5%–6.5%, excluding recoveries. It warned that income from the acquired portfolio would continue to decline.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management described economic activity in its markets as modestly improving but noted uncertainty around global growth, energy-sector weakness and the timing and pace of Federal Reserve rate increases. It said a prolonged low-rate environment pressures margins as higher-yielding assets mature or repay.
- Energy-related LHFI was approximately $207 million, or 3.0% of LHFI, concentrated in Mississippi and Texas. Trustmark reported no exposure dependent on energy-reserve values for repayment or collateral, but warned that prolonged low oil prices could lead to credit downgrades.
- Interest-rate simulations estimated that a 100-basis-point increase would reduce one-year net interest income by 0.3%, while a 100-basis-point decrease would reduce it by 4.8%. A 100-basis-point decrease was estimated to lower net portfolio value by 7.7%. These are model estimates, not forecasts.
- Two Stanford Financial Group-related lawsuits against Trustmark National Bank remain pending; claims are unquantified. Management said the cases are being vigorously contested, believed a loss was not probable and had recorded no accrual. It did not expect the proceedings to materially affect financial position or results, but outcomes remain uncertain.
- Unused commitments to extend credit totaled $2.724 billion; letters of credit had maximum stated exposure of $132.2 million. Management noted that many commitments may expire undrawn. Mortgage-servicing putback exposure is also subject to estimation uncertainty; the reserve was $1.6 million.
- Management cited ongoing retail-channel realignment, new mobile banking, mortgage and insurance growth initiatives, and expense discipline. The filing reported no material change in previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether margin pressure and acquired-loan runoff continue to weigh on net interest income and earnings.
- Whether the recent increase in charge-offs—especially in Mississippi and Texas—and the revised allowance assumptions are adequate indicators of future credit costs.
- How deposit trends and greater reliance on short-term borrowings affect funding costs, liquidity and margins.
- Developments in energy-related credits, construction and real-estate lending, and nonperforming assets.
- Updates on the Stanford litigation, mortgage-servicing putbacks and the FDIC loss-share true-up exposure.
- Actual results versus management’s Q4 acquired-loan balance and yield estimates, and the sensitivity of mortgage-servicing rights and earnings to interest-rate changes.