Trustmark Corporation (10-Q) — Q2 2015
Reporting period: Three and six months ended June 30, 2015. Trustmark is a regional financial services company operating 201 offices in Alabama, Florida, Mississippi, Tennessee and Texas.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue (net interest income plus noninterest income) | $142.5 million | $149.4 million | $282.2 million | $288.4 million |
| Net interest income | $96.9 million | $105.3 million | $194.3 million | $200.2 million |
| Net income | $30.6 million | $32.9 million | $59.8 million | $61.9 million |
| Diluted EPS | $0.45 | $0.49 | $0.88 | $0.92 |
| FTE net interest margin | 3.81% | 4.21% | 3.84% | 4.07% |
| Return on average assets | 1.01% | 1.10% | 0.99% | 1.05% |
Q2 noninterest income was $45.5 million, up 3.2%, while noninterest expense was $100.3 million, down 2.4%. Six-month noninterest expense fell 2.4% to $199.5 million. The board declared a $0.23 per-share quarterly dividend.
Balance sheet, liquidity and capital
- At June 30, total assets were $12.18 billion, shareholders’ equity $1.45 billion and total deposits $9.79 billion. Assets were modestly below year-end 2014; deposits rose 1.0% and equity rose 2.1%.
- Loans held for investment were $6.45 billion, approximately unchanged from year-end. Securities totaled $3.64 billion. Cash and due from banks were $255.1 million, down from $316.0 million at year-end.
- Short-term borrowings were $679.2 million, down 21.8% from $868.6 million at year-end, mainly reflecting lower short-term FHLB advances. Long-term FHLB advances were $1.2 million; subordinated notes were $50.0 million and junior subordinated debt was $61.9 million. The $50 million notes mature in December 2016.
- For the six months, operating cash flow was $55.7 million versus $91.1 million in 2014; investing cash flow was an outflow of $10.5 million versus $388.0 million; financing cash flow was an outflow of $106.1 million versus an inflow of $274.0 million. Cash and cash equivalents decreased $60.9 million to $255.1 million.
- Management reported adequate liquidity and excess funding capacity. Available capacity included $1.873 billion of additional FHLB Dallas advances, about $1.036 billion through repurchase agreements and about $859 million at the Federal Reserve discount window.
- Trustmark and its bank subsidiary were categorized as well-capitalized. Trustmark’s June 30 ratios included common equity Tier 1 of 13.28%, total risk-based capital of 15.07% and Tier 1 leverage of 10.14%.
Changes, credit quality and business developments
- Q2 net income declined 7.0% year over year. Net interest income fell 7.9%, principally because acquired-loan interest income declined $10.7 million as those portfolios paid down. Fee-income growth and lower expenses partly offset the decline.
- For the first half, net income declined 3.5%. FTE margin fell 23 basis points, reflecting competitive repricing of loans and the low-rate environment; lower deposit costs partly offset asset-yield pressure. Management noted continued pressure as higher-yielding assets mature or pay down.
- Credit indicators improved: nonaccrual LHFI fell to $68.4 million from $79.3 million at year-end; nonperforming assets, excluding acquired loans and covered other real estate, fell to $159.2 million from $171.9 million. Classified and criticized LHFI were lower year over year. First-half LHFI net charge-offs were $1.3 million, compared with net recoveries of $0.7 million in 2014.
- The allowance for LHFI was $71.2 million, or 1.10% of LHFI. First-quarter methodology revisions increased provision by about $1.1 million net: a longer 1.5-year loss emergence period and Florida reserve-factor adjustments increased provision, partly offset by removal of caps and floors on criticized loans.
- Mortgage banking and insurance grew. First-half mortgage loan sales were $579.9 million versus $397.9 million, with gains of $8.8 million versus $4.6 million. Insurance commissions rose 9.9%; management cited new business and added experienced producers. Trustmark launched its myTrustmark online consumer-banking service and continued branch and delivery-channel realignment.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management described the economy as improving moderately, but cited uncertainty around global conditions, oil prices and the timing of Federal Reserve rate increases. It expected low rates to continue pressuring margins.
- Management estimated that debit-card interchange rules would reduce 2015 noninterest income by $10–$11 million, based on current transaction volume. Process, fee and delivery-channel initiatives were intended to offset part of the impact.
- Energy-related LHFI was approximately $190.3 million, or 3.0% of total LHFI. Management warned prolonged low oil prices could lead to credit downgrades and said it would monitor the exposure. Loan concentrations and other real estate are primarily tied to Trustmark’s five regional markets.
- Two Stanford Financial Group-related lawsuits involving the bank subsidiary remain pending. Claims are unquantified; management said they are being vigorously contested, that a loss was not probable at the reporting date and that no accrual was required. Management did not expect a material effect, based on its current assessment.
- Mortgage-servicing putback reserves were $1.4 million. The filing notes uncertainty in estimating future claims. The FDIC indemnification asset declined to $2.6 million from $7.0 million at year-end; the FDIC loss-share agreement also carries a possible future true-up payment, with a $2.4 million provision recorded.
- Interest-rate sensitivity estimates showed net interest income potentially rising 2.0% under a 200-basis-point increase but falling 5.4% under a 100-basis-point decrease. These are modeled estimates, not forecasts, and depend on assumptions and balance-sheet behavior.
Most important facts for investors to verify
- Whether margin pressure and runoff in acquired loans continue, and whether loan growth can offset them.
- Credit trends, particularly energy exposure, criticized loans, net charge-offs, ORE and reserve adequacy after the allowance-method changes.
- Actual 2015 interchange-fee impact and whether fee growth and expense initiatives offset it.
- Liquidity and funding costs, including dependence on wholesale borrowing, and capital headroom under phased-in regulatory requirements and stress scenarios.
- Developments in the Stanford litigation, mortgage putback exposure and the FDIC loss-share true-up estimate.