Trustmark Corporation — FY 2016 Form 10-K
Business context and reporting period. Trustmark is a regional financial services company headquartered in Jackson, Mississippi, with banking, mortgage, insurance and wealth-management operations in Alabama, Florida, Mississippi, Tennessee and Texas. This filing reports the fiscal year ended December 31, 2016; quarterly comparisons below refer to the fourth quarter of 2016 versus the fourth quarter of 2015. All figures are in U.S. dollars.
Key financial results and position
| Metric | FY/Q4 2016 | Comparable period |
|---|---|---|
| Revenue (net interest income plus noninterest income) | FY: $561.5 million | FY 2015: $564.9 million |
| Net income | FY: $108.4 million; Q4: $28.9 million | FY 2015: $116.0 million; Q4 2015: $27.9 million |
| Diluted EPS | FY: $1.60; Q4: $0.43 | FY 2015: $1.71; Q4 2015: $0.41 |
| Net interest margin, fully taxable equivalent | FY: 3.53% | FY 2015: 3.78% |
| Net cash from operating activities | FY: $147.4 million | FY 2015: $171.9 million |
| Total assets / loans held for investment / deposits | Year-end: $13.35 billion / $7.85 billion / $10.06 billion | 2015 year-end: $12.68 billion / $7.09 billion / $9.59 billion |
- Profitability and margins: FY return on average assets was 0.84%, return on average equity 7.14%, and return on average tangible equity 9.99%. The dividend payout ratio was 57.5%. Net interest income was $387.5 million, down from $391.8 million in 2015; noninterest income was $173.9 million, broadly stable.
- Cash flow: FY investing activities used $649.7 million, principally reflecting $677.3 million of net loan growth. Financing activities provided $552.2 million, including $467.8 million of deposit growth and increased short-term funding. Cash and cash equivalents ended the year at $327.7 million, up $50.0 million.
- Credit quality: Net charge-offs were $7.3 million, or 0.10% of average loans, versus $10.4 million, or 0.15%, in 2015. Nonperforming assets, excluding acquired loans and covered other real estate, fell to $111.3 million from $132.5 million; nonaccrual loans were $49.2 million. The allowance for loan losses on loans held for investment was $71.3 million, or 0.91% of those loans.
- Debt and liquidity: Year-end short-term borrowings were $1.310 billion, including $700 million of FHLB advances; long-term FHLB advances were $251.0 million. The $50 million subordinated notes matured and were repaid in December 2016. Trustmark reported $1.511 billion of additional FHLB of Dallas borrowing capacity, $1.373 billion of repurchase-agreement capacity and $998.1 million of Federal Reserve discount-window collateral capacity. Management said liquidity and capital resources were sufficient for presently known needs.
- Capital and shareholder returns: Trustmark’s CET1, Tier 1 and total risk-based capital ratios were 12.16%, 12.76% and 13.59%; TNB’s were 12.58%, 12.58% and 13.41%. Trustmark’s leverage ratio was 9.90%. The annual dividend remained $0.92 per share. Under a $100 million repurchase authorization through March 2019, the company repurchased about $0.75 million of stock in 2016.
Material changes versus prior periods
- FY revenue declined 0.6% and net income declined 6.6% from 2015; diluted EPS fell from $1.71 to $1.60. The decline reflected lower net interest income, higher provision expense and higher noninterest expense.
- Loan growth was strong: loans held for investment rose 10.7% year over year. Deposits rose 4.9%, so loan growth outpaced deposit growth and Trustmark increased short-term borrowings.
- Net interest margin contracted 25 basis points to 3.53%, with pressure from low rates, competitive loan pricing, lower yields on securities and declining accretion and recoveries on acquired loans.
- Annual provision for loan losses, including acquired loans, increased to $14.7 million from $11.8 million. In contrast, Q4 net income improved year over year to $28.9 million, supported by higher revenue and a lower loan-loss provision.
- Noninterest expense rose 1.4%. Trustmark recorded $9.8 million of pretax voluntary early-retirement program costs and $1.3 million of pension expense tied to de-risking; retirement-program savings were $4.4 million during 2016.
- Other real estate, excluding covered properties, declined to $62.1 million from $77.2 million. Acquired loans continued to run off, with balances down $118.2 million, or 30.3%, during 2016.
Outlook, commentary, risks and unusual items
- Management described 2016 economic activity in its markets as generally modestly improving and cited positive near-term regional outlooks. It also emphasized uncertainty and did not provide specific earnings or revenue guidance. Management expected acquired loans to decline by approximately $20 million to $25 million in Q1 2017 and their yield, excluding recoveries, to be approximately 5.5% to 6.5%.
- The defined-benefit pension plan was terminated effective December 31, 2016. Trustmark estimated a one-time settlement expense of about $17.5 million when assets are distributed in Q2 2017; the amount could increase if many participants choose annuities. Management expected annual pension expense to decline by about $3 million to $4 million after distribution.
- A proposed acquisition of RB Bancorporation, parent of Reliance Bank in Alabama, was expected to close in the first half of 2017, subject to shareholder approval and customary closing conditions. The announced transaction value was approximately $25.6 million.
- Energy-related loans were $271.5 million, or 3.5% of loans held for investment. About 4.2% of those energy loans were nonperforming or on nonaccrual. Management cited possible borrower deterioration if oil prices remained low for an extended period.
- Interest-rate sensitivity modeling estimated that a 100-basis-point rate decline could reduce net interest income by 6.3%; a 200-basis-point increase was estimated to have little effect on net interest income. These are model-based scenarios, not forecasts.
- Material risks include credit deterioration, real-estate and regional economic conditions, funding and deposit competition, interest-rate and securities-market changes, regulation, cyber and vendor risks, litigation, and natural disasters. Mississippi represented 56.1% of loans, indicating meaningful geographic concentration.
- TNB faced Stanford-related lawsuits and consolidated trust-beneficiary litigation. The matters remained pending; claims were contested and damages were not quantified in key cases. Management stated that a loss was not considered probable and reasonably estimable, and did not expect pending proceedings to materially adversely affect consolidated financial condition.
Important facts for investors to verify
- Whether loan growth continues to outpace deposit growth, and the resulting effect on borrowing levels and funding costs.
- Whether the declining net interest margin stabilizes, particularly as rates change and acquired-loan income runs off.
- Whether criticized and classified commercial credits, including energy-related credits, translate into higher provisions or charge-offs.
- The final pension-plan settlement cost, timing of the Q2 2017 distribution, and realized expense savings.
- Completion, terms and integration effects of the Reliance Bank acquisition, if approved.
- Developments in the Stanford and trust litigation, for which the filing states that outcomes and timing cannot be predicted.