Trustmark Corporation — Q1 2015 Form 10-Q
Business and period: Bank holding company headquartered in Jackson, Mississippi, operating 202 offices across Alabama, Florida, Mississippi, Tennessee and Texas. The quarter ended March 31, 2015; income and cash-flow comparisons are with Q1 2014, and balance-sheet comparisons are primarily with December 31, 2014. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
- Revenue and earnings: Revenue, defined as net interest income plus noninterest income, was $139.8 million, up 0.6% year over year. Net interest income rose 2.6% to $97.4 million; noninterest income fell 3.9% to $42.4 million. Net income was $29.1 million versus $29.0 million; basic and diluted EPS remained $0.43. Quarterly dividend was $0.23 per share.
- Margins and returns: Tax-equivalent net interest margin was 3.88%, down 4 basis points. Return on average assets was 0.97% versus 0.99%; return on average equity was 8.23% versus 8.60%; return on average tangible equity was 11.86% versus 12.93%.
- Expenses and credit costs: Noninterest expense declined 2.4% to $99.2 million, led by lower ORE/foreclosure and other expense. Total loan-loss provision was $2.1 million, compared with a $0.7 million net provision credit in Q1 2014. Net charge-offs on loans held for investment were $0.08 million, versus net recoveries of $1.9 million.
- Loans and credit quality: Loans held for investment (LHFI) were $6.414 billion, down 0.6% from year-end but up 8.3% from March 2014. Nonperforming assets, excluding acquired loans and covered ORE, were $167.2 million, down 2.7% from year-end; nonaccrual LHFI were $77.0 million, down 2.9%. The allowance was $71.3 million, or 1.11% of LHFI. Classified and criticized LHFI were down 13.8% and 21.3%, respectively, year over year.
- Liquidity and funding: Deposits increased 2.2% from year-end to $9.907 billion, including a $188.2 million increase in noninterest-bearing deposits. Short-term borrowings fell 33.9% to $573.8 million, primarily after $350 million of short-term FHLB advances matured. Cash and due from banks were $335.2 million. Management cited excess funding capacity, including $1.995 billion of additional FHLB Dallas capacity, $669 million of repurchase-agreement capacity and $919.4 million of Discount Window collateral capacity.
- Debt and capital: At quarter-end, the company reported $49.9 million of subordinated notes, $61.9 million of junior subordinated debt and $1.2 million of long-term FHLB advances. Shareholders’ equity was $1.446 billion, up 1.8% from year-end. Trustmark’s CET1, Tier 1, total risk-based capital and Tier 1 leverage ratios were 13.14%, 13.83%, 14.92% and 9.99%, respectively; management said Trustmark and its bank subsidiary were well-capitalized.
- Cash flow: Operating activities used $2.8 million, compared with $57.4 million provided in Q1 2014. Investing activities provided $100.6 million, versus $232.8 million used; financing activities used $78.5 million, versus $253.4 million provided. Cash increased $19.3 million during the quarter to $335.2 million.
Material changes and notable items
- Net interest income benefited from loan growth and lower deposit costs, while competitive repricing reduced the yield on LHFS and LHFI. Management noted that low rates continue to pressure margins as higher-yielding assets mature or default.
- Mortgage banking income rose 31.3% to $9.0 million, reflecting higher mortgage production and gains on loan sales. Production was $304.6 million, up 32.2% year over year; loan sales were $233.0 million. Bank card and other fees fell 25.5%, in part following Trustmark’s loss of the small-bank debit interchange exemption; management estimated the rule could reduce 2015 noninterest income by $10–$11 million.
- During Q1, Trustmark changed commercial-loan allowance methodology: extending the loss-emergence period to 1.5 years added about $2.3 million of provision; changes to criticized-grade caps and Florida market factors had a net additional provision impact of about $1.1 million. These estimates contributed to the higher reported provision.
- Trustmark repurchased and resold approximately $28.5 million of delinquent GNMA-serviced loans, recording a $0.3 million gain. Mortgage servicing rights were $62.9 million at quarter-end; market changes and runoff reduced their value during the quarter.
- Energy-related LHFI totaled approximately $195.4 million, or 3.0% of LHFI. Management warned that prolonged low oil prices could lead to credit downgrades and said it would continue monitoring the exposure.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management described the economy as improving modestly but highlighted uncertainty around crude oil prices, global growth and the timing of Federal Reserve rate increases. It expects low rates to continue pressuring net interest margins and described continued investment in growth, channel realignment and expense efficiency. Its interest-rate models estimated that a 200-basis-point increase could raise one-year net interest income 3.8%, while a 100-basis-point decrease could reduce it 5.9%; these are model scenarios, not forecasts.
Key risks include borrower performance and real-estate values in the five-state footprint, oil-price exposure, deposit withdrawals and competition for low-cost funding, interest-rate and securities valuation changes, mortgage-servicing valuation and repurchase claims, and regulatory and litigation outcomes. The filing describes Stanford Financial Group-related lawsuits against the bank subsidiary; plaintiffs did not quantify damages. Management said loss was not probable and no accrual was required, while vigorously contesting the cases. The filing also reports an April 2015 court ruling dismissing some claims and allowing others to proceed. Management stated that pending proceedings were not expected to materially affect consolidated results or financial position. No material change to previously disclosed risk factors was reported.
Most important facts for investors to verify
- Whether margin pressure persists and whether loan growth can offset competitive repricing and the expected interchange-fee impact.
- Whether the reported improvement in nonperforming assets and criticized/classified loans continues, particularly in real estate and energy-related lending.
- The effect of Q1 allowance-methodology revisions on reserve adequacy and future provision expense.
- Liquidity and funding trends after the maturity of short-term FHLB advances, including deposit mix and use of wholesale funding.
- Developments in Stanford-related litigation and potential mortgage-servicing or FDIC loss-share obligations.