UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-03683
Trustmark Corporation
(Exact name of registrant as specified in its charter)
Mississippi
64-0471500
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
248 East Capitol Street, Jackson, Mississippi
39201
(Address of principal executive offices)
(Zip Code)
(601) 208-5111
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2016, there were 67,627,272 shares outstanding of the registrant’s common stock (no par value).
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future” or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements include, but are not limited to, statements relating to anticipated future operating and financial performance measures, including net interest margin, credit quality, business initiatives, growth opportunities and growth rates, among other things, and encompass any estimate, prediction, expectation, projection, opinion, anticipation, outlook or statement of belief included therein as well as the management assumptions underlying these forward-looking statements. You should be aware that the occurrence of the events described under the caption “Risk Factors” in Trustmark’s filings with the Securities and Exchange Commission could have an adverse effect on our business, results of operations and financial condition. Should one or more of these risks materialize, or should any such underlying assumptions prove to be significantly different, actual results may vary significantly from those anticipated, estimated, projected or expected.
Risks that could cause actual results to differ materially from current expectations of Management include, but are not limited to, changes in the level of nonperforming assets and charge-offs, local, state and national economic and market conditions, including conditions in the housing and real estate markets in the regions in which Trustmark operates and the extent and duration of the current volatility in the credit and financial markets as well as crude oil prices, changes in our ability to measure the fair value of assets in our portfolio, material changes in the level and/or volatility of market interest rates, the performance and demand for the products and services we offer, including the level and timing of withdrawals from our deposit accounts, the costs and effects of litigation and of unexpected or adverse outcomes in such litigation, our ability to attract noninterest-bearing deposits and other low-cost funds, competition in loan and deposit pricing, as well as the entry of new competitors into our markets through de novo expansion and acquisitions, economic conditions, including the potential impact of issues relating to the European financial system and monetary and other governmental actions designed to address the level and volatility of interest rates and the volatility of securities, currency and other markets, the enactment of legislation and changes in existing regulations or enforcement practices or the adoption of new regulations, changes in accounting standards and practices, including changes in the interpretation of existing standards, that affect our consolidated financial statements, changes in consumer spending, borrowings and savings habits, technological changes, changes in the financial performance or condition of our borrowers, changes in our ability to control expenses, changes in our compensation and benefit plans, including those associated with the planned termination of our noncontributory tax-qualified defined benefit pension plan, greater than expected costs or difficulties related to the integration of acquisitions or new products and lines of business, cyber-attacks and other breaches which could affect our information system security, natural disasters, environmental disasters, acts of war or terrorism, and other risks described in our filings with the Securities and Exchange Commission.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Except as required by law, we undertake no obligation to update or revise any of this information, whether as the result of new information, future events or developments or otherwise.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Trustmark Corporation and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
(Unaudited)
September 30, 2016
December 31, 2015
Assets
Cash and due from banks (noninterest-bearing)
$
383,945
277,751
Federal funds sold and securities purchased under reverse repurchase agreements
500
250
Securities available for sale (at fair value)
2,410,947
2,345,422
Securities held to maturity (fair value: $1,173,101-2016; $1,195,367-2015)
1,143,234
1,187,818
Loans held for sale (LHFS)
242,097
160,189
Loans held for investment (LHFI)
7,499,204
7,091,385
Less allowance for loan losses, LHFI
70,871
67,619
Net LHFI
7,428,333
7,023,766
Acquired loans:
Noncovered loans
291,825
372,711
Covered loans
3,912
17,700
Less allowance for loan losses, acquired loans
11,380
11,992
Net acquired loans
284,357
378,419
Net LHFI and acquired loans
7,712,690
7,402,185
Premises and equipment, net
190,930
195,656
Mortgage servicing rights
65,514
74,007
Goodwill
366,156
Identifiable intangible assets
22,366
27,546
Other real estate, excluding covered other real estate
64,993
77,177
Covered other real estate
—
1,651
FDIC indemnification asset
738
Other assets
558,166
562,350
Total Assets
13,161,538
12,678,896
Liabilities
Deposits:
Noninterest-bearing
3,111,603
2,998,694
Interest-bearing
6,574,098
6,589,536
Total deposits
9,685,701
9,588,230
Federal funds purchased and securities sold under repurchase agreements
514,918
441,042
Short-term borrowings
412,792
412,617
Long-term FHLB advances
751,075
501,155
Subordinated notes
49,993
49,969
Junior subordinated debt securities
61,856
Other liabilities
150,442
150,970
Total Liabilities
11,626,777
11,205,839
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 67,626,939 shares - 2016; 67,559,128 shares - 2015
14,090
14,076
Capital surplus
365,553
361,467
Retained earnings
1,172,193
1,142,908
Accumulated other comprehensive loss, net of tax
(17,075
)
(45,394
Total Shareholders' Equity
1,534,761
1,473,057
Total Liabilities and Shareholders' Equity
See notes to consolidated financial statements.
3
Consolidated Statements of Income
($ in thousands except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2016
2015
Interest Income
Interest and fees on LHFS & LHFI
76,524
69,458
222,555
203,836
Interest and fees on acquired loans
6,781
11,607
21,854
39,242
Interest on securities:
Taxable
19,351
20,264
58,839
59,581
Tax exempt
902
1,046
2,804
3,306
Interest on federal funds sold and securities purchased under reverse
repurchase agreements
5
10
4
Other interest income
223
392
653
1,177
Total Interest Income
103,786
102,769
306,715
307,146
Interest Expense
Interest on deposits
3,208
3,147
9,368
9,598
Interest on federal funds purchased and securities sold under repurchase
agreements
411
205
1,246
527
Other interest expense
2,603
1,811
7,420
5,074
Total Interest Expense
6,222
5,163
18,034
15,199
Net Interest Income
97,564
97,606
288,681
291,947
Provision for loan losses, LHFI
4,284
2,514
9,123
5,332
Provision for loan losses, acquired loans
691
1,256
2,607
2,428
Net Interest Income After Provision for Loan Losses
92,589
93,836
276,951
284,187
Noninterest Income
Service charges on deposit accounts
11,677
12,400
33,809
35,405
Bank card and other fees
6,756
6,964
21,110
21,142
Mortgage banking, net
7,364
7,443
22,784
25,889
Insurance commissions
10,074
9,906
28,305
27,923
Wealth management
7,571
7,790
22,987
23,538
Other, net
1,274
1,470
3,534
(18
Security losses, net
(310
Total Noninterest Income
44,716
45,973
132,219
133,879
Noninterest Expense
Salaries and employee benefits
57,250
58,270
181,469
172,832
Services and fees
14,947
14,691
43,944
43,817
Net occupancy - premises
6,440
6,580
18,556
19,014
Equipment expense
6,063
5,877
18,053
17,754
Other real estate expense
(1,313
3,385
61
5,421
FDIC assessment expense
2,911
2,559
8,681
8,114
Other expense
11,610
12,198
36,267
36,090
Total Noninterest Expense
97,908
103,560
307,031
303,042
Income Before Income Taxes
39,397
36,249
102,139
115,024
Income taxes
8,415
7,819
22,651
26,844
Net Income
30,982
28,430
79,488
88,180
Earnings Per Share
Basic
0.46
0.42
1.18
1.31
Diluted
1.17
1.30
Dividends Per Share
0.23
0.69
Consolidated Statements of Comprehensive Income
Net income per consolidated statements of income
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on available for sale securities and
transferred securities:
Unrealized holding (losses) gains arising during the period
(7,816
11,035
19,796
8,470
Less: adjustment for net losses realized in net income
191
Change in net unrealized holding loss on securities
transferred to held to maturity
1,653
1,036
5,171
2,931
Pension and other postretirement benefit plans:
Net change in prior service costs
39
116
Recognized net loss due to lump sum settlement
286
373
1,935
926
Change in net actuarial loss
573
751
1,658
2,256
Derivatives:
Change in the accumulated loss on effective cash flow
hedge derivatives
257
(751
(840
(1,185
Less: adjustment for loss realized in net income
97
130
292
390
Other comprehensive (loss) income, net of tax
(4,911
12,613
28,319
13,904
Comprehensive income
26,071
41,043
107,807
102,084
Consolidated Condensed Statements of Changes in Shareholders' Equity
Balance, January 1,
1,419,940
Other comprehensive income, net of tax
Common stock dividends paid
(46,983
(46,952
Common stock issued-net, long-term incentive plan
(992
(842
Repurchase and retirement of common stock
(750
Excess tax expense from stock-based compensation arrangements
(119
(212
Compensation expense, long-term incentive plan
2,741
2,738
Balance, September 30,
1,476,756
6
Consolidated Statements of Cash Flows
Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, net
11,730
7,760
Depreciation and amortization
27,183
27,995
Net amortization of securities
6,833
6,411
Securities losses, net
310
Gains on sales of loans, net
(14,477
(13,301
Deferred income tax provision
12,900
11,600
Proceeds from sales of loans held for sale
1,030,784
943,804
Purchases and originations of loans held for sale
(1,096,979
(985,935
Originations of mortgage servicing rights
(12,392
(13,321
Increase in bank-owned life insurance
(3,653
(3,598
Net (increase) decrease in other assets
(20,833
18,480
Net increase (decrease) in other liabilities
5,405
(1,151
Other operating activities, net
14,617
6,325
Net cash provided by operating activities
40,916
93,249
Investing Activities
Proceeds from calls and maturities of securities held to maturity
221,002
95,467
Proceeds from calls and maturities of securities available for sale
344,160
345,156
Proceeds from sales of securities available for sale
24,693
Purchases of securities held to maturity
(168,665
(68,715
Purchases of securities available for sale
(408,532
(375,866
Net proceeds from bank-owned life insurance
604
655
Net (increase) decrease in federal funds sold and securities purchased
under reverse repurchase agreements
(250
1,885
Net increase in member bank stock
(2,153
(12,585
Net increase in loans
(343,707
(247,772
Purchases of premises and equipment
(6,929
(9,934
Proceeds from sales of premises and equipment
435
2,896
Proceeds from sales of other real estate
37,378
Purchases of software
(5,072
(6,576
Investments in tax credit and other partnerships
(46
(315
Purchase of insurance book of business
(2,787
Net cash used in investing activities
(307,082
(244,682
Financing Activities
Net increase (decrease) in deposits
97,471
(285,954
Net increase in federal funds purchased and securities sold under repurchase agreements
73,876
90,661
Net (decrease) increase in short-term borrowings
(1,057
298,888
Payments on long-term FHLB advances
(78
(77
Proceeds from long-term FHLB advances
250,000
Common stock dividends
Net cash provided by financing activities
372,360
55,512
Increase (Decrease) in cash and cash equivalents
106,194
(95,921
Cash and cash equivalents at beginning of period
315,973
Cash and cash equivalents at end of period
220,052
7
Notes to Consolidated Financial Statements
Note 1 – Business, Basis of Financial Statement Presentation and Principles of Consolidation
Trustmark Corporation (Trustmark) is a bank holding company headquartered in Jackson, Mississippi. Through its subsidiaries, Trustmark operates as a financial services organization providing banking and financial solutions to corporate institutions and individual customers through 194 offices in Alabama, Florida, Mississippi, Tennessee and Texas.
The consolidated financial statements include the accounts of Trustmark and all other entities in which Trustmark has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements, and notes thereto, included in Trustmark’s 2015 Annual Report on Form 10-K.
Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of these consolidated financial statements have been included. The preparation of financial statements in conformity with these accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expense during the reporting periods and the related disclosures. Although Management’s estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that in 2016 actual conditions could vary from those anticipated, which could affect Trustmark’s financial condition and results of operations. Actual results could differ from those estimates.
8
Note 2 – Securities Available for Sale and Held to Maturity
The following tables are a summary of the amortized cost and estimated fair value of securities available for sale and held to maturity at September 30, 2016 and December 31, 2015 ($ in thousands):
Securities Available for Sale
Securities Held to Maturity
Amortized
Cost
Gross
Unrealized
Gains
(Losses)
Estimated
Fair
Value
U.S. Government agency obligations
Issued by U.S. Government agencies
58,259
482
(507
58,234
Issued by U.S. Government sponsored
agencies
26
283
3,636
337
3,973
Obligations of states and political
subdivisions
121,485
3,167
(11
124,641
52,937
2,615
(4
55,548
Mortgage-backed securities
Residential mortgage pass-through
securities
Guaranteed by GNMA
36,130
712
(54
36,788
16,183
666
16,849
Issued by FNMA and FHLMC
554,916
7,239
(166
561,989
39,989
810
40,799
Other residential mortgage-backed
Issued or guaranteed by FNMA,
FHLMC or GNMA
1,353,984
21,507
(1,092
1,374,399
831,662
18,690
(60
850,292
Commercial mortgage-backed securities
247,689
6,945
(21
254,613
198,827
6,921
(108
205,640
Total
2,372,720
40,078
(1,851
30,039
(172
1,173,101
68,314
555
(734
68,135
258
23
281
101,782
3,282
105,064
134,719
3,922
(32
138,609
55,892
2,918
58,810
25,602
399
(189
25,812
17,363
342
(49
17,656
222,899
2,956
(313
225,542
10,368
311
10,679
1,584,338
9,541
(11,019
1,582,860
820,012
4,951
(4,742
820,221
278,429
2,689
(1,892
279,226
182,401
1,700
(1,164
182,937
Asset-backed securities and structured
financial products
25,003
79
(125
24,957
2,339,562
20,164
(14,304
13,504
(5,955
1,195,367
9
During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale to securities held to maturity. The securities were transferred at fair value, which became the cost basis for the securities held to maturity. At the date of transfer, the net unrealized holding loss on the available for sale securities totaled approximately $46.6 million ($28.8 million, net of tax). The net unrealized holding loss is amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. At September 30, 2016, the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive loss in the accompanying balance sheet totaled approximately $25.7 million ($15.8 million, net of tax).
Temporarily Impaired Securities
The tables below include securities with gross unrealized losses segregated by length of impairment at September 30, 2016 and December 31, 2015 ($ in thousands):
Less than 12 Months
12 Months or More
Fair Value
Losses
10,548
(86
30,728
(421
41,276
Obligations of states and political subdivisions
7,495
(13
969
(2
8,464
(15
Residential mortgage pass-through securities
9,072
(50
249
9,321
100,191
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or
GNMA
72,256
(154
98,118
(998
170,374
(1,152
10,512
5,815
16,327
(129
210,074
(490
135,879
(1,533
345,953
(2,023
18,924
(81
30,591
(653
49,515
4,289
(12
2,842
(20
7,131
20,300
(222
1,863
(16
22,163
(238
82,177
1,135,533
(8,832
238,152
1,373,685
(15,761
238,668
(2,902
11,090
249,758
(3,056
Asset-backed securities and structured financial
products
6,778
1,506,669
(12,487
284,538
(7,772
1,791,207
(20,259
The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. Because Trustmark does not intend to sell these securities and it is more likely than not that Trustmark will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Trustmark does not consider these investments to be other-than-temporarily impaired at September 30, 2016. There were no other-than-temporary impairments for the three and nine months ended September 30, 2016 and 2015.
Security Gains and Losses
Gains and losses as a result of calls and dispositions of securities, as well as any associated proceeds, were as follows for the periods presented ($ in thousands):
Available for Sale
Proceeds from calls and sales of securities
Gross realized gains
32
Gross realized (losses)
(342
Realized gains and losses are determined using the specific identification method and are included in noninterest income as security losses, net.
Securities Pledged
Securities with a carrying value of $1.826 billion and $2.157 billion at September 30, 2016 and December 31, 2015, respectively, were pledged to collateralize public deposits and securities sold under repurchase agreements and for other purposes as permitted by law. At both September 30, 2016 and December 31, 2015, none of these securities were pledged under the Federal Reserve Discount Window program to provide additional contingency funding capacity.
Contractual Maturities
The amortized cost and estimated fair value of securities available for sale and held to maturity at September 30, 2016, by contractual maturity, are shown below ($ in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities
Held to Maturity
Due in one year or less
32,173
32,377
5,845
Due after one year through five years
99,840
103,180
27,025
28,099
Due after five years through ten years
8,263
8,332
23,703
25,577
Due after ten years
39,725
39,269
180,001
183,158
56,573
59,521
2,192,719
2,227,789
1,086,661
1,113,580
Note 3 – Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI
At September 30, 2016 and December 31, 2015, LHFI consisted of the following ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
766,685
824,723
Secured by 1-4 family residential properties
1,592,453
1,649,501
Secured by nonfarm, nonresidential properties
1,916,153
1,736,476
Other real estate secured
317,680
211,228
Commercial and industrial loans
1,421,382
1,343,211
Consumer loans
170,073
169,135
State and other political subdivision loans
875,973
734,615
Other loans
438,805
422,496
LHFI
11
Loan Concentrations
Trustmark does not have any loan concentrations other than those reflected in the preceding table, which exceed 10% of total LHFI. At September 30, 2016, Trustmark’s geographic loan distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. Accordingly, the ultimate collectability of a substantial portion of these loans is susceptible to changes in market conditions in these areas.
Nonaccrual/Impaired LHFI
At September 30, 2016 and December 31, 2015, the carrying amounts of nonaccrual LHFI were $54.4 million and $55.3 million, respectively. Included in these amounts were $3.7 million and $7.4 million, respectively, of nonaccrual LHFI classified as troubled debt restructurings (TDRs). No material interest income was recognized in the income statement on nonaccrual LHFI for each of the periods ended September 30, 2016 and 2015.
Trustmark considers all nonaccrual LHFI to be impaired loans. All commercial nonaccrual LHFI (including those classified as TDRs) over $500 thousand are specifically evaluated for impairment (specifically evaluated impaired LHFI) using a fair value approach. The remaining nonaccrual LHFI, which primarily consist of consumer loans secured by 1-4 family residential property, are not specifically reviewed. Consumer loans secured by 1-4 family residential property are generally charged off or written down when the credit becomes severely delinquent and the balance exceeds the fair value of the property less costs to sell.
At September 30, 2016 and December 31, 2015, specifically evaluated impaired LHFI totaled $28.6 million and $26.5 million, respectively. Trustmark’s specifically evaluated impaired LHFI are primarily collateral dependent loans. Fair value estimates for collateral dependent loans are derived from appraised values based on the current market value or as is value of the collateral, normally from recently received and reviewed appraisals. Current appraisals are ordered on an annual basis based on the inspection date. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Trustmark’s Appraisal Review Department to ensure they are acceptable, and values are adjusted down for costs associated with asset disposal. Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated. At the time a specifically evaluated impaired LHFI is deemed to be impaired, the full difference between book value and the most likely estimate of the collateral’s net realizable value is charged off. Charge-offs related to specifically evaluated impaired LHFI totaled $5.0 million and $9.7 million for the first nine months of 2016 and 2015, respectively. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded. At September 30, 2016 and December 31, 2015, reserves related to specifically evaluated impaired LHFI totaled $4.5 million and $7.0 million, respectively. Provision recapture on specifically evaluated impaired LHFI totaled $2.0 million for the first nine months of 2016 compared to provision expense of $4.5 million for the first nine months of 2015.
At September 30, 2016 and December 31, 2015, impaired LHFI, excluding the specifically evaluated impaired LHFI, totaled $25.8 million and $28.8 million, respectively. In addition, these impaired LHFI had allocated allowance for loan losses of $2.3 million and $2.0 million at the end of the respective periods. No material interest income was recognized in the income statement on impaired LHFI for each of the periods ended September 30, 2016 and 2015.
The following tables detail LHFI individually and collectively evaluated for impairment at September 30, 2016 and December 31, 2015 ($ in thousands):
LHFI Evaluated for Impairment
Individually
Collectively
4,724
761,961
20,107
1,572,346
10,313
1,905,840
1,731
315,949
16,525
1,404,857
189
169,884
821
437,984
54,410
7,444,794
12
6,123
818,600
23,079
1,626,422
17,800
1,718,676
145
211,083
7,622
1,335,589
31
169,104
512
421,984
55,312
7,036,073
At September 30, 2016 and December 31, 2015, the carrying amount of LHFI individually evaluated for impairment consisted of the following ($ in thousands):
Unpaid
Principal
Balance
With No Related
Allowance
Recorded
With an
Carrying
Amount
Related
Average
Investment
8,186
3,113
1,611
453
5,424
25,160
495
19,612
1,514
21,593
11,633
1,312
9,001
2,316
14,058
1,782
1,000
731
90
938
18,203
12,055
4,470
2,305
12,073
193
111
966
154
667
66,123
17,975
36,435
6,834
54,864
11,113
3,395
2,728
909
9,995
27,678
22,796
1,230
24,350
20,387
8,037
9,763
3,402
21,758
160
15
732
9,880
1,137
6,485
3,304
9,863
34
59
642
128
570
69,894
12,852
42,460
8,988
67,327
A TDR occurs when a borrower is experiencing financial difficulties, and for related economic or legal reasons, a concession is granted to the borrower that Trustmark would not otherwise consider. Whatever the form of concession that might be granted by Trustmark, Management’s objective is to enhance collectability by obtaining more cash or other value from the borrower or by increasing the probability of receipt by granting the concession than by not granting it. Other concessions may arise from court proceedings or may be imposed by law. In addition, TDRs also include those credits that are extended or renewed to a borrower who is not able to obtain funds from sources other than Trustmark at a market interest rate for new debt with similar risk.
13
All loans whose terms have been modified in a troubled debt restructuring are evaluated for impairment under FASB ASC Topic 310. Accordingly, Trustmark measures any loss on the restructuring in accordance with that guidance. A TDR in which Trustmark receives physical possession of the borrower’s assets, regardless of whether formal foreclosure or repossession proceedings take place, is accounted for in accordance with FASB ASC Subtopic 310-40, “Troubled Debt Restructurings by Creditors.” Thus, the loan is treated as if assets have been received in satisfaction of the loan and reported as a foreclosed asset. At September 30, 2016 and December 31, 2015, Trustmark held $880 thousand and $1.0 million, respectively, of foreclosed residential real estate as a result of foreclosure or in substance repossession of consumer mortgage LHFI classified as TDRs. There were no consumer mortgage LHFI classified as TDRs in the process of formal foreclosure proceedings at September 30, 2016 compared to $83 thousand at December 31, 2015.
A TDR may be returned to accrual status if Trustmark is reasonably assured of repayment of principal and interest under the modified terms and the borrower has demonstrated sustained performance under those terms for a period of at least six months. Otherwise, the restructured loan must remain on nonaccrual.
At September 30, 2016 and 2015, LHFI classified as TDRs totaled $3.7 million and $11.2 million, respectively, and were comprised of credits with interest-only payments for an extended period of time which totaled $1.6 million and $7.5 million, respectively. The remaining TDRs at September 30, 2016 and 2015 resulted from real estate loans discharged through Chapter 7 bankruptcy that were not reaffirmed or from payment or maturity extensions.
For TDRs, Trustmark had a related loan loss allowance of $31 thousand and $1.2 million at September 30, 2016 and 2015, respectively. LHFI classified as TDRs are charged down to the most likely fair value estimate less an estimated cost to sell for collateral dependent loans, which would approximate net realizable value. Specific charge-offs related to TDRs for the nine months ended September 30, 2016 were $ 1.0 million compared to $806 thousand for the nine months ended September 30, 2015.
The following tables illustrate the impact of modifications classified as TDRs as well as those TDRs modified within the last 12 months for which there was a payment default during the period for the periods presented ($ in thousands):
Troubled Debt Restructurings
Number of
Contracts
Pre-Modification
Outstanding
Post-Modification
Loans secured by 1-4 family residential properties
35
Construction, land development and other land loans
1
14
740
Loans secured by nonfarm, nonresidential properties
3,512
756
4,007
TDRs that Subsequently Defaulted
101
243
Trustmark’s TDRs have resulted primarily from allowing the borrower to pay interest-only for an extended period of time rather than from forgiveness. Accordingly, as shown above, these TDRs have a similar recorded investment for both the pre-modification and post-modification disclosure. Trustmark has utilized loans 90 days or more past due to define payment default in determining TDRs that have subsequently defaulted.
The following tables detail LHFI classified as TDRs by loan type at September 30, 2016 and 2015 ($ in thousands):
Accruing
Nonaccrual
556
2,545
179
387
Total TDRs
3,669
September 30, 2015
1,006
1,385
2,921
4,306
819
4,503
5,322
62
477
2,204
8,969
11,173
Credit Quality Indicators
Trustmark’s loan portfolio credit quality indicators focus on six key quality ratios that are compared against bank tolerances. The loan indicators are total classified outstanding, total criticized outstanding, nonperforming loans, nonperforming assets, delinquencies and net loan losses. Due to the homogenous nature of consumer loans, Trustmark does not assign a formal internal risk rating to each credit and therefore the criticized and classified measures are primarily composed of commercial loans.
In addition to monitoring portfolio credit quality indicators, Trustmark also measures how effectively the lending process is being managed and risks are being identified. As part of an ongoing monitoring process, Trustmark grades the commercial portfolio as it relates to credit file completion and financial statement exceptions, underwriting, collateral documentation and compliance with law as shown below:
•
Credit File Completeness and Financial Statement Exceptions – evaluates the quality and condition of credit files in terms of content, completeness and organization and focuses on efforts to obtain and document sufficient information to determine the quality and status of credits. Also included is an evaluation of the systems/procedures used to insure compliance with policy.
Underwriting – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within loan policy requirements. A properly approved credit is approved by adequate authority in a timely manner with all conditions of approval fulfilled. Total policy exceptions measure the level of underwriting and other policy exceptions within a loan portfolio.
Collateral Documentation – focuses on the adequacy of documentation to perfect Trustmark’s collateral position and substantiate collateral value. Collateral exceptions measure the level of documentation exceptions within a loan portfolio. Collateral exceptions occur when certain collateral documentation is either not present, is not considered current or has expired.
Compliance with Law – focuses on underwriting, documentation, approval and reporting in compliance with banking laws and regulations. Primary emphasis is directed to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and Regulation O requirements.
Commercial Credits
Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to delineate the level of risk across the ten unique credit risk grades. Credit risk grade definitions are as follows:
Risk Rate (RR) 1 through RR 6 – Grades one through six represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risk measured by using a variety of credit risk criteria such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.
Other Assets Especially Mentioned (Special Mention) - (RR 7) – a loan that has a potential weakness that if not corrected will lead to a more severe rating. This rating is for credits that are currently protected but potentially weak because of an adverse feature or condition that if not corrected will lead to a further downgrade.
Substandard (RR 8) – a loan that has at least one identified weakness that is well defined. This rating is for credits where the primary sources of repayment are not viable at the time of evaluation or where either the capital or collateral is not adequate to support the loan and the secondary means of repayment do not provide a sufficient level of support to offset the identified weakness. Loss potential exists in the aggregate amount of substandard loans but does not necessarily exist in individual loans.
Doubtful (RR 9) – a loan with an identified weakness that does not have a valid secondary source of repayment. Generally these credits have an impaired primary source of repayment and secondary sources are not sufficient to prevent a loss in the credit. The exact amount of the loss has not been determined at this time.
Loss (RR 10) – a loan or a portion of a loan that is deemed to be uncollectible.
By definition, credit risk grades special mention (RR 7), substandard (RR 8), doubtful (RR 9) and loss (RR 10) are criticized loans while substandard (RR 8), doubtful (RR 9) and loss (RR 10) are classified loans. These definitions are standardized by all bank regulatory agencies and are generally equally applied to each individual lending institution. The remaining credit risk grades are considered pass credits and are solely defined by Trustmark.
Each commercial loan is assigned a credit risk grade that is an indication for the likelihood of default and is not a direct indication of loss at default. The loss at default aspect of the subject risk ratings is neither uniform across the nine primary commercial loan groups or constant between the geographic areas. To account for the variance in the loss at default aspects of the risk rating system, the loss expectations for each risk rating are integrated into the allowance for loan loss methodology where the calculated loss at default is allotted for each individual risk rating with respect to the individual loan group and unique geographic area. The loss at default aspect of the reserve methodology is calculated each quarter as a component of the overall reserve factor for each risk grade by loan group and geographic area.
To enhance this process, loans of a certain size that are rated in one of the criticized categories are routinely reviewed to establish an expectation of loss, if any, and if such examination indicates that the level of reserve is not adequate to cover the expectation of loss, a special reserve or impairment is generally applied.
The distribution of the losses is accomplished by means of a loss distribution model that assigns a loss factor to each risk rating (1 to 9) in each commercial loan pool. A factor is not applied to risk rate 10 as loans classified as Losses are charged off within the period that the loss is determined and are not carried on Trustmark’s books over quarter-end.
16
The expected loss distribution is spread across the various risk ratings by the perceived level of risk for loss. The nine grade scale described above ranges from a negligible risk of loss to an identified loss across its breadth. The loss distribution factors are graduated through the scale on a basis proportional to the degree of risk that appears manifest in each individual rating and assumes that migration through the loan grading system will occur.
Each loan officer assesses the appropriateness of the internal risk rating assigned to their credits on an ongoing basis. Trustmark’s Asset Review area conducts independent credit quality reviews of the majority of Trustmark’s commercial loan portfolio concentrations both on the underlying credit quality of each individual loan portfolio as well as the adherence to Trustmark’s loan policy and the loan administration process. In general, Asset Review conducts reviews of each lending area within a six to eighteen month window depending on the overall credit quality results of the individual area.
In addition to the ongoing internal risk rate monitoring described above, Trustmark’s Credit Quality Review Committee meets monthly and performs a review of all loans of $100 thousand or more that are either delinquent thirty days or more or on nonaccrual. This review includes recommendations regarding risk ratings, accrual status, charge-offs and appropriate servicing officer as well as evaluation of problem credits for determination of TDRs. Quarterly, the Credit Quality Review Committee reviews and modifies continuous action plans for all credits risk rated seven or worse for relationships of $100 thousand or more. In addition, the following reviews are performed on an annual basis:
Residential real estate developments - a development project analysis is performed on all projects regardless of size. Performance of the development is assessed through an evaluation of the number of lots remaining, payout ratios, and loan-to-value ratios. This analysis is reviewed by each senior credit officer for the respective market to determine the need for any risk rate or accrual status changes.
Non-owner occupied commercial real estate - a cash flow analysis is performed on all projects with an outstanding balance of $1.0 million or more. Confirmation is obtained that guarantor financial statements are current, taxes have been paid and there are no other issues that need to be addressed. This analysis is reviewed by each senior credit officer in the respective market to determine the need for any risk rate or accrual status changes.
Consumer Credits
Consumer LHFI that do not meet a minimum custom credit score are reviewed quarterly by Management. The Retail Credit Review Committee reviews the volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer to ensure that Trustmark continues to originate quality loans.
Trustmark monitors the levels and severity of past due consumer LHFI on a daily basis through its collection activities. A detailed assessment of consumer LHFI delinquencies is performed monthly at both a product and market level by delivery channel, which incorporates the perceived level of risk at time of underwriting. Trustmark also monitors its consumer LHFI delinquency trends by comparing them to quarterly industry averages.
The tables below illustrate the carrying amount of LHFI by credit quality indicator at September 30, 2016 and December 31, 2015 ($ in thousands):
Commercial LHFI
Pass -
Categories 1-6
Special Mention -
Category 7
Substandard -
Category 8
Doubtful -
Category 9
Subtotal
Construction, land development and other
land
687,123
8,494
9,410
469
705,496
Secured by 1-4 family residential
properties
124,472
467
6,262
361
131,562
Secured by nonfarm, nonresidential
1,870,036
3,196
41,668
494
1,915,394
314,858
1,957
316,815
1,304,137
9,094
107,405
746
858,168
6,450
11,355
429,403
340
2,232
432,617
5,588,197
28,041
180,289
2,712
5,799,239
17
Consumer LHFI
Current
Past Due
30-89 Days
90 Days or More
Total LHFI
60,546
176
61,189
1,435,347
8,173
717
16,654
1,460,891
759
865
167,817
1,845
218
6,188
1,671,522
10,194
935
17,314
1,699,965
746,227
15,637
529
762,393
125,268
345
7,525
190
133,328
1,680,846
2,031
52,485
1,735,723
205,097
4,768
209,865
1,295,760
9,473
37,284
694
713,616
12,478
8,521
414,089
183
2,663
375
417,310
5,180,903
24,510
128,883
2,149
5,336,445
62,158
146
62,330
1,485,914
7,565
2,058
20,636
1,516,173
753
1,363
166,681
2,182
242
30
5,186
1,722,055
9,893
2,300
20,692
1,754,940
18
Past Due LHFI
The following tables provide an aging analysis of past due and nonaccrual LHFI by loan type at September 30, 2016 and December 31, 2015 ($ in thousands):
30-59 Days
60-89 Days
90 Days
or More (1)
Loans
1,136
78
1,214
760,747
6,801
1,803
1,563,025
576
594
1,905,246
144
315,805
868
180
1,048
1,403,809
1,465
380
2,063
167,821
147
149
437,835
11,137
2,443
953
14,533
7,430,261
(1)
Past due 90 days or more but still accruing interest.
214
818,386
6,203
1,800
10,061
1,616,361
437
88
525
1,718,151
921
45
1,334,623
1,835
347
2,424
166,680
65
734,550
68
421,916
9,743
2,280
14,323
7,021,750
Past Due Loans Held for Sale (LHFS)
LHFS past due 90 days or more totaled $25.6 million and $21.8 million at September 30, 2016 and December 31, 2015, respectively. LHFS past due 90 days or more are serviced loans eligible for repurchase, which are fully guaranteed by the Government National Mortgage Association (GNMA). GNMA optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer’s option and without GNMA’s prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When Trustmark is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether Trustmark intends to exercise the buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings.
19
During the first quarter of 2015, Trustmark exercised its option to repurchase approximately $28.5 million of delinquent loans serviced for GNMA. These loans were subsequently sold to a third party under different repurchase provisions. Trustmark retained the servicing for these loans, which are subject to guarantees by FHA/VA. As a result of this repurchase and sale, the loans are no longer carried as LHFS. The transaction resulted in a gain of $304 thousand, which is included in mortgage banking, net for 2015. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first nine months of 2016.
Allowance for Loan Losses, LHFI
Trustmark’s allowance for loan loss methodology for commercial LHFI is based upon regulatory guidance from its primary regulator and GAAP. The methodology segregates the commercial purpose and commercial construction LHFI portfolios into nine separate loan types (or pools) which have similar characteristics such as repayment, collateral and risk profiles. The nine basic loan pools are further segregated into Trustmark’s five key market regions, Alabama, Florida, Mississippi, Tennessee and Texas, to take into consideration the uniqueness of each market. A 10-point risk rating system is utilized for each separate loan pool to apply a reserve factor consisting of quantitative and qualitative components to determine the needed allowance by each loan type. As a result, there are 450 risk rate factors for commercial loan types. The nine separate pools are shown below:
Commercial Purpose LHFI
Real Estate – Owner-Occupied
Real Estate – Non-Owner Occupied
Working Capital
Non-Working Capital
Land
Lots and Development
Political Subdivisions
Commercial Construction LHFI
1 to 4 Family
Non-1 to 4 Family
The quantitative factors of the allowance methodology reflect a twelve-quarter rolling average of net charge-offs by loan type within each key market region. This allows for a greater sensitivity to current trends, such as economic changes, as well as current loss profiles and creates a more accurate depiction of historical losses.
Qualitative factors used in the allowance methodology include the following:
National and regional economic trends and conditions
Impact of recent performance trends
Experience, ability and effectiveness of management
Adherence to Trustmark’s loan policies, procedures and internal controls
Collateral, financial and underwriting exception trends
Credit concentrations
Loan facility risk
Acquisitions
Catastrophe
20
Each qualitative factor is converted to a scale ranging from 0 (No risk) to 100 (High Risk), other than the last two factors, which are applied on a dollar-for-dollar basis to ensure that the combination of such factors is proportional. The resulting ratings from the individual factors are weighted and summed to establish the weighted-average qualitative factor within each key market region.
The allowance for loan loss methodology segregates the consumer LHFI portfolio into homogeneous pools of loans that contain similar structure, repayment, collateral and risk profiles. These homogeneous pools of loans are shown below:
Residential Mortgage
Direct Consumer
Junior Lien on 1-4 Family Residential Properties
Credit Cards
Overdrafts
The historical loss experience for these pools is determined by calculating a 12-quarter rolling average of net charge-offs, which is applied to each pool to establish the quantitative aspect of the methodology. Where, in Management’s estimation, the calculated loss experience does not fully cover the anticipated loss for a pool, an estimate is also applied to each pool to establish the qualitative aspect of the methodology, which represents the perceived risks across the loan portfolio at the current point in time. This qualitative methodology utilizes four separate factors made up of unique components that when weighted and combined produce an estimated level of reserve for each of the loan pools. The four qualitative factors include the following:
Economic indicators
Performance trends
Management experience
The risk measure for each factor is converted to a scale ranging from 0 (No risk) to 100 (High Risk) to ensure that the combination of such factors is proportional. The determination of the risk measurement for each qualitative factor is done for all markets combined. The resulting estimated reserve factor is then applied to each pool.
The resulting ratings from the individual factors are weighted and summed to establish the weighted-average qualitative factor of a specific loan portfolio. This weighted-average qualitative factor is then applied over the five loan pools.
Trustmark’s loan policy dictates the guidelines to be followed in determining when a loan is charged off. Commercial purpose loans are charged off when a determination is made that the loan is uncollectible and continuance as a bankable asset is not warranted or an impairment evaluation indicates that a value adjustment is necessary. Consumer loans secured by 1-4 family residential real estate are generally charged off or written down when the credit becomes severely delinquent and the balance exceeds the fair value of the property less costs to sell. Non-real estate consumer purpose loans, both secured and unsecured, are generally charged off in full during the month in which the loan becomes 120 days past due. Credit card loans are generally charged off in full when the loan becomes 180 days past due.
Changes in the allowance for loan losses, LHFI were as follows for the periods presented ($ in thousands):
Balance at beginning of period
71,796
71,166
69,616
Loans charged-off
(8,279
(11,406
(14,893
(18,688
Recoveries
3,070
3,333
9,022
9,347
Net charge-offs
(5,209
(8,073
(5,871
(9,341
Balance at end of period
65,607
21
The following tables detail the balance in the allowance for loan losses, LHFI by loan type at September 30, 2016 and 2015 ($ in thousands):
January 1,
Charge-offs
Provision for
Loan Losses
September 30,
11,587
(3,183
9,198
10,678
(1,129
680
172
10,401
21,563
(1,662
823
1,479
22,203
2,467
(213
2,259
15,815
(6,408
519
10,982
20,908
2,879
(1,398
3,397
3,027
809
877
1,821
(4,084
2,592
1,669
1,998
Total allowance for loan losses, LHFI
Disaggregated by Impairment Method
8,745
8,887
19,887
2,169
18,603
3,025
1,844
64,037
13,073
(2,236
395
12,506
9,677
(2,013
781
1,529
9,974
18,523
(1,282
397
(1,517
16,121
2,141
(24
(382
1,741
19,917
(7,243
1,553
5,109
19,336
(1,543
2,639
(1,166
2,079
1,314
(624
690
2,822
(4,347
2,697
1,988
3,160
2,054
10,452
267
9,707
2,602
13,519
28
1,713
16,380
200
2,960
8,107
57,500
22
Note 4 – Acquired Loans
At September 30, 2016 and December 31, 2015, acquired loans consisted of the following ($ in thousands):
Noncovered
Covered (1)
Covered
25,040
41,623
1,021
72,689
86,950
10,058
110,606
135,626
4,638
20,903
23,860
1,286
39,519
55,075
624
3,878
5,641
19,190
23,936
73
Acquired loans
11,330
50
11,259
733
280,495
3,862
361,452
16,967
Trustmark’s loss share agreement with the FDIC covering the acquired covered loans other than loans secured by 1-4 family residential properties expired on June 30, 2016. Trustmark’s loss share agreement with the FDIC covering the acquired covered loans secured by 1-4 family residential properties will expire in 2021. Effective July 1, 2016, all acquired covered loans excluding the acquired covered loans secured by 1-4 family residential properties were reclassified to acquired noncovered loans.
The following table presents changes in the net carrying value of the acquired loans for the periods presented ($ in thousands):
Acquired
Impaired
Not ASC
310-30 (1)
Carrying value, net at January 1, 2015
434,151
81,091
20,504
1,604
Accretion to interest income
28,193
479
2,308
Payments received, net
(164,671
(15,484
(8,592
(33
Other (2)
(1,589
391
Less change in allowance for loan losses, acquired loans
(718
785
Carrying value, net at December 31, 2015
295,366
66,086
15,396
1,571
Transfers (3)
9,157
446
(9,157
(446
13,498
40
853
(75,875
(28,861
(4,203
709
(414
(523
452
(454
Carrying value, net at September 30, 2016
242,332
38,163
3,612
"Acquired Not ASC 310-30" loans consist of revolving credit agreements and commercial leases that are not in scope for FASB ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality."
(2)
Includes miscellaneous timing adjustments as well as acquired loan terminations through foreclosure, charge-off and other terminations.
(3)
Covered acquired loans transferred to noncovered acquired loans as a result of expiration of the related indemnification agreement with the FDIC on June 30, 2016.
Under FASB ASC Topic 310-30, the accretable yield is the excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans and is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. The following table presents changes in the accretable yield for the periods presented ($ in thousands):
Accretable yield at beginning of period
(52,672
(77,149
14,351
24,907
Disposals
8,194
Reclassification from nonaccretable difference (1)
(7,046
(12,215
Accretable yield at end of period
(41,061
(56,263
Reclassifications from nonaccretable difference are due to lower loss expectations and improvements in expected cash flows.
The following tables present the components of the allowance for loan losses on acquired loans for the periods presented ($ in thousands):
Three Months Ended September 30, 2016
Nine Months Ended September 30, 2016
12,218
262
12,480
Transfers (1)
215
(215
686
2,969
(362
(2,590
(4,959
(82
(5,041
801
799
1,846
1,822
(1,789
(1,791
(3,113
(106
(3,219
Three Months Ended September 30, 2015
Nine Months Ended September 30, 2015
11,927
702
12,629
10,541
1,518
12,059
1,221
2,797
(369
(2,456
(110
(2,566
(5,024
(560
(5,584
725
141
866
3,103
Net (charge-offs) recoveries
(1,731
(1,700
(1,921
(381
(2,302
11,417
768
12,185
The allowance for loan losses on covered acquired loans other than loans secured by 1-4 family residential properties transferred to the allowance for loan losses on noncovered acquired loans as a result of expiration of the related indemnification agreement with the FDIC on June 30, 2016.
As discussed in Note 3 - Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI, Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to segregate the level of risk across the ten unique risk ratings. These credit quality measures are unique to commercial loans. Credit quality for consumer loans is based on individual credit scores, aging status of the loan and payment activity.
24
The tables below illustrate the carrying amount of acquired loans by credit quality indicator at September 30, 2016 and December 31, 2015 ($ in thousands):
Commercial Loans
Noncovered Loans:
Construction, land development
and other land
14,624
117
7,900
322
22,963
Secured by 1-4 family
residential properties
17,629
56
4,249
22,244
Secured by nonfarm,
nonresidential properties
88,799
1,071
20,167
516
110,553
16,313
3,482
673
20,468
14,230
1,406
13,361
5,665
162
19,188
Total noncovered loans
174,586
1,267
55,693
3,389
234,935
Covered Loans: (1)
185
60
Total covered loans
Total acquired loans
174,771
1,279
55,753
235,192
25
Consumer Loans
Nonaccrual (2)
Acquired Loans
2,066
2,077
47,666
1,783
94
50,445
53
3,825
48
54,047
1,834
915
56,890
3,311
136
208
3,655
57,358
1,970
1,123
60,545
295,737
Total dollar balances are presented in this table; however, these loans are covered by the loss-share agreement with the FDIC. TNB is at risk for only 20% of the losses incurred on these loans.
Acquired loans not accounted for under FASB ASC Topic 310-30.
15,839
253
19,252
3,874
39,218
22,272
27
5,033
331
27,663
106,924
2,301
25,690
711
19,346
3,777
23,854
36,670
844
15,526
2,035
17,150
6,624
218,201
3,425
75,902
7,844
305,372
235
588
119
942
869
107
534
1,510
4,060
472
4,567
730
841
560
42
70
6,524
164
1,747
8,554
224,725
3,589
77,649
7,963
313,926
2,353
2,405
56,371
1,841
930
59,287
5,498
142
64,228
2,007
959
67,339
7,472
314
762
8,548
71
445
8,061
323
9,146
72,289
2,330
1,721
76,485
390,411
At September 30, 2016 and December 31, 2015, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At September 30, 2016, approximately $653 thousand of acquired loans not accounted for under FASB ASC Topic 310-30 were classified as nonaccrual loans, compared to approximately $1.0 million of acquired loans at December 31, 2015.
The following tables provide an aging analysis of contractually past due and nonaccrual acquired loans, by loan type at September 30, 2016 and December 31, 2015 ($ in thousands):
Total Acquired
Noncovered loans:
203
889
1,104
1,679
333
934
2,946
112
69,631
225
857
1,114
338
109,154
1,458
1,570
19,333
832
33
38,450
3,099
410
4,144
7,653
283,519
Covered loans:
55
81
344
3,568
3,154
491
4,352
7,997
287,087
29
Construction, land development and
other land
114
13,021
13,159
28,464
1,544
636
1,220
3,400
83,163
192
195
5,913
6,300
129,182
737
23,114
82
184
270
429
54,376
143
85
23,835
2,055
988
21,076
24,119
960
347,632
893
428
132
978
1,538
8,520
167
478
645
3,993
51
610
1,097
2,311
15,338
2,659
1,598
22,173
26,430
1,011
362,970
Note 5 – Mortgage Banking
The activity in the mortgage servicing rights (MSR) is detailed in the table below for the periods presented ($ in thousands):
64,358
Origination of servicing assets
12,392
13,320
Change in fair value:
Due to market changes
(13,518
(433
Due to run-off
(7,367
(7,436
69,809
During the first nine months of 2016 and 2015, Trustmark sold $1.016 billion and $930.5 million, respectively, of residential mortgage loans. Pretax gains on these sales were recorded to noninterest income in mortgage banking, net and totaled $14.5 million for the first nine months of 2016 compared to $13.3 million for the first nine months of 2015. The table below details the mortgage loans sold and serviced for others at September 30, 2016 and December 31, 2015 ($ in thousands):
Federal National Mortgage Association
3,933,746
3,750,685
Government National Mortgage Association
2,238,400
2,111,797
Federal Home Loan Mortgage Corporation
58,236
67,817
Other
34,214
41,013
Total mortgage loans sold and serviced for others
6,264,596
5,971,312
Trustmark is subject to losses in its loan servicing portfolio due to loan foreclosures. Trustmark has obligations to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loan sold was in violation of representations or warranties made by Trustmark at the time of the sale, herein referred to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that had missing or insufficient file documentation, loans that do not meet investor guidelines, loans in which the appraisal does not support the value and/or loans obtained through fraud by the borrowers or other third parties. Generally, putback requests may be made until the loan is paid in full. However, mortgage loans delivered to Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) on or after January 1, 2013 are subject to the Lending and Selling Representations and Warranties Framework updated in May 2014, which provides certain instances in which FNMA and FHLMC will not exercise their remedies, including a putback request, for breaches of certain selling representations and warranties, such as payment history and quality control review.
When a putback request is received, Trustmark evaluates the request and takes appropriate actions based on the nature of the request. Effective January 1, 2013, Trustmark was required by FNMA and FHLMC to provide a response to putback requests within 60 days of the date of receipt. Currently, putback requests primarily relate to 2009 through 2013 vintage mortgage loans. The total mortgage loan servicing putback expenses incurred by Trustmark during the first nine months of 2016 were $315 thousand compared to $210 thousand during the same time period in 2015.
Changes in the reserve for mortgage loan servicing putback expense for mortgage loans delivered to FNMA in periods not covered by the November 2013 Resolution Agreement between Trustmark and FNMA and to other entities were as follows for the periods presented ($ in thousands):
1,685
1,170
Provision for putback expenses
315
210
(Losses) gains
(944
211
1,056
1,591
There is inherent uncertainty in reasonably estimating the requirement for reserves against potential future mortgage loan servicing putback expenses. Future putback expenses are dependent on many subjective factors, including the review procedures of the purchasers and the potential refinance activity on loans sold with servicing released and the subsequent consequences under the representations and warranties. Trustmark believes that it has appropriately reserved for potential mortgage loan servicing putback requests.
Note 6 –Other Real Estate and Covered Other Real Estate
Other Real Estate, excluding Covered Other Real Estate
At September 30, 2016, Trustmark’s geographic other real estate distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. The ultimate recovery of a substantial portion of the carrying amount of other real estate, excluding covered other real estate, is susceptible to changes in market conditions in these areas.
For the periods presented, changes and gains, net on other real estate, excluding covered other real estate, were as follows ($ in thousands):
92,509
Additions
21,972
26,832
(30,494
(33,015
Write-downs
(3,662
(2,371
83,955
Gain, net on the sale of other real estate included in
other real estate expense
5,350
2,116
At September 30, 2016 and December 31, 2015, other real estate, excluding covered other real estate, by type of property consisted of the following ($ in thousands):
Construction, land development and other land properties
38,345
47,550
1-4 family residential properties
10,732
Nonfarm, nonresidential properties
18,611
16,717
Other real estate properties
2,178
Total other real estate, excluding covered other real estate
At September 30, 2016 and December 31, 2015, other real estate, excluding covered other real estate, by geographic location consisted of the following ($ in thousands):
Alabama
15,574
21,578
Florida
25,147
29,579
Mississippi (1)
16,659
14,312
Tennessee (2)
6,061
Texas
1,552
1,734
Mississippi includes Central and Southern Mississippi Regions
Tennessee includes Memphis, Tennessee and Northern Mississippi Regions
Covered Other Real Estate
On July 1, 2016, $388 thousand of covered other real estate was transferred to other real estate, excluding covered other real estate, as a result of the expiration of a loss-share agreement with the FDIC on June 30, 2016. As of September 30, 2016, Trustmark had no covered other real estate. The remaining loss-share agreement with the FDIC, which covers loans secured by 1-4 family residential properties, will expire in 2021. Should a loan covered by the remaining loss-share agreement be foreclosed, the related property will be classified as covered other real estate.
For the periods presented, changes and gains (losses), net on covered other real estate were as follows ($ in thousands):
6,060
Transfers from covered loans
456
266
FASB ASC 310-30 adjustment for the residual recorded
investment
(902
Net transfers from covered loans
444
(636
(1,679
(1,404
Transfers to noncovered other real estate
(388
(28
(1,155
2,865
Gain (loss), net on the sale of covered other real estate included in
At September 30, 2016 and December 31, 2015, covered other real estate by type of property consisted of the following ($ in thousands):
638
Total covered other real estate
Note 7 – Deposits
At September 30, 2016 and December 31, 2015, deposits consisted of the following ($ in thousands):
Noninterest-bearing demand
Interest-bearing demand
1,783,655
1,938,497
Savings
3,133,286
2,970,997
Time
1,657,157
1,680,042
Note 8 – Securities Sold Under Repurchase Agreements
Trustmark utilizes securities sold under repurchase agreements as a source of borrowing in connection with overnight repurchase agreements offered to commercial deposit customers by using its unencumbered investment securities as collateral. Trustmark accounts for its securities sold under repurchase agreements as secured borrowings in accordance with FASB ASC Topic 860-30, “Transfers and Servicing – Secured Borrowing and Collateral.” Securities sold under repurchase agreements are stated at the amount of cash received in connection with the transaction. Trustmark monitors collateral levels on a continual basis and may be required to provide additional collateral based on the fair value of the underlying securities. Trustmark’s repurchase agreements are transacted under master repurchase agreements that give Trustmark, in the event of default by the counterparty, the right of offset with the same counterparty. As of September 30, 2016, all repurchase agreements were short-term and consisted primarily of sweep repurchase arrangements, under which excess deposits are “swept” into overnight repurchase agreements with Trustmark. The following table presents the securities sold under repurchase agreements by collateral pledged at September 30, 2016 and December 31, 2015 ($ in thousands):
Issued by U.S. Government sponsored agencies
22,516
Issued or guaranteed by FNMA, FHLMC or GNMA
122,865
102,604
41,067
Total securities sold under repurchase agreements
163,932
125,120
Note 9 – Defined Benefit and Other Postretirement Benefits
Qualified Pension Plans
Trustmark maintains a noncontributory tax-qualified defined benefit pension plan (Trustmark Capital Accumulation Plan, the “Plan”), in which substantially all associates who began employment prior to 2007 participate. The Plan provides retirement benefits that are based on the length of credited service and final average compensation, as defined in the Plan, and vest upon three years of service. Benefit accruals under the plan have been frozen since 2009, with the exception of certain associates covered through plans obtained in acquisitions that were subsequently merged into the Plan. Other than the associates covered through these acquired plans that were merged into the Plan, associates have not earned additional benefits, except for interest as required by law, since the Plan was frozen. Current and former associates who participate in the Plan retain their right to receive benefits that accrued before the Plan was frozen.
On July 26, 2016, the Board of Directors of Trustmark authorized the termination of the Plan, effective as of December 31, 2016. To satisfy commitments made by Trustmark to associates (collectively, the “Continuing Associates”) covered through acquired plans that were merged into the Plan, the Board also approved the spin-off of the portion of the Plan associated with the accrued benefits of the Continuing Associates into a new plan titled the Trustmark Corporation Pension Plan for Certain Employees of Acquired Financial Institutions (the “Spin-Off Plan”), effective as of December 31, 2016, immediately prior to the termination of the Plan.
In order to terminate the Plan, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, Trustmark is required to fully fund the Plan on a termination basis and will contribute the additional assets necessary to do so. The final distributions will be made from current plan assets and a one-time pension settlement expense will be recognized when paid by Trustmark during the second quarter of 2017. Further, as a result of Trustmark’s de-risking investment strategy for the Plan as of June 30, 2016, the expected rate of return on plan assets during the second half of 2016 will decrease from 6.0% to 2.5%. Accordingly, Trustmark's increased periodic benefit costs for the Plan during the third quarter of 2016 was $664 thousand. Participants in the Plan will have a choice of receiving a lump sum cash payment or annuity payments under a group annuity contract purchased from an insurance carrier, subject to certain exceptions. As a result of the termination of the Plan, each participant will become fully vested in his or her accrued benefits under the Plan.
The Board reserved the right to defer or revoke the termination of the Plan if circumstances change such that deferral or revocation would be warranted, but has no intent to do so at this time.
The following table presents information regarding the net periodic benefit cost for the Plan for the periods presented ($ in thousands):
Service cost
106
127
Interest cost
847
867
2,507
2,593
Expected return on plan assets
(426
(1,297
(2,470
(3,890
Recognized net loss due to lump sum settlements
463
603
3,134
1,499
Recognized net actuarial loss
714
2,907
Net periodic benefit cost
1,704
1,269
5,528
3,496
The range of potential contributions to the Plan is determined annually by the Plan’s actuary in accordance with applicable IRS rules and regulations. Trustmark’s policy is to fund amounts that are sufficient to satisfy the annual minimum funding requirements and do not exceed the maximum that is deductible for federal income tax purposes. The actual amount of the contribution is determined annually based on the Plan’s funded status and return on plan assets as of the measurement date, which is December 31. For the plan year ending December 31, 2016, Trustmark’s minimum required contribution to the Plan is expected to be zero; however, Management and the Board of Directors of Trustmark will monitor the Plan throughout 2016 to determine any additional funding requirements by the Plan’s measurement date.
Supplemental Retirement Plans
Trustmark maintains a nonqualified supplemental retirement plan covering key executive officers and senior officers as well as directors who have elected to defer fees. The plan provides for retirement and/or death benefits based on a participant’s covered salary or deferred fees. Although plan benefits may be paid from Trustmark’s general assets, Trustmark has purchased life insurance contracts on the participants covered under the plan, which may be used to fund future benefit payments under the plan. The measurement date for the plan is December 31. As a result of the BancTrust merger on February 15, 2013, Trustmark became the administrator of an additional nonqualified supplemental retirement plan, for which the plan benefits were frozen prior to the merger date.
The following table presents information regarding the net periodic benefit cost for Trustmark’s nonqualified supplemental retirement plans for the periods presented ($ in thousands):
221
542
520
1,630
1,563
Amortization of prior service cost
63
188
246
649
745
892
936
2,688
2,819
Note 10 – Stock and Incentive Compensation Plans
Trustmark has granted stock and incentive compensation awards subject to the provisions of the Stock and Incentive Compensation Plan (the Stock Plan). Current outstanding and future grants of stock and incentive compensation awards are subject to the provisions of the Stock Plan, which is designed to provide flexibility to Trustmark regarding its ability to motivate, attract and retain the services of key associates and directors. The Stock Plan also allows Trustmark to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance units to key associates and directors.
Restricted Stock Grants
Performance Awards
Trustmark’s performance awards vest over three years and are granted to Trustmark’s executive and senior management teams. Performance awards granted vest based on performance goals of return on average tangible equity and total shareholder return compared to a defined peer group. Performance awards are valued utilizing a Monte Carlo simulation model to estimate fair value of the awards at the grant date. These awards are recognized using the straight-line method over the requisite service period. These awards provide for achievement shares if performance measures exceed 100%. The restricted share agreement provides for voting rights and dividend privileges.
Time-Vested Awards
Trustmark’s time-vested awards vest over three years and are granted to members of Trustmark’s Board of Directors as well as Trustmark’s executive and senior management teams. Time-vested awards are valued utilizing the fair value of Trustmark’s stock at the grant date. These awards are recognized on the straight-line method over the requisite service period.
The following table summarizes the Stock Plan activity for the periods presented:
Performance
Awards
Time-Vested
Nonvested shares, beginning of period
239,006
327,197
Granted
2,000
Released from restriction
(1,587
(3,379
Forfeited
(283
(917
Nonvested shares, end of period
237,136
324,901
212,309
306,657
99,116
139,291
(40,888
(105,717
(33,401
(15,330
The following table presents information regarding compensation expense for awards under the Stock Plan for the periods presented ($ in thousands):
Performance awards
382
319
789
883
Time-vested awards
559
1,952
1,855
Total compensation expense
941
957
Note 11 – Contingencies
Lending Related
Trustmark makes commitments to extend credit and issues standby and commercial letters of credit (letters of credit) in the normal course of business in order to fulfill the financing needs of its customers. The carrying amount of commitments to extend credit and letters of credit approximates the fair value of such financial instruments. These amounts are not material to Trustmark’s financial statements.
Commitments to extend credit are agreements to lend money to customers pursuant to certain specified conditions. Commitments generally have fixed expiration dates or other termination clauses. Because many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit is represented by the contract amount of those instruments. Trustmark applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based upon the assessed creditworthiness of the borrower. At September 30, 2016 and 2015, Trustmark had unused commitments to extend credit of $3.110 billion and $2.724 billion, respectively.
Letters of credit are conditional commitments issued by Trustmark to insure the performance of a customer to a third-party. A financial standby letter of credit irrevocably obligates Trustmark to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument. A performance standby letter of credit irrevocably obligates Trustmark to pay a third-party beneficiary when a customer fails to perform some contractual, nonfinancial obligation. When issuing letters of credit, Trustmark uses essentially the same policies regarding credit risk and collateral, which are followed in the lending process. At September 30, 2016 and 2015, Trustmark’s maximum exposure to credit loss in the event of nonperformance by the other party for letters of credit was $113.5 million and $132.2 million, respectively. These amounts consist primarily of commitments with maturities of less than three years, which have an immaterial carrying value. Trustmark holds collateral to support standby letters of credit when deemed necessary. As of September 30, 2016 and 2015, the fair value of collateral held was $27.7 million and $31.7 million, respectively.
36
Legal Proceedings
Trustmark’s wholly-owned subsidiary, TNB, has been named as a defendant in three lawsuits related to the collapse of the Stanford Financial Group. The first is a purported class action complaint that was filed on August 23, 2009 in the District Court of Harris County, Texas, by Peggy Roif Rotstain, Guthrie Abbott, Catherine Burnell, Steven Queyrouze, Jaime Alexis Arroyo Bornstein and Juan C. Olano (collectively, Class Plaintiffs), on behalf of themselves and all others similarly situated, naming TNB and four other financial institutions unaffiliated with Trustmark as defendants. The complaint seeks to recover (i) alleged fraudulent transfers from each of the defendants in the amount of fees and other monies received by each defendant from entities controlled by R. Allen Stanford (collectively, the Stanford Financial Group) and (ii) damages allegedly attributable to alleged conspiracies by one or more of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud on the asserted grounds that defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme. Plaintiffs have demanded a jury trial. Plaintiffs did not quantify damages.
In November 2009, the lawsuit was removed to federal court by certain defendants and then transferred by the United States Panel on Multidistrict Litigation to federal court in the Northern District of Texas (Dallas) where multiple Stanford related matters are being consolidated for pre-trial proceedings. In May 2010, all defendants (including TNB) filed motions to dismiss the lawsuit. In August 2010, the court authorized and approved the formation of an Official Stanford Investors Committee (OSIC) to represent the interests of Stanford investors and, under certain circumstances, to file legal actions for the benefit of Stanford investors. In December 2011, the OSIC filed a motion to intervene in this action. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues. In December 2012, the court granted the OSIC’s motion to intervene, and the OSIC filed an Intervenor Complaint against one of the other defendant financial institutions. In February 2013, the OSIC filed a second Intervenor Complaint that asserts claims against TNB and the remaining defendant financial institutions. The OSIC seeks to recover: (i) alleged fraudulent transfers in the amount of the fees each of the defendants allegedly received from Stanford Financial Group, the profits each of the defendants allegedly made from Stanford Financial Group deposits, and other monies each of the defendants allegedly received from Stanford Financial Group; (ii) damages attributable to alleged conspiracies by each of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud and conversion on the asserted grounds that the defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme; and (iii) punitive damages. The OSIC did not quantify damages.
In July 2013, all defendants (including TNB) filed motions to dismiss the OSIC’s claims. In March 2015, the court entered an order authorizing the parties to conduct discovery regarding class certification and setting a deadline for the parties to complete briefing on class certification issues. In April 2015, the court granted in part and denied in part the defendants’ motions to dismiss the Class Plaintiffs’ claims and the OSIC’s claims. The court dismissed all of the Class Plaintiffs’ fraudulent transfer claims and dismissed certain of the OSIC’s claims. The court denied the motions by TNB and the other financial institution defendants to dismiss the OSIC’s constructive fraudulent transfer claims.
On June 23, 2015, the court allowed the Class Plaintiffs to file a Second Amended Class Action Complaint (SAC), which asserted new claims against TNB and certain of the other defendants for (i) aiding, abetting and participating in a fraudulent scheme, (ii) aiding, abetting and participating in violations of the Texas Securities Act, (iii) aiding, abetting and participating in breaches of fiduciary duty, (iv) aiding, abetting and participating in conversion and (v) conspiracy. On July 14, 2015, the defendants (including TNB) filed motions to dismiss the SAC and to reconsider the court’s prior denial to dismiss the OSIC’s constructive fraudulent transfer claims against TNB and the other financial institutions that are defendants in the action. On July 27, 2016, the court denied the motion by TNB and the other financial institution defendants to dismiss the SAC and also denied the motion by TNB and the other financial institution defendants to reconsider the court’s prior denial to dismiss the OSIC’s constructive fraudulent transfer claims. On August 24, 2016, TNB filed its answer to the SAC.
The second Stanford-related lawsuit was filed on December 14, 2009 in the District Court of Ascension Parish, Louisiana, individually by Harold Jackson, Paul Blaine, Carolyn Bass Smith, Christine Nichols, and Ronald and Ramona Hebert naming TNB (misnamed as Trust National Bank) and other individuals and entities not affiliated with Trustmark as defendants. The complaint seeks to recover the money lost by these individual plaintiffs as a result of the collapse of the Stanford Financial Group (in addition to other damages) under various theories and causes of action, including negligence, breach of contract, breach of fiduciary duty, negligent misrepresentation, detrimental reliance, conspiracy, and violation of Louisiana’s uniform fiduciary, securities, and racketeering laws. The complaint does not quantify the amount of money the plaintiffs seek to recover. In January 2010, the lawsuit was removed to federal court by certain defendants and then transferred by the United States Panel on Multidistrict Litigation to federal court in the Northern District of Texas (Dallas) where multiple Stanford related matters are being consolidated for pre-trial proceedings. On March 29, 2010, the court stayed the case. TNB filed a motion to lift the stay, which was denied on February 28, 2012. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues.
37
On April 11, 2016, Trustmark learned that a third Stanford-related lawsuit had been filed on April 11, 2016 in the Superior Court of Justice in Ontario, Canada, by The Toronto-Dominion Bank (“TD Bank”), naming TNB and three other financial institutions not affiliated with Trustmark as defendants. The complaint seeks a declaration specifying the degree to which each of TNB and the other defendants are liable in respect of any loss and damage for which TD Bank is found to be liable in a litigation commenced against TD Bank brought by the Joint Liquidators of Stanford International Bank Limited in the Superior Court of Justice, Commercial List in Ontario, Canada (the “Joint Liquidators’ Action”), as well as contribution and indemnity in respect of any judgment, interest and costs TD Bank is ordered to pay in the Joint Liquidators’ Action. To date, TNB has not been served in connection with this action.
TNB’s relationship with the Stanford Financial Group began as a result of Trustmark’s acquisition of a Houston-based bank in August 2006, and consisted of correspondent banking and other traditional banking services in the ordinary course of business. All Stanford-related lawsuits are in pre-trial stages.
TNB has been named as a defendant in two separately filed but now consolidated lawsuits involving two testamentary trusts created in the will of Kathleen Killebrew Paine for her two children, Carolyn Paine Davis and W.K. Paine. TNB is named as the Trustee in both trusts. The lawsuits were filed on June 30, 2014 in the Chancery Court of the First Judicial District of Hinds County, Mississippi by Jennifer Davis Michael, Elizabeth Paine Lindigrin, Wilmer Harrison Paine, Kenneth Whitworth Paine, Robert Harvey Paine and Nathan Davis, who are all children of Mrs. Davis and Mr. Paine. The complaints allege that the plaintiffs are vested current beneficiaries of the respective trusts; that the plaintiffs should have been entitled to be considered for distributions of trust income; and that the interests of Mrs. Davis and Mr. Paine were favored over plaintiffs’ interest in both the distribution of income and in the making of trust investments. Plaintiffs seek compensatory damages, refund of trust fees and sweep fees, punitive damages, attorneys’ fees and pre- and post-judgment interest. On March 9, 2015, the court granted TNB’s motion to add Mrs. Davis and Mr. W.K. Paine as cross-defendants. Following a bench trial that concluded on January 20, 2016, the judge ordered the parties to enter into mandatory mediation. On February 22, 2016, the mediator reported to the judge that the mediation had failed to resolve the matter. All post-trial briefings have been completed by the parties and submitted to the court. The judge will consider those submissions and then enter a ruling on the case at some point in the future.
Trustmark and its subsidiaries are also parties to other lawsuits and other claims that arise in the ordinary course of business. Some of the lawsuits assert claims related to the lending, collection, servicing, investment, trust and other business activities, and some of the lawsuits allege substantial claims for damages.
All pending legal proceedings described above are being vigorously contested. In accordance FASB ASC Topic 450-20, “Loss Contingencies,” Trustmark will establish an accrued liability for litigation matters when those matters present loss contingencies that are both probable and reasonably estimable. At the present time, Trustmark believes, based on its evaluation and the advice of legal counsel, that a loss in any such proceeding is not both probable and reasonably estimable.
Note 12 – Earnings Per Share (EPS)
The following table reflects weighted-average shares used to calculate basic and diluted EPS for the periods presented (in thousands):
Basic shares
67,625
67,557
67,618
67,547
Dilutive shares
168
150
153
Diluted shares
67,793
67,707
67,771
67,677
Weighted-average antidilutive stock awards were excluded in determining diluted EPS. The following table reflects weighted-average
antidilutive stock awards for the periods presented (in thousands):
Weighted-average antidilutive stock awards
38
Note 13 – Statements of Cash Flows
The following table reflects specific transaction amounts for the periods presented ($ in thousands):
Income taxes paid
24,646
15,291
Interest expense paid on deposits and borrowings
17,132
14,639
Noncash transfers from loans to other real estate (1)
26,196
Includes transfers from covered loans to covered other real estate.
Note 14 – Shareholders’ Equity
Regulatory Capital
Trustmark and TNB are subject to minimum risk-based capital and leverage capital requirements, as described in the section captioned “Capital Adequacy” included in Part I. Item 1. – Business of Trustmark’s 2015 Annual Report on Form 10-K, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Effective January 1, 2016, Trustmark’s and TNB’s minimum risk-based capital requirements include the year-one phased in capital conservation buffer of 0.625%. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of Trustmark and TNB and limit Trustmark’s and TNB’s ability to pay dividends. As of September 30, 2016, Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered well-capitalized at September 30, 2016. To be categorized in this manner, Trustmark and TNB maintained minimum common equity Tier 1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and Tier 1 leverage ratios as set forth in the accompanying table, and were not subject to any written agreement, order or capital directive, or prompt corrective action directive issued by their primary federal regulators to meet and maintain a specific capital level for any capital measures. There are no significant conditions or events that have occurred since September 30, 2016, which Management believes have affected Trustmark’s or TNB’s present classification.
The following table provides Trustmark’s and TNB’s actual regulatory capital amounts and ratios under regulatory capital standards in effect at September 30, 2016 and December 31, 2015 ($ in thousands):
Actual
Minimum
To Be Well
Ratio
Requirement
Capitalized
At September 30, 2016:
Common Equity Tier 1 Capital (to Risk Weighted Assets)
1,194,729
12.35
%
5.125
n/a
Trustmark National Bank
1,235,923
12.78
6.50
Tier 1 Capital (to Risk Weighted Assets)
1,254,453
12.97
6.625
8.00
Total Capital (to Risk Weighted Assets)
1,336,704
13.82
8.625
1,318,174
13.63
10.00
Tier 1 Leverage (to Average Assets)
9.92
4.00
9.79
5.00
At December 31, 2015:
1,161,598
12.57
4.50
1,201,113
13.00
1,220,535
13.21
6.00
1,300,146
14.07
1,280,724
13.86
10.03
9.89
Stock Repurchase Program
On March 11, 2016, the Board of Directors of Trustmark authorized a stock repurchase program under which $100.0 million of Trustmark’s outstanding common stock may be acquired through March 31, 2019. The shares may be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Trustmark did not repurchase any shares of its common stock during the three months ended September 30, 2016. Trustmark repurchased approximately 34 thousand shares of its common stock during the nine months ended September 30, 2016.
Other Comprehensive Income and Accumulated Other Comprehensive Loss
The following table presents the components of accumulated other comprehensive loss and the related tax effects allocated to each component for the three and nine months ended September 30, 2016 and 2015 ($ in thousands). Reclassification adjustments related to securities available for sale are included in security losses, net in the accompanying consolidated statements of income. The amortization of prior service cost, recognized net loss due to lump sum settlements and change in net actuarial loss on pension and other postretirement benefit plans are included in the computation of net periodic benefit cost (see Note 9 – Defined Benefit and Other Postretirement Benefits for additional details). Reclassification adjustments related to pension and other postretirement benefit plans are included in salaries and employee benefits in the accompanying consolidated statements of income. Reclassification adjustments related to the cash flow hedge derivative are included in other interest expense in the accompanying consolidated statements of income.
Before Tax
Tax (Expense)
Benefit
Net of Tax
Securities available for sale and transferred securities:
Unrealized holding (losses) gains arising during
the period
(12,657
4,841
17,872
(6,837
Reclassification adjustment for net losses realized
in net income
Change in net unrealized holding loss on
securities transferred to held to maturity
2,677
(1,024
1,678
(642
Total securities available for sale
and transferred securities
(9,980
3,817
(6,163
19,550
(7,479
12,071
(177
(230
928
(355
1,216
(465
Reclassification related to net losses realized
1,454
(556
898
1,882
(719
1,163
Cash flow hedge derivatives:
Change in accumulated loss on effective cash flow
417
(160
(1,216
465
Reclassification adjustment for loss realized
157
Total cash flow hedge derivatives
574
(220
354
(1,005
384
(621
Total other comprehensive (loss) income
(7,952
3,041
20,427
(7,814
41
Unrealized holding gains arising during
32,057
(12,261
13,718
(5,248
8,374
(3,203
4,747
(1,816
40,741
(15,583
25,158
18,465
(7,064
11,401
(72
(1,199
(573
2,684
(1,026
3,653
(1,397
6,006
(2,297
3,709
5,340
(2,042
3,298
(1,360
(1,919
734
473
(181
632
(242
(887
339
(548
(1,287
492
(795
Total other comprehensive income
45,860
(17,541
22,518
(8,614
The following table presents the changes in the balances of each component of accumulated other comprehensive loss for the periods presented ($ in thousands). All amounts are presented net of tax.
and Transferred
Defined
Pension Items
Cash Flow
Hedge
Derivatives
Balance at January 1, 2016
(17,394
(27,840
Other comprehensive income (loss) before reclassification
24,967
24,127
Amounts reclassified from accumulated other
comprehensive loss
4,192
Net other comprehensive income (loss)
Balance at September 30, 2016
7,764
(24,131
(708
Balance at January 1, 2015
(11,003
(31,617
(42,484
Other comprehensive (loss) income before reclassification
13,514
Balance at September 30, 2015
398
(28,319
(659
(28,580
Note 15 – Fair Value
Financial Instruments Measured at Fair Value
The methodologies Trustmark uses in determining the fair values are based primarily on the use of independent, market-based data to reflect a value that would be reasonably expected upon exchange of the position in an orderly transaction between market participants at the measurement date. The predominant portion of assets that are stated at fair value are of a nature that can be valued using prices or inputs that are readily observable through a variety of independent data providers. The providers selected by Trustmark for fair valuation data are widely recognized and accepted vendors whose evaluations support the pricing functions of financial institutions, investment and mutual funds, and portfolio managers. Trustmark has documented and evaluated the pricing methodologies used by the vendors and maintains internal processes that regularly test valuations for anomalies.
Trustmark utilizes an independent pricing service to advise it on the carrying value of the securities available for sale portfolio. As part of Trustmark’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, Trustmark investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. Trustmark has also reviewed and confirmed its determinations in thorough discussions with the pricing source regarding their methods of price discovery.
Mortgage loan commitments are valued based on the securities prices of similar collateral, term, rate and delivery for which the loan is eligible to deliver in place of the particular security. Trustmark acquires a broad array of mortgage security prices that are supplied by a market data vendor, which in turn accumulates prices from a broad list of securities dealers. Prices are processed through a mortgage pipeline management system that accumulates and segregates all loan commitment and forward-sale transactions according to the similarity of various characteristics (maturity, term, rate, and collateral). Prices are matched to those positions that are deemed to be an eligible substitute or offset (i.e., “deliverable”) for a corresponding security observed in the market place.
Trustmark estimates fair value of the MSR through the use of prevailing market participant assumptions and market participant valuation processes. This valuation is periodically tested and validated against other third-party firm valuations.
Trustmark obtains the fair value of interest rate swaps from a third-party pricing service that uses an industry standard discounted cash flow methodology. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its interest rate swap contracts for the effect of nonperformance risk, Trustmark has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB’s fair value measurement guidance, Trustmark made an accounting policy election to measure the credit risk of these derivative financial instruments, which are subject to master netting agreements, on a net basis by counterparty portfolio.
Trustmark has determined that the majority of the inputs used to value its interest rate swaps offered to qualified commercial borrowers fall within Level 2 of the fair value hierarchy, while the credit valuation adjustments associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads. Trustmark has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate swaps and has determined that the credit valuation adjustment is not significant to the overall valuation of these derivatives. As a result, Trustmark classifies its interest rate swap valuations in Level 2 of the fair value hierarchy.
Trustmark also utilizes exchange-traded derivative instruments such as Treasury note futures contracts and option contracts to achieve a fair value return that offsets the changes in fair value of the MSR attributable to interest rates. Fair values of these derivative instruments are determined from quoted prices in active markets for identical assets therefore allowing them to be classified within Level 1 of the fair value hierarchy. In addition, Trustmark utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area which lack observable inputs for valuation purposes resulting in their inclusion in Level 3 of the fair value hierarchy.
At this time, Trustmark presents no fair values that are derived through internal modeling. Should positions requiring fair valuation arise that are not relevant to existing methodologies, Trustmark will make every reasonable effort to obtain market participant assumptions, or independent evaluation.
43
Financial Assets and Liabilities
The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value ($ in thousands). There were no transfers between fair value levels for the nine months ended September 30, 2016 and the year ended December 31, 2015.
Level 1
Level 2
Level 3
58,517
Securities available for sale
Loans held for sale
Other assets - derivatives
7,901
(25
5,179
2,747
Other liabilities - derivatives
8,583
808
7,775
68,416
2,113,440
Asset-backed securities and structured financial products
3,611
(149
2,647
1,113
3,929
2,709
The changes in Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2016 and 2015 are summarized as follows ($ in thousands):
MSR
Other Assets -
Balance, January 1, 2016
Total net (loss) gain included in Mortgage banking, net (1)
(20,885
9,486
Sales
(7,852
Balance, September 30, 2016
The amount of total (losses) gains for the period included in earnings
that are attributable to the change in unrealized gains or
losses still held at September 30, 2016
(13,519
904
Balance, January 1, 2015
1,299
(7,869
6,193
(4,786
Balance, September 30, 2015
2,706
The amount of total losses for the period included in
earnings that are attributable to the change in unrealized
gains or losses still held at September 30, 2015
(169
Total net (loss) gain included in Mortgage banking, net relating to the MSR includes changes in fair value due to market changes and due to run-off.
44
Trustmark may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. Assets at September 30, 2016, which have been measured at fair value on a nonrecurring basis, include impaired LHFI. Loans for which it is probable Trustmark will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement are considered impaired. Specific allowances for impaired LHFI are based on comparisons of the recorded carrying values of the loans to the present value of the estimated cash flows of these loans at each loan’s original effective interest rate, the fair value of the collateral or the observable market prices of the loans. Impaired LHFI are primarily collateral dependent loans and are assessed using a fair value approach. Fair value estimates for collateral dependent loans are derived from appraised values based on the current market value or as-is value of the property being appraised, normally from recently received and reviewed appraisals. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Trustmark’s Appraisal Review Department to ensure they are acceptable. Appraised values are adjusted down for costs associated with asset disposal. At September 30, 2016, Trustmark had outstanding balances of $28.6 million in impaired LHFI that were specifically identified for evaluation and written down to the fair value of the underlying collateral less cost to sell based on the fair value of the collateral or other unobservable input compared to $26.5 million at December 31, 2015. These specifically evaluated impaired LHFI are classified as Level 3 in the fair value hierarchy. Impaired LHFI are periodically reviewed and evaluated for additional impairment and adjusted accordingly based on the same factors identified above.
Nonfinancial Assets and Liabilities
Certain nonfinancial assets measured at fair value on a nonrecurring basis include foreclosed assets (upon initial recognition or subsequent impairment), nonfinancial assets and nonfinancial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment.
Other real estate, excluding covered other real estate, includes assets that have been acquired in satisfaction of debt through foreclosure and is recorded at the lower of cost or estimated fair value. Fair value is based on independent appraisals and other relevant factors. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. At September 30, 2016, Trustmark’s geographic other real estate distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. The ultimate recovery of a substantial portion of the carrying amount of other real estate, excluding covered other real estate, is susceptible to changes in market conditions in these areas. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market.
Certain foreclosed assets, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs based on adjusted observable market data. Foreclosed assets measured at fair value upon initial recognition totaled $22.0 million (utilizing Level 3 valuation inputs) during the nine months ended September 30, 2016 compared with $26.8 million for the same period in 2015. In connection with the measurement and initial recognition of the foregoing foreclosed assets, Trustmark recognized charge-offs of the allowance for loan losses totaling $19.8 million and $7.4 million for the first nine months of 2016 and 2015, respectively. Other than foreclosed assets measured at fair value upon initial recognition, $26.5 million of foreclosed assets were remeasured during the first nine months of 2016, requiring write-downs of $3.7 million to reach their current fair values compared to $39.4 million of foreclosed assets that were remeasured during the first nine months of 2015, requiring write-downs of $2.4 million.
Fair Value of Financial Instruments
FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. A detailed description of the valuation methodologies used in estimating the fair value of financial instruments can be found in Note 19 – Fair Value included in Item 8 of Trustmark’s Annual Report on Form 10-K for the year ended December 31, 2015.
The carrying amounts and estimated fair values of financial instruments at September 30, 2016 and December 31, 2015, are as follows ($ in thousands):
Financial Assets:
Level 2 Inputs:
Cash and short-term investments
384,445
278,001
Securities held to maturity
Level 3 Inputs:
7,493,082
7,136,105
Financial Liabilities:
Deposits
9,689,282
9,592,531
Short-term liabilities
927,710
853,659
751,077
501,160
50,484
51,405
40,825
49,021
In cases where quoted market prices are not available, fair values are generally based on estimates using present value techniques. Trustmark’s premise in present value techniques is to represent the fair values on a basis of replacement value of the existing instrument given observed market rates on the measurement date. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates for those assets or liabilities cannot necessarily be substantiated by comparison to independent markets and, in many cases, may not be realizable in immediate settlement of the instruments. The estimated fair value of financial instruments with immediate and shorter-term maturities (generally 90 days or less) is assumed to be the same as the recorded book value. All nonfinancial instruments, by definition, have been excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Trustmark.
The fair values of net LHFI are estimated for portfolios of loans with similar financial characteristics. For variable rate LHFI that reprice frequently with no significant change in credit risk, fair values are based on carrying values. The fair values of certain mortgage LHFI, such as 1-4 family residential properties, are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of other types of LHFI are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The processes for estimating the fair value of net LHFI described above does not represent an exit price under FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” and such an exit price could potentially produce a different fair value estimate at September 30, 2016 and December 31, 2015.
46
Fair Value Option
Trustmark has elected to account for its mortgage LHFS purchased or originated on or after October 1, 2014 under the fair value option, with interest income on these mortgage LHFS reported in interest and fees on LHFS and LHFI. The fair value of the mortgage LHFS is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan. The mortgage LHFS are actively managed and monitored and certain market risks of the loans may be mitigated through the use of derivatives. These derivative instruments are carried at fair value with changes in fair value recorded in noninterest income in mortgage banking, net. The changes in the fair value of the LHFS are largely offset by changes in the fair value of the derivative instruments. For the three and nine months ended September 30, 2016, a net loss of $1.1 million and a net gain of $2.6 million, respectively, was recorded in noninterest income in mortgage banking, net for changes in the fair value of the LHFS accounted for under the fair value option, compared to a net gain of $3.6 million and $1.7 million for the three and nine months ended September 30, 2015, respectively. Interest and fees on LHFS and LHFI for the three and nine months ended September 30, 2016 included $1.5 million and $3.7 million, respectively, of interest earned on the LHFS accounted for under the fair value option, compared to $1.4 million and $3.7 million for the same time periods in 2015. Election of the fair value option allows Trustmark to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of cost or fair value and the derivatives at fair value. The fair value option election does not apply to the GNMA optional repurchase loans which do not meet the requirements under FASB ASC Topic 825 to be accounted for under the fair value option. GNMA optional repurchase loans totaled $37.3 million and $36.0 million at September 30, 2016 and December 31, 2015, respectively, and are included in LHFS on the accompanying consolidated balance sheets.
The following table provides information about the fair value and the contractual principal outstanding of the LHFS accounted for under the fair value option as of September 30, 2016 and December 31, 2015 ($ in thousands):
Fair value of LHFS
204,839
124,165
LHFS contractual principal outstanding
198,288
121,608
Fair value less unpaid principal
6,551
2,557
Note 16 – Derivative Financial Instruments
Derivatives Designated as Hedging Instruments
On April 4, 2013, Trustmark entered into a forward interest rate swap contract on junior subordinated debentures with a total notional amount of $60.0 million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under FASB ASC Topic 815, “Derivatives and Hedging,” with the objective of protecting the quarterly interest payments on Trustmark’s $60.0 million of junior subordinated debentures issued to Trustmark Preferred Capital Trust I throughout the five-year period beginning December 31, 2014 and ending December 31, 2019 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate. Under the swap, which became effective on December 31, 2014, Trustmark will pay a fixed interest rate of 1.66% and receive a variable interest rate based on three-month LIBOR on a total notional amount of $60.0 million, with quarterly net settlements.
No ineffectiveness related to the interest rate swap designated as a cash flow hedge was recognized in the consolidated statements of income for the nine months ended September 30, 2016 and 2015. The accumulated net after-tax loss related to the effective cash flow hedge included in accumulated other comprehensive loss totaled $708 thousand and $160 thousand at September 30, 2016 and December 31, 2015, respectively. Amounts reported in accumulated other comprehensive loss related to this derivative are reclassified to other interest expense as interest payments are made on Trustmark’s variable rate junior subordinated debentures. During the next twelve months, Trustmark estimates that $442 thousand will be reclassified as an increase to other interest expense.
47
Derivatives not Designated as Hedging Instruments
Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in the fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. The total notional amount of these derivative instruments were $338.5 million at September 30, 2016 compared to $264.5 million at December 31, 2015. Changes in the fair value of these exchange-traded derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by changes in the fair value of the MSR. The impact of this strategy resulted in a net negative ineffectiveness of $1.2 million compared to a net positive ineffectiveness of $479 thousand for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, the impact was a net negative ineffectiveness of $2.7 million compared to a net positive ineffectiveness of $3.9 million, respectively.
As part of Trustmark’s risk management strategy in the mortgage banking area, derivative instruments such as forward sales contracts are utilized. Trustmark’s obligations under forward sales contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. Changes in the fair value of these derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by changes in the fair value of LHFS. Trustmark’s off-balance sheet obligations under these derivative instruments totaled $301.5 million at September 30, 2016, with a negative valuation adjustment of $1.2 million, compared to $190.5 million, with a positive valuation adjustment of $262 thousand as of December 31, 2015.
Trustmark also utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area. Interest rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified time period. Changes in the fair value of these derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of forward sales contracts. Trustmark’s off-balance sheet obligations under these derivative instruments totaled $195.7 million at September 30, 2016, with a positive valuation adjustment of $2.7 million, compared to $108.1 million, with a positive valuation adjustment of $1.1 million as of December 31, 2015.
Trustmark offers certain derivatives products directly to qualified commercial lending clients seeking to manage their interest rate risk. Trustmark economically hedges interest rate swap transactions executed with commercial lending clients by entering into offsetting interest rate swap transactions with institutional derivatives market participants. Derivatives transactions executed as part of this program are not designated as qualifying hedging relationships and are, therefore, carried at fair value with the change in fair value recorded in noninterest income in bank card and other fees. Because these derivatives have mirror-image contractual terms, in addition to collateral provisions which mitigate the impact of non-performance risk, the changes in fair value are expected to substantially offset. As of September 30, 2016, Trustmark had interest rate swaps with an aggregate notional amount of $350.3 million related to this program, compared to $359.3 million as of December 31, 2015.
Credit-risk-related Contingent Features
Trustmark has agreements with its financial institution counterparties that contain provisions where if Trustmark defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Trustmark could also be declared in default on its derivatives obligations.
As of September 30, 2016 and December 31, 2015, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $5.9 million and $2.6 million, respectively. As of September 30, 2016, Trustmark had posted collateral of $5.8 million against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at September 30, 2016, it could have been required to settle its obligations under the agreements at the termination value.
Credit risk participation agreements arise when Trustmark contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. At both September 30, 2016 and December 31, 2015, Trustmark had entered into two risk participation agreements as a beneficiary with an aggregate notional amount of $14.3 million and $14.8 million, respectively. At September 30, 2016, Trustmark had entered into five risk participation agreements as a guarantor with an aggregate notional amount of $28.6 million compared to one risk participation agreement as a guarantor with an aggregate notional amount of $5.9 million at December 31, 2015. The aggregate fair values of these risk participation agreements were immaterial at September 30, 2016 and December 31, 2015.
Tabular Disclosures
The following tables disclose the fair value of derivative instruments in Trustmark’s balance sheets as of September 30, 2016 and December 31, 2015 as well as the effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):
Derivatives in hedging relationships
Interest rate contracts:
Interest rate swaps included in other assets
(1,147
(259
Derivatives not designated as hedging instruments
Futures contracts included in other assets
(199
(207
Exchange traded purchased options included in other assets
174
58
OTC written options (rate locks) included in other assets
6,298
2,888
Credit risk participation agreements included in other assets
Forward contracts included in other liabilities
(262
Exchange traded written options included in other liabilities
Interest rate swaps included in other liabilities
6,570
2,954
Credit risk participation agreements included in other liabilities
Amount of loss reclassified from accumulated other
comprehensive loss and recognized in other interest expense
(157
(211
(473
(632
Amount of (loss) gain recognized in mortgage banking, net
(688
1,265
11,042
4,221
Amount of gain (loss) recognized in bank card and other fees
(128
(206
(94
The following table discloses the amount included in other comprehensive income (loss), net of tax, for derivative instruments designated as cash flow hedges for the periods presented ($ in thousands):
Derivatives in cash flow hedging relationship
Amount of gain (loss) recognized in other comprehensive
income (loss), net of tax
Trustmark’s interest rate swap derivative instruments are subject to master netting agreements, and therefore, eligible for offsetting in the consolidated balance sheet. Trustmark has elected to not offset any derivative instruments in its consolidated balance sheets. Information about financial instruments that are eligible for offset in the consolidated balance sheets as of September 30, 2016 and December 31, 2015 is presented in the following tables ($ in thousands):
Offsetting of Derivative Assets
As of September 30, 2016
Gross Amounts Not Offset in the
Statement of Financial Position
Amounts of
Recognized
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Assets presented in
the Statement of
Financial
Instruments
Cash Collateral
Received
Net Amount
5,151
49
Offsetting of Derivative Liabilities
Liabilities presented
in the Statement of
Posted
(4,932
1,638
As of December 31, 2015
2,629
(1,195
1,759
Note 17 – Segment Information
Trustmark’s management reporting structure includes three segments: General Banking, Wealth Management and Insurance. For a complete overview of Trustmark’s operating segments, see Note 21 – Segment Information included in Part II. Item 8. – Financial Statements and Supplementary Data, of Trustmark’s 2015 Annual Report on Form 10-K. There have been no significant changes in Trustmark’s operating segments during the periods presented.
The accounting policies of each reportable segment are the same as those of Trustmark except for its internal allocations. Noninterest expenses for back-office operations support are allocated to segments based on estimated uses of those services. Trustmark measures the net interest income of its business segments with a process that assigns cost of funds or earnings credit on a matched-term basis. This process, called “funds transfer pricing”, charges an appropriate cost of funds to assets held by a business unit, or credits the business unit for potential earnings for carrying liabilities. The net of these charges and credits flows through to the General Banking segment, which contains the management team responsible for determining TNB’s funding and interest rate risk strategies.
The following table discloses financial information by reportable segment for the periods presented ($ in thousands):
General Banking
Net interest income
97,395
97,408
287,950
291,483
4,975
3,770
Noninterest income
27,207
28,320
81,230
82,477
Noninterest expense
84,358
90,043
267,063
262,403
Income before income taxes
35,269
31,915
90,387
103,797
6,844
6,207
18,168
22,588
General banking net income
28,425
25,708
72,219
81,209
Selected Financial Information
Average assets
12,916,011
12,231,450
12,788,736
12,123,213
9,274
9,209
26,483
27,256
Wealth Management
91
571
194
7,434
7,748
22,681
23,477
6,216
6,195
18,200
19,373
1,337
1,644
5,052
4,298
629
1,933
Wealth management net income
825
1,015
3,119
2,654
6,039
4,181
1,842
3,020
131
139
Insurance
10,075
9,905
28,308
27,925
7,334
7,322
21,768
21,266
2,791
2,690
6,700
6,929
1,059
983
2,550
2,612
Insurance net income
1,732
1,707
4,150
4,317
78,167
78,146
63,652
58,570
186
213
569
600
Consolidated
Consolidated net income
13,000,217
12,313,777
12,854,230
12,184,803
9,504
9,466
Note 18 – Accounting Policies Recently Adopted and Pending Accounting Pronouncements
ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” Issued in August 2016, ASU 2016-15 provides guidance to reduce the diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments of ASU 2016-15 are effective for interim and annual periods beginning after December 15, 2017. Management is currently evaluating the impact this ASU will have on Trustmark’s consolidated financial statements; however, the adoption of ASU 2016-15 is not expected to have a material impact on Trustmark’s consolidated financial statements.
ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a write-down. The amendments of ASU 2016-13 are effective for interim and annual periods beginning after December 15, 2019. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Management is currently evaluating the impact this ASU will have on Trustmark’s consolidated financial statements.
ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Issued in March 2016, ASU 2016-09 seeks to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions, including (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flow; (3) forfeitures; (4) minimum statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes; (6) the practical expedient for estimating the expected term; and (7) intrinsic value. The amendments of ASU 2016-09 are effective for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact this ASU will have on Trustmark’s consolidated financial statements; however, the adoption of ASU 2016-09 is not expected to have a material impact on Trustmark’s consolidated financial statements.
ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” Issued in March 2016, ASU 2016-07 affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 simplifies the transition to the equity method of accounting by eliminating the retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. The amendments of ASU 2016-07 are effective for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact this ASU will have on Trustmark’s consolidated financial statements; however, the adoption of ASU 2016-07 is not expected to have a material impact on Trustmark’s consolidated financial statements.
ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” Issued in March 2016, ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments of ASU 2016-05 are effective for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact this ASU will have on Trustmark’s consolidated financial statements; however, the adoption of ASU 2016-05 is not expected to have a material impact on Trustmark’s consolidated financial statements.
ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for interim and annual periods beginning after December 15,
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2018. Management is currently evaluating the impact this ASU will have on Trustmark’s consolidated financial statements; however, the adoption of ASU 2016-02 is not expected to have a material impact on Trustmark’s consolidated financial statements.
ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the FASB Accounting Standards Codification).” Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; and (iii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017. Management is currently evaluating the impact this ASU will have on Trustmark’s consolidated financial statements; however, the adoption of ASU 2016-01 is not expected to have a material impact on Trustmark’s consolidated financial statements.
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, “Revenue from Contracts with Customers,” and will supersede revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” as well as certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts.” ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services are transferred to the customer. ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09. The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for interim and annual periods beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All subsequently issued ASUs which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective. Management is currently evaluating the impact ASU 2014-09 will have on Trustmark’s consolidated financial statements as well as the most appropriate method of application; however, regardless of the method of application selected, the adoption of ASU 2014-09 is not expected to have a material impact on Trustmark’s consolidated financial statements.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following provides a narrative discussion and analysis of Trustmark Corporation’s (Trustmark) financial condition and results of operations. This discussion should be read in conjunction with the unaudited consolidated financial statements and the supplemental financial data included in Part I. Item 1. – Financial Statements – of this report.
Description of Business
Trustmark, a Mississippi business corporation incorporated in 1968, is a bank holding company headquartered in Jackson, Mississippi. Trustmark’s principal subsidiary is Trustmark National Bank (TNB), initially chartered by the State of Mississippi in 1889. At September 30, 2016, TNB had total assets of $13.160 billion, which represented approximately 99.99% of the consolidated assets of Trustmark.
Through TNB and its other subsidiaries, Trustmark operates as a financial services organization providing banking and other financial solutions through 194 offices and 2,787 full-time equivalent associates (measured at September 30, 2016) located in the states of Alabama (primarily in the central and southern regions of that state, which are collectively referred to herein as Trustmark’s Alabama market), Florida (primarily in the northwest or “Panhandle” region of that state, which is referred to herein as Trustmark’s Florida market), Mississippi, Tennessee (in the Memphis and Northern Mississippi regions, which are collectively referred to herein as Trustmark’s Tennessee market), and Texas (primarily in Houston, which is referred to herein as Trustmark’s Texas market). Trustmark’s operations are managed along three operating segments: General Banking Division, Wealth Management Division and Insurance Division. For a complete overview of Trustmark’s business, see the section captioned “The Corporation” included in Part I. Item 1. – Business of Trustmark’s 2015 Annual Report on Form 10-K.
Executive Overview
Trustmark continued to achieve solid financial results with total revenues of $142.3 million and $420.9 million for the three and nine months ended September 30, 2016, respectively. Trustmark continued to maintain and expand customer relationships as reflected by growth across all five market regions in the loans held for investment (LHFI) portfolio, which increased $94.0 million, or 1.3%, during the third quarter of 2016 and $407.8 million, or 5.8%, during the first nine months of 2016. Credit quality remained strong and continued to be an important contributor to Trustmark’s financial success. During the second quarter of 2016, Trustmark completed a voluntary early retirement program (ERP) as a proactive measure to manage noninterest expense. As a result of the ERP, 188 of the eligible associates retired by June 30, 2016. The ERP resulted in a one-time charge of $9.3 million to noninterest expense ($9.1 million included in salaries and employee benefits expense and $230 thousand included in other expense) during the second quarter of 2016. As a result of the ERP, during the third quarter of 2016 Trustmark realized cost savings of $1.9 million in salaries and employee benefits expense and incurred additional pension expense of $236 thousand, which resulted from additional settlements from pension lump sum elections. On July 26, 2016, the Board of Directors of Trustmark authorized the termination of the Trustmark Capital Accumulation Plan (the Plan), a noncontributory tax-qualified defined benefit pension plan, effective December 31, 2016. During the third quarter of 2016, Trustmark incurred non-routine pension expense of $664 thousand as a result of the de-risking investment strategy for the plan assets implemented in anticipation of the Plan termination. Trustmark reported net income of $31.0 million, or diluted earnings per share (EPS) of $0.46, and $79.5 million, or diluted EPS of $1.17, for the three and nine months ended September 30, 2016, respectively. Excluding the non-routine expenses related to the ERP and the Plan termination, net income for the three and nine months ended September 30, 2016 totaled $31.5 million, or diluted EPS of $0.47, and $85.8 million, or diluted EPS of $1.27, respectively. Trustmark is committed to investments to support profitable revenue growth as well as reengineering and efficiency opportunities to enhance shareholder value. Trustmark’s capital position remained solid, reflecting the consistent profitability of its diversified financial services businesses. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable December 15, 2016, to shareholders of record on December 1, 2016.
Recent Economic and Industry Developments
The economy showed moderate signs of improvement in the first nine months of 2016; however, economic concerns remain as a result of the cumulative weight of continued soft labor markets in the United States, volatility in crude oil prices and slowing growth in markets in Western Europe, Japan, China, Russia and other emerging markets, combined with uncertainty regarding anticipated further tightening of monetary policy by the Board of Governors of the Federal Reserve System (FRB), the consequences of the decision of the United Kingdom to exit the European Union, and the upcoming presidential election. Doubts surrounding the near-term direction of global markets, and the potential impact of these trends on the United States economy, are expected to persist for some time. While Trustmark’s customer base is wholly domestic, international economic conditions affect domestic economic conditions, and thus may have an impact upon Trustmark’s financial condition or results of operations.
In the October 2016 “Summary of Commentary on Current Economic Conditions by Federal Reserve Districts” (the “Beige Book”), the twelve Federal Reserve Districts’ reports suggested national economic activity continued to expand at a modest pace during the reporting period, and noted that labor market conditions remained tight with modest employment and wage growth; growth in lending activity and improvement in loan quality occurred, as well as improvements in both the residential and commercial real estate markets. Reports by the twelve Federal Reserve Districts also noted that low prices continued to impact agricultural producers despite generally strong crop yields and that signs of stabilization continued in the oil and gas sector. Reports by the three Federal Reserve Districts covering the southeast United States, which include Trustmark’s five key market regions, suggested that economic activity increased at a modest pace, with most businesses reporting improved sales and positive outlooks for the near term, with the exception of the energy sector. The Federal Reserve’s Sixth District, Atlanta (which includes Trustmark’s Alabama, Florida and Mississippi market regions) and the Eighth District, St. Louis (which includes Trustmark’s Tennessee market region) also reported increased loan demand, improvements in residential and commercial real estate activity and increased construction. However, the Federal Reserve’s Sixth District also reported inconsistency in commercial real estate growth, noting that the rate of improvement varied by metropolitan area, submarket, and property type. The Federal Reserve’s Eleventh District, Dallas (which includes Trustmark’s Texas market region) reported that real estate activity was flat to up in most markets; loan demand was mixed while loan quality remained strong;
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depressed demand for oilfield services; and continued deterioration in the financial positions of many oil-related firms despite the increase in prices earlier in the year.
In December 2015, the FRB increased the target range for the federal funds rate for the first time in over seven years. The FRB also indicated that it may further increase rates before the end of 2016 and on a gradual basis through 2017, depending on economic conditions. It is not possible to predict the timing or amount of any such additional increases. Low interest rates will continue to place pressure on net interest margins for Trustmark (as well as its competitors), as older, higher-yielding assets that mature or default can only be replaced with lower-yielding instruments.
Financial Highlights
Trustmark reported net income of $31.0 million, or basic and diluted EPS of $0.46, in the third quarter of 2016, compared to $28.4 million, or basic and diluted EPS of $0.42, in the third quarter of 2015. The increase in net income when the third quarter of 2016 is compared to the same time period in 2015 was principally due to the decline in noninterest expense. Noninterest expense for the third quarter of 2016 decreased $5.7 million when compared to the same time period in 2015, primarily due to declines in other real estate expense, resulting principally from higher gains on sales of other real estate and lower write-downs of other real estate, and cost savings realized in salaries and employee benefits expense as a result of the ERP. Trustmark’s performance during the quarter ended September 30, 2016 produced a return on average tangible equity of 11.16%, a return on average assets of 0.95%, an average equity to average assets ratio of 11.78% and a dividend payout ratio of 50.00%, compared to a return on average tangible equity of 10.96%, a return on average assets of 0.92%, an average equity to average assets ratio of 11.93% and a dividend payout ratio of 54.76% during the quarter ended September 30, 2015.
Revenue, which is defined as net interest income plus noninterest income, totaled $142.3 million for the quarter ended September 30, 2016 compared to $143.6 million for the quarter ended September 30, 2015, a decrease of $1.3 million, or 0.9%. The decrease in total revenue for the third quarter of 2016 was principally the result of declines in interest and fees on acquired loans and noninterest income as well as increases in interest expense, which were partially offset by increases in interest and fees on loans held for sale (LHFS) and LHFI.
Interest and fees on acquired loans decreased $4.8 million, or 41.6%, when the third quarter of 2016 is compared to the same time period in 2015, in accordance with prior expectations. This was primarily due to a $2.9 million decline in recoveries from the settlement of debt and a $2.1 million decline in accretion income as acquired loans have continued to pay down as anticipated. Noninterest income decreased $1.3 million, or 2.7%, when the third quarter of 2016 is compared to the same time period in 2015 as a result of slight declines in all categories of noninterest income with the exception of insurance commissions. Interest expense for the three months ended September 30, 2016 increased $1.1 million, or 20.5%, when compared to the same time period in 2015 principally due to increased interest expense for advances from the Federal Home Loan Bank (FHLB) of Dallas and federal funds purchased as a result of higher balances of and increased interest rates for these funding sources. Interest and fees on LHFS and LHFI increased $7.1 million, or 10.2%, when the third quarter of 2016 is compared to the same time period in 2015, primarily due to an increase in the LHFI portfolio. LHFI totaled $7.499 billion at September 30, 2016, an increase of $707.6 million, or 10.4%, when compared to September 30, 2015, as a result of net growth across all of Trustmark’s market regions and all categories in its LHFI portfolio, with the exception of loans secured by 1-4 family residential properties and construction, land development and other land loans.
Trustmark’s provision for loan losses, LHFI for the three months ended September 30, 2016 totaled $4.3 million, an increase of $1.8 million, or 70.4%, when compared to a provision for loan losses, LHFI of $2.5 million for the three months ended September 30, 2015. The increase in the provision for loan losses, LHFI for the third quarter of 2016 primarily reflects the net effect of revisions to the allowance for loan loss methodology for LHFI during 2015, growth in the LHFI portfolio and increased required reserves for commercial LHFI, partially offset by a decrease in net charge-offs of LHFI and a decline in the amount of specific reserve required for impaired LHFI, primarily in the Mississippi market region, when compared to the third quarter of 2015. Please see the section captioned “Provision for Loan Losses, LHFI,” for additional information regarding the provision for loan losses, LHFI. The provision for loan losses, acquired loans for the three months ended September 30, 2016 totaled $691 thousand, a decrease of $565 thousand, or 45.0%, when compared to the same time period in 2015. Please see the section captioned “Provision for Loan Losses, Acquired Loans,” for additional information regarding the provision for loan losses, acquired loans. In total, the provision for loan losses, net was $5.0 million for the third quarter of 2016, an increase of $1.2 million, or 32.0%, when compared to the same time period in 2015.
Trustmark reported net income of $79.5 million, or basic and diluted EPS of $1.18 and $1.17, respectively, for the first nine months of 2016, compared to $88.2 million, or basic and diluted EPS of $1.31 and $1.30, respectively, for the first nine months of 2015. The decline in net income when the first nine months of 2016 is compared to the same time period in 2015 was principally the result of the non-routine transaction expense resulting from the ERP, an increase in the provision for loan losses, LHFI and an increase in other interest expense related to FHLB advances with the FHLB of Dallas, which was partially offset by a decline in other real estate expense. Trustmark’s performance during the nine months ended September 30, 2016 produced a return on average tangible equity of 9.85%, a return on average assets of 0.83%, an average equity to average assets ratio of 11.77% and a dividend payout ratio of 58.47%, compared to a return on average tangible equity of 11.62%, a return on average assets of 0.97%, an average equity to average assets ratio of 11.93% and a dividend payout ratio of 52.67% during the nine months ended September 30, 2015.
Revenue totaled $420.9 million for the first nine months of 2016 compared to $425.8 million for the same time period in 2015, a decrease of $4.9 million, or 1.2%. The decrease in total revenue for the first nine months of 2016 was principally the result of declines in interest and fees on acquired loans, mortgage banking, net and service charges on deposit accounts and an increase in other interest expense, which were partially offset by increases in interest and fees on LHFS and LHFI and other income, net.
Interest and fees on acquired loans decreased $17.4 million, or 44.3%, when the first nine months of 2016 is compared to the same time period in 2015, primarily due to a $10.6 million decline in accretion income and a $6.3 million decline in recoveries from the settlement of debt as acquired loans have continued to pay down as anticipated. Mortgage banking, net declined $3.1 million, or 12.0%, when the nine months ended September 30, 2016 is compared to the same time period in 2015, principally due to a net negative hedge ineffectiveness of $2.7 million in the first nine months of 2016 compared to a net positive hedge ineffectiveness of $3.9 million in the first nine months of 2015 partially offset by a $3.4 million increase in mortgage banking income. Service charges on deposit accounts declined $1.6 million, or 4.5%, when the first nine months of 2016 is compared to the same time period in 2015, primarily due to a decrease in the number of occurrences resulting in a non-sufficient funds or overdraft charge. Other interest expense increased $2.3 million, or 46.2%, when the first nine months of 2016 is compared to the same time period in 2015, primarily due to an increase in interest expense on FHLB advances with the FHLB of Dallas, which Trustmark uses as a liquidity source. Trustmark had $350.0 million of outstanding short-term advances and $750.0 million of outstanding long-term advances from the FHLB of Dallas at September 30, 2016, compared to $650.0 million of outstanding short-term advances and no outstanding long-term advances at September 30, 2015. Interest and fees on LHFS and LHFI increased $18.7 million, or 9.2%, when the first nine months of 2016 is compared to the same time period in 2015, primarily due to the $707.6 million increase in the LHFI portfolio. Other income, net increased $3.6 million when the nine months ended September 30, 2016 is compared to the same time period in 2015, primarily reflecting a decrease in the net reduction of the FDIC indemnification asset related to the acquired covered loans and covered other real estate, a decrease in the net loss on the sale of premises and equipment due to a loss recorded during the first nine months of 2015 on the sale of a former bank branch acquired in the BancTrust merger and an increase in other miscellaneous income related to various vendor contract bonuses and settlements received during the second quarter of 2016 and a one-time arrangement fee received during the third quarter of 2016.
Trustmark’s provision for loan losses, LHFI for the nine months ended September 30, 2016 totaled $9.1 million, an increase of $3.8 million, or 71.1%, when compared to a provision for loan losses, LHFI of $5.3 million for the nine months ended September 30, 2015. The increase in the provision for loan losses, LHFI for the first nine months of 2016 primarily reflects the net effect of revisions to the allowance for loan loss methodology for LHFI during 2015 and growth in the LHFI portfolio and an increase in the amount of reserves required related to commercial LHFI in the Mississippi, Texas and Alabama market regions, partially offset by decreases in the amount of charge-offs as well as specific reserves required related to impaired LHFI in the Mississippi market region when compared to the first nine months of 2015. Please see the section captioned “Provision for Loan Losses, LHFI,” for additional information regarding the provision for loan losses, LHFI. The provision for loan losses, acquired loans for the nine months ended September 30, 2016 totaled $2.6 million, an increase of $179 thousand, or 7.4%, when compared to the same time period in 2015. Please see the section captioned “Provision for Loan Losses, Acquired Loans,” for additional information regarding the provision for loan losses, acquired loans. In total, the provision for loan losses, net was $11.7 million for the first nine months of 2016, an increase of $4.0 million, or 51.2%, when compared to the same time period in 2015.
At September 30, 2016, nonperforming assets, excluding acquired loans and covered other real estate, totaled $119.4 million, a decrease of $13.1 million, or 9.9%, compared to December 31, 2015 primarily due to a decline in other real estate, excluding covered other real estate. Total nonaccrual LHFI were $54.4 million at September 30, 2016, representing a decrease of $902 thousand, or 1.6%, relative to December 31, 2015, principally due to substandard credits that were paid off or foreclosed in the Mississippi market region, returned to accrual status in the Florida market region, and charged off in the Mississippi and Texas market regions partially offset by LHFI migrating to nonaccrual status in the Mississippi, Florida and Tennessee market regions during the first nine months of 2016. Other real estate, excluding covered other real estate, declined $12.2 million, or 15.8%, during the first nine months of 2016 primarily due to properties sold in Trustmark’s Florida, Alabama, Mississippi and Tennessee market regions as well as write-downs of properties in Trustmark’s Mississippi, Alabama, and Tennessee market regions partially offset by properties foreclosed in the Florida, Mississippi, Alabama and Tennessee market regions.
LHFI totaled $7.499 billion at September 30, 2016, an increase of $407.8 million, or 5.8%, compared to December 31, 2015. The increase in LHFI during the first nine months of 2016 represented net growth across all five of Trustmark’s market regions, primarily in the loans secured by real estate, state and other political subdivision loans categories and commercial and industrial loans. For additional information regarding changes in LHFI and comparative balances by loan category, see the section captioned “LHFI.”
While both classified and criticized LHFI balances remain at historically low levels and continue to reflect strong credit quality, both classified and criticized LHFI increased during the third quarter of 2016. As of September 30, 2016, classified LHFI balances increased $39.8 million, or 24.3%, while criticized LHFI balances increased $33.1 million, or 16.7%, when compared to balances at September 30, 2015. The increase in the volume of classified and criticized LHFI was primarily a result of downgrades to four energy related credits in the Texas and Mississippi market regions during the third quarter of 2016. All four of these credits are performing loans. The downgrades were identified during Trustmark’s ongoing quarterly assessment of its energy portfolio and have been reserved for appropriately.
Management has continued its practice of maintaining excess funding capacity to provide Trustmark with adequate liquidity for its ongoing operations. In this regard, Trustmark benefits from its strong deposit base, its highly liquid investment portfolio and its access to funding from a variety of external funding sources such as upstream federal funds lines, FHLB advances and, on a limited basis, brokered deposits.
Total deposits were $9.686 billion at September 30, 2016, an increase of $97.5 million, or 1.0% compared to December 31, 2015. During the first nine months of 2016, noninterest-bearing deposits increased $112.9 million, or 3.8%, primarily due to growth in commercial demand deposit accounts partially offset by seasonal declines in public demand deposit accounts, while interest-bearing deposits decreased $15.4 million, or 0.2%, primarily due to declines in interest-bearing demand deposit accounts and certificates of deposit. The increase in commercial demand deposit accounts during the first nine months of 2016 was principally due to growth in commercial regular demand deposit accounts, which was largely due to a large sale completed by a commercial customer during the third quarter of 2016.
Trustmark uses short-term borrowings to fund growth of earning assets in excess of deposits growth. Other short-term borrowings totaled $927.7 million at September 30, 2016, an increase of $74.1 million, or 8.7%, when compared with $853.7 million at December 31, 2015 as a result of the increase in earning assets, principally LHFI, out-pacing the growth in deposits. The increase in other short-term borrowings was principally due to a $41.0 million increase in upstream federal funds purchased as Trustmark continues to utilize this attractively priced funding source as well as a $38.8 million increase in securities sold under repurchase agreements.
Long-term FHLB advances totaled $751.1 million at September 30, 2016, an increase of $249.9 million, or 49.9%, when compared with $501.2 million at December 31, 2015. During the second quarter of 2016, Trustmark obtained a $250.0 million long-term FHLB advance from the FHLB of Dallas. Similar to the long-term advance obtained in December 2015, the advance has a variable rate and a two-year maturity. Trustmark chose to utilize these long-term advances as a funding source due to the advantageous rates available in comparison to other sources of funding.
Recent Legislative and Regulatory Developments
For information regarding legislation and regulation applicable to Trustmark, see the section captioned “Supervision and Regulation” included in Part I. Item 1. – Business of Trustmark’s 2015 Annual Report on Form 10-K.
In March 2016, the Board of Directors of the FDIC approved a final rule to increase the Deposit Insurance Fund (DIF) to the statutorily required minimum level of 1.35 percent. Under a rule adopted by the FDIC in 2011, regular assessment rates for all banks decrease once the reserve ratio reaches 1.15 percent. On August 30, 2016, the FDIC announced that the reserve ratio was 1.17 percent as of June 30, 2016. The final rule approved in March 2016 imposes a surcharge of 4.5 cents per $100 of the assessment base, after making certain adjustments, on banks with at least $10.0 billion in assets. The FDIC expects the reserve ratio will likely reach 1.35 percent after approximately two years of payments of these surcharges. The final rule became effective and surcharges began on July 1, 2016. Trustmark expects that its FDIC assessment expense will decline under this final rule as the lower regular assessment rates and the allowable adjustments will more than offset the surcharge of 4.5 cents per $100 of assessment base.
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In April and May 2016, the FRB, the Office of the Comptroller of the Currency (OCC), and other federal financial agencies re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1.0 billion or more in total consolidated assets. For institutions with at least $1.0 billion but less than $50.0 billion in total consolidated assets, such as Trustmark and TNB, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation. Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risk-taking by the institution (1) by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits, or (2) that could lead to material financial loss to the institution. The proposal would also impose certain governance and recordkeeping requirements on institutions of Trustmark and TNB’s size. The FRB and OCC would reserve the authority to impose more stringent requirements on institutions of Trustmark and TNB’s size. Trustmark is evaluating the potential impact, if any, of the proposal on its results of operations and financial condition.
Selected Financial Data
The following table presents financial data derived from Trustmark’s consolidated financial statements as of and for the periods presented ($ in thousands, except per share data):
Total interest income
Total interest expense
Revenues (1)
Total revenues
142,280
143,579
420,900
425,826
Per Share Data
Basic earnings per share
Diluted earnings per share
Cash dividends per share
Performance Ratios
Return on average equity
8.05
7.68
7.02
8.11
Return on average tangible equity
11.16
10.96
9.85
11.62
Return on average assets
0.95
0.92
0.83
0.97
Average equity/average assets
11.78
11.93
11.77
Net interest margin (fully taxable equivalent)
3.52
3.72
3.54
3.80
Dividend payout ratio
50.00
54.76
58.47
52.67
Credit Quality Ratios (2)
Net charge-offs/average loans
0.27
0.47
0.10
0.19
Provision for loan losses/average loans
0.22
0.15
0.16
0.11
Nonperforming loans/total loans (incl LHFS*)
0.70
0.88
Nonperforming assets/total loans (incl LHFS*)
plus ORE**
1.53
2.06
Allowance for loan losses/total loans (excl LHFS*)
Total assets
12,390,276
3,554,181
3,561,262
Total loans (including LHFS* and acquired loans)
8,037,038
7,384,495
9,412,404
Total shareholders' equity
Stock Performance
Market value - close
27.56
23.17
Book value
22.69
21.86
Tangible book value
16.95
16.00
Capital Ratios
Total equity/total assets
11.66
11.92
Tangible equity/tangible assets
8.97
9.01
Tangible equity/risk-weighted assets
11.85
12.24
Tier 1 leverage ratio
10.09
Common equity tier 1 risk-based capital ratio
Tier 1 risk-based capital ratio
13.66
Total risk-based capital ratio
14.66
Consistent with Trustmark's audited annual financial statements, revenue is defined as net interest income plus noninterest income
Excludes Acquired Loans and Covered Other Real Estate
*
LHFS is Loans Held for Sale
**
ORE is Other Real Estate
Non-GAAP Financial Measures
In addition to capital ratios defined by U.S. generally accepted accounting principles (GAAP) and banking regulators, Trustmark utilizes various tangible common equity measures when evaluating capital utilization and adequacy. Tangible common equity, as defined by Trustmark, represents common equity less goodwill and identifiable intangible assets.
Trustmark believes these measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of Trustmark’s capitalization to other organizations. These ratios differ from capital measures defined by banking regulators principally in that the numerator excludes shareholders’ equity associated with preferred securities, the nature and extent of which varies across organizations. In Management’s experience, many stock analysts use tangible common equity measures in conjunction with more traditional bank capital ratios to compare capital adequacy of banking organizations with significant amounts of goodwill or other tangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions.
These calculations are intended to complement the capital ratios defined by GAAP and banking regulators. Because GAAP does not include these capital ratio measures, Trustmark believes there are no comparable GAAP financial measures to these tangible common equity ratios. Despite the importance of these measures to Trustmark, there are no standardized definitions for them and, as a result, Trustmark’s calculations may not be comparable with other organizations. Also there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its consolidated financial statements and the notes related thereto in their entirety and not to rely on any single financial measure.
The following table reconciles Trustmark’s calculation of these measures to amounts reported under GAAP for the periods presented ($ in thousands, except per share data):
TANGIBLE EQUITY
AVERAGE BALANCES
1,530,842
1,469,255
1,512,855
1,453,693
Less: Goodwill
(366,156
(365,500
(23,311
(31,144
(24,988
(31,304
Total average tangible equity
1,141,375
1,072,611
1,121,711
1,056,889
PERIOD END BALANCES
(22,366
(30,129
Total tangible equity
(a)
1,146,239
1,081,127
TANGIBLE ASSETS
Total tangible assets
(b)
12,773,016
11,994,647
Risk-weighted assets
(c)
9,670,302
8,832,099
NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION
Net income
Plus: Intangible amortization net of tax
1,045
1,199
3,199
3,638
Net income adjusted for intangible amortization
32,027
29,629
82,687
91,818
Period end shares outstanding
(d)
67,626,939
67,557,395
TANGIBLE EQUITY MEASUREMENTS
Return on average tangible equity (1)
(a)/(b)
(a)/(c)
(a)/(d)*1,000
COMMON EQUITY TIER 1 CAPITAL (CET1)
AOCI-related adjustments
17,075
28,580
CET1 adjustments and deductions:
Goodwill net of associated deferred tax liabilities (DTLs)
(347,800
(348,587
Other adjustments and deductions for CET1 (2)
(9,307
(8,888
CET1 capital
(e)
1,147,861
Additional tier 1 capital instruments plus related surplus
60,000
Less: additional tier 1 capital deductions
(276
Additional tier 1 capital
59,724
58,713
Tier 1 Capital
1,206,574
(e)/(c)
Calculation = ((net income adjusted for intangible amortization/number of days in period)*number of days in year)/total average tangible equity
Includes other intangible assets, net of DTLs, disallowed deferred tax assets, threshold deductions and transition adjustments, as applicable
Significant Non-Routine Transactions
Trustmark discloses certain non-GAAP financial measures, including net income adjusted for significant non-routine transactions, because Management uses these measures for business planning purposes, including to manage Trustmark’s business against internal projected results of operations and to measure Trustmark’s performance. Trustmark views net income adjusted for significant non-routine transactions as a measure of our core operating business, which excludes the impact of the items detailed below, as these items are generally not operational in nature. This non-GAAP measure also provides another basis for comparing period-to-period results as presented in the accompanying selected financial data table and the audited consolidated financial statements by excluding potential differences caused by non-operational and unusual or non-recurring items. Readers are cautioned that these adjustments are not permitted under GAAP. Trustmark encourages readers to consider its consolidated financial statements and the notes related thereto in their entirety, and not to rely on any single financial measure.
The following table presents adjustments to net income and select financial ratios as reported in accordance with GAAP resulting from significant non-routine items occurring during the periods presented ($ in thousands, except per share data):
Diluted EPS
Net Income (GAAP)
0.457
0.420
1.173
1.303
Significant non-routine transactions (net of taxes):
Non-routine early retirement
program expense
0.002
5,884
0.087
Non-routine pension expense due to
de-risking strategy in Plan assets portfolio
0.006
Net Income adjusted for significant
non-routine transactions (Non-GAAP)
31,538
0.465
85,782
1.266
Reported (GAAP)
Adjusted
(Non-GAAP)
8.20
7.57
11.36
10.60
0.89
n/a – Not Applicable
Results of Operations
Net interest income is the principal component of Trustmark’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The net interest margin is computed by dividing fully taxable equivalent (FTE) net interest income by average interest-earning assets and measures how effectively Trustmark utilizes its interest-earning assets in relationship to the interest cost of funding them. The accompanying Yield/Rate Analysis Table shows the average balances for all assets and liabilities of Trustmark and the interest income or expense associated with earning assets and interest-bearing liabilities. The yields and rates have been computed based upon interest income and expense adjusted to a FTE basis using a 35% federal marginal tax rate for all periods shown. Loans on nonaccrual have been included in the average loan balances, and interest collected prior to these loans having been placed on nonaccrual has been included in interest income. Loan fees included in interest associated with the average loan balances are immaterial.
Net interest income-FTE for the three months ended September 30, 2016 remained relatively unchanged when compared to the same time period in 2015, while the net interest margin for the third quarter of 2016 decreased 20 basis points to 3.52% when compared to the third quarter of 2015. Net interest income-FTE for the nine months ended September 30, 2016 decreased $1.7 million, or 0.6%, when compared with the same time period in 2015. The net interest margin for the nine months ended September 30, 2016 decreased 26 basis points to 3.54% when compared to the same time period in 2015. The decrease in the net interest margin for both the three and nine months ended September 30, 2016, reflected the prolonged low interest rate environment in the United States, and was primarily the result of decreases in the yield on acquired loans principally due to declines in accretion income and recoveries on settlement of debt related to acquired loans and downward repricing of LHFI in response to increased competitive pricing pressures. The net interest margin excluding acquired loans, which equals the reported net interest income-FTE excluding interest and fees on
acquired loans, as a percentage of average earning assets excluding average acquired loans, for the three and nine months ended September 30, 2016 was 3.38% and 3.39%, respectively, a decrease of 5 basis points and 8 basis points, respectively, when compared to the same time periods in 2015, due to similar factors as discussed above.
Average interest-earning assets for the first nine months of 2016 were $11.406 billion compared to $10.700 billion for the same time period in 2015, an increase of $706.7 million, or 6.6%. The growth in average earning assets during the first nine months of 2016 was primarily due to an increase in average loans (LHFS and LHFI) of $873.7 million, or 13.2%, partially offset by a decrease in average acquired loans of $134.4 million, or 27.8%, and decline in average total securities of $50.6 million, or 1.4%. The increase in average loans (LHFS and LHFI) was primarily attributable to the $707.6 million, or 10.4%, increase in the LHFI portfolio when balances at September 30, 2016 are compared to balances at September 30, 2015. This increase represented net growth across all of Trustmark’s market regions and all categories in its LHFI portfolio, with the exception of loans secured by 1-4 family residential properties and construction, land development and other land loans. The decline in average acquired loans was primarily attributable to pay-offs of acquired loans, principally related to the BancTrust merger. The decline in average total securities for the first nine months of 2016 was principally due to calls, maturities and pay-downs of the loans underlying these securities.
During the first nine months of 2016, interest and fees on LHFS and LHFI-FTE increased $20.5 million, or 9.6%, when compared to the same time period in 2015, due to growth in LHFI, while the yield on loans (LHFS and LHFI) fell 14 basis points to 4.18% as a result of downward repricing of LHFI due to the current low interest rate environment and related competitive pressures. During the first nine months of 2016, interest and fees on acquired loans decreased $17.4 million, or 44.3%, compared to the same time period in 2015, due to declines in accretion income and recoveries on settlement of debt as acquired loans continue to pay-down as anticipated. As a result, the yield on acquired loans for the first nine months of 2016 decreased to 8.38% compared to 10.87% during the first nine months of 2015. As a result of these factors, interest income-FTE increased $1.1 million, or 0.3%, when the first nine months of 2016 is compared to the same time period in 2015. The impact of these changes is also illustrated by the decline in the yield on total earning assets, which fell from 3.99% for the first nine months of 2015 to 3.75% for the first nine months of 2016, a decrease of 24 basis points.
Average interest-bearing liabilities for the first nine months of 2016 totaled $8.265 billion compared to $7.832 billion for the same time period in 2015, an increase of $433.0 million, or 5.5%. The increase in average interest-bearing liabilities was principally due to the increase in average other borrowings partially offset by a decline in average interest-bearing deposits. Average other borrowings increased $656.0 million when the first nine months of 2016 is compared to the first nine months of 2015, primarily reflecting the increased balance of long-term FHLB advances obtained from the FHLB of Dallas as Trustmark chose to utilize these less costly sources of funding, partially offset by the maturity of a $6.5 million FHLB advance with the FHLB of Atlanta, which was acquired in the BancTrust merger, during the fourth quarter of 2015. Average interest-bearing deposits for the first nine months of 2016 decreased $235.8 million, or 3.4%, when compared to the same time period in 2015, principally due to declines in average time deposits, reflecting Trustmark’s continued efforts to reduce high-cost deposit balances and customers continued movement away from longer-term commitments as a result of the low interest rate environment.
Total interest expense for the first nine months of 2016 increased $2.8 million, or 18.7%, when compared with the same time period in 2015, principally due to the increase in other interest expense. Other interest expense for the first nine months of 2016 increased $2.3 million, or 46.2%, when compared to the same time period in 2015 primarily due to the increase in FHLB advances with the FHLB of Dallas, while the rate on other borrowings declined from 1.61% for the first nine months of 2015 to 0.92% for the first nine months of 2016. The decline in the rate on other borrowings for the first nine months of 2016 was principally due to the FHLB advances outstanding during the first nine months of 2016 having a much lower interest rate than those advances outstanding during the first nine months of 2015, primarily as a result of the $6.5 million FHLB advance acquired in the BancTrust merger which expired in the fourth quarter of 2015. During the first nine months of 2016, interest expense on federal funds purchased and securities sold under repurchase agreements increased $719 thousand, while the rate on federal funds purchased and securities sold under repurchase agreements increased 19 basis points to 0.34% when compared to the first nine months of 2015. The increase in the rate on federal funds purchased and securities sold under repurchase agreements for the first nine months of 2016 was primarily due to the increase in rates by the FRB. As a result of these factors, the overall yield on interest-bearing liabilities increased 3 basis points to 0.29% when the first nine months of 2016 is compared with the first nine months of 2015.
The following tables provide the tax equivalent basis yield or rate for each component of the tax equivalent net interest margin for the periods presented ($ in thousands):
Interest
Yield/
Rate
Interest-earning assets:
Federal funds sold and securities purchased under
reverse repurchase agreements
1,352
1.47
1,167
0.68
Securities - taxable
3,364,162
2.29
3,421,436
2.35
Securities - nontaxable
129,412
1,388
4.27
152,568
1,609
4.18
Loans (LHFS and LHFI)
7,658,089
80,649
4.19
6,771,947
72,951
317,273
8.50
440,244
10.46
Other earning assets
68,706
1.29
58,534
2.66
Total interest-earning assets
11,538,994
108,397
3.74
10,845,896
106,825
3.91
Cash and due from banks
299,670
266,174
1,243,854
1,286,189
Allowance for loan losses, net
(82,301
(84,482
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits
6,616,590
6,760,033
0.18
Federal funds purchased and securities sold under
481,071
0.34
528,232
Other borrowings
1,174,412
647,937
1.11
Total interest-bearing liabilities
8,272,073
0.30
7,936,202
0.26
Noninterest-bearing demand deposits
3,060,331
2,771,186
136,971
137,134
Shareholders' equity
Net Interest Margin
102,175
101,662
Less tax equivalent adjustment
4,611
4,056
Net Interest Margin per Consolidated
Statements of Income
1.34
650
0.82
3,351,572
3,377,246
2.36
135,038
4,314
159,973
5,086
4.25
7,503,842
234,661
6,630,143
214,155
4.32
348,369
8.38
482,807
10.87
66,477
48,759
3.23
11,406,298
320,331
3.75
10,699,578
319,245
3.99
284,295
276,151
1,245,988
1,292,685
(82,351
(83,611
6,692,936
6,928,711
495,535
482,740
1,076,822
420,841
1.61
8,265,293
0.29
7,832,292
2,941,795
2,762,064
134,287
136,754
302,297
304,046
13,616
12,099
Provision for Loan Losses, LHFI
The provision for loan losses, LHFI is determined by Management as the amount necessary to adjust the allowance for loan losses, LHFI to a level, which, in Management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses, LHFI reflects loan quality trends, including the levels of and trends related to nonaccrual LHFI, past due LHFI, potential problem LHFI, criticized LHFI, net charge-offs or recoveries and growth in the LHFI portfolio among other factors. Accordingly, the amount of the provision reflects the necessary increases in the allowance for loan losses, LHFI related to newly identified criticized LHFI as well as the actions taken related to other LHFI including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. The provision for loan losses, LHFI totaled $4.3 million and $9.1 million, respectively, for the three and nine months ended September 30, 2016, an increase of $1.8 million and $3.8 million, respectively, when compared to the same time periods in 2015. See the section captioned “Allowance for Loan Losses, LHFI” for further analysis of the provision for loan losses, LHFI.
64
Provision for Loan Losses, Acquired Loans
The provision for loan losses, acquired loans is recognized subsequent to acquisition to the extent it is probable that Trustmark will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition, considering both the timing and amount of those expected cash flows. Provisions may be required when actual losses of unpaid principal incurred exceed previous loss expectations to date, or future cash flows previously expected to be collectible are no longer probable of collection. The provision for loan losses, acquired loans is reflected as a valuation allowance netted against the carrying value of the acquired loans accounted for under Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The decrease in the provision for loan losses, acquired loans during the third quarter of 2016 when compared to the third quarter of 2015 was principally due to changes in expectations based on the periodic re-estimations performed during the period, primarily related to loans acquired from BancTrust and Heritage. The increase in the provision for loan losses, acquired loans during the first nine months of 2016 when compared to the same time period in 2015 was principally due to changes in expectations based on the periodic re-estimations performed during the period, primarily related to loans acquired from Bay Bank, an increase in charge-offs of acquired loans from Bay Bank, and a decrease in recoveries of acquired loans primarily from BancTrust partially offset by a decrease in charge-offs of acquired loans from both Heritage and BancTrust.
The following table presents the provision for loan losses, acquired loans, by acquisition for the periods presented ($ in thousands):
BancTrust
1,335
3,066
3,043
Bay Bank
(112
(224
Heritage
(391
Total provision for loan losses, acquired loans
Noninterest income represented 31.4% and 31.5% of total revenue, before securities losses, net, for the three and nine months ended September 30, 2016, respectively, compared to 32.0% and 31.4% of total revenue, before securities losses, net, for the three and nine months ended September 30, 2015, respectively. The following table provides the comparative components of noninterest income for the periods presented ($ in thousands):
$ Change
% Change
(723
-5.8
(1,596
-4.5
(208
-3.0
-0.2
(79
-1.1
(3,105
-12.0
1.7
1.4
(219
-2.8
(551
-2.3
(196
-13.3
3,552
n/m
Total Noninterest Income before
securities losses, net
(1,257
-2.7
132,529
(1,350
-1.0
(1,660
-1.2
n/m - percentage changes greater than +/- 100% are not considered meaningful
Changes in various components of noninterest income are discussed in further detail below. For analysis of Trustmark’s insurance commissions and wealth management income, please see the section captioned “Results of Segment Operations.”
Service Charges on Deposit Accounts
The decrease in service charges on deposit accounts for both the three and nine months ended September 30, 2016 when compared to the same time periods in 2015 was primarily due to a decrease in the number of occurrences resulting in a non-sufficient funds or overdraft charge.
Mortgage Banking, Net
The following table illustrates the components of mortgage banking income included in noninterest income for the periods presented ($ in thousands):
Mortgage servicing income, net
5,271
4,906
365
7.4
15,506
14,499
1,007
7.0
Change in fair value-MSR from runoff
(2,862
(2,636
(226
8.6
69
-0.9
Gain on sales of loans, net
6,410
4,479
1,931
43.1
14,481
13,309
1,172
8.8
(299
(514
2,841
1,666
1,175
70.5
Mortgage banking income before
hedge ineffectiveness
1,556
22.3
25,461
22,038
3,423
15.5
Change in fair value-MSR from
market changes
381
(4,141
4,522
(13,085
Change in fair value of derivatives
(1,537
4,620
(6,157
10,841
6,557
Net (negative) positive hedge
ineffectiveness
(1,156
(1,635
(2,677
3,851
(6,528
The decrease in net revenue from mortgage banking for the three months ended September 30, 2016 when compared to the same time period in 2015 was principally due to a net negative hedge ineffectiveness in the third quarter of 2016 compared to a net positive hedge ineffectiveness in the third quarter of 2015, which was mostly offset by an increase in gain on sale of loans, net. The decrease in net revenue from mortgage banking for the nine months ended September 30, 2016 when compared to the same time period in 2015 was principally due to a net negative hedge ineffectiveness in the first nine months of 2016 compared to a net positive hedge ineffectiveness in the first nine months of 2015 partially offset by increases in mortgage banking income due to the factors described below. Mortgage loan production for the three and nine months ended September 30, 2016 was $487.9 million and $1.199 billion, respectively, an increase of $67.5 million, or 16.1%, and $57.6 million, or 5.0%, respectively, when compared to the same time periods in 2015. Loans serviced for others totaled $6.265 billion at September 30, 2016, compared with $5.852 billion at September 30, 2015, an increase of $413.0 million, or 7.1%, primarily due to increased loan sales.
Representing a significant component of mortgage banking income is gain on the sales of loans, net. The increase in the gain on sales of loans, net when the three and nine months ended September 30, 2016 is compared to the same time periods in 2015, resulted from both higher profit margins from secondary marketing activities as well as higher volumes of loans sold. Loan sales totaled $425.6 million for the three months ended September 30, 2016, an increase of $75.1 million, or 21.4%, when compared with the same time period in 2015. Loan sales totaled $1.016 billion for the nine months ended September 30, 2016, an increase of $85.8 million, or 9.2%, when compared with the same time period in 2015. The increase in loans sales for the first nine months of 2016 when compared to the same time period in 2015 was primarily due to Trustmark’s decision during 2015 to sell the vast majority of these lower-rate, longer-term home mortgages in the secondary market, rather than replacing the run-off in its single-family loan portfolio.
Other mortgage banking income, net includes the net valuation adjustment recognized in income in accordance with FASB ASC Topic 825, “Financial Instruments,” for the fair value of LHFS accounted for under the fair value option and the net valuation adjustment recognized in income in accordance with FASB ASC Topic 815, “Derivatives and Hedging,” for the fair value of interest rate lock commitments and forward sales contracts. Valuation adjustments are primarily the result of changes in volume and profit margins for the related instruments during the period. The decrease in other mortgage banking income, net when comparing the three months ended September 30, 2016 with the same time period in 2015 primarily resulted from the negative net valuation adjustment in the fair value of LHFS, interest rate lock commitments and forward sales contracts during the third quarter of 2016 compared to a positive net valuation adjustment during the third quarter of 2015, which was principally due to larger declines in volumes during the three months ended September 30, 2016. The increase in other mortgage banking income, net when comparing the first nine months of 2016 with the same time period in 2015 primarily resulted from an increase in the positive net valuation adjustment in the fair value of LHFS, interest rate lock commitments and forward sales contracts during the period, which was principally due to higher increases in volumes and profit margins during the first nine months of 2016. For additional information regarding the LHFS accounted for under the fair value option, please see the section captioned “Fair Value Option” included in Note 15 – Fair Value set forth in Part I. Item 1. – Financial Statements – of this report. See the section captioned “Derivatives” for further discussion of the mortgage related derivative instruments.
66
Other Income, Net
The following table illustrates the components of other income, net included in noninterest income for the periods presented ($ in thousands):
Partnership amortization for tax credit
purposes
(2,479
(2,083
(396
19.0
(7,437
(7,035
(402
5.7
(Decrease) Increase in FDIC
indemnification asset
(289
(2,686
2,397
-89.2
Increase in life insurance cash
surrender value
1,746
1,687
3.5
5,140
5,035
105
2.1
Other miscellaneous income
1,784
295
16.5
6,120
4,668
1,452
31.1
Total other, net
The increase in other income, net when the first nine months of 2016 are compared to the same time period in 2015 was primarily the result of a decrease in the net reduction of the FDIC indemnification asset and increases in other miscellaneous income. The increase in other miscellaneous income for the first nine months of 2016 compared to the same time period in 2015 was principally due to a decrease in the net loss on the sale of premises and equipment due to a loss recorded during the first nine months of 2015 on the sale of a former bank branch acquired in the February 2013 merger with BancTrust and an increase in other miscellaneous income related to various vendor contract bonuses and settlements received during the second quarter of 2016 as well as a one-time arrangement fee received during the third quarter of 2016. The decrease in the net reduction of the FDIC indemnification asset for the nine months ended September 30, 2016 was principally due to the decline in the balance of the FDIC indemnification asset as a result of amortization and valuation adjustments over the life of the loss share agreements as well as the expiration of a loss share agreement with the FDIC on June 30, 2016. See the section caption “Acquired Loans” for further discussion of the acquired loans covered by loss share agreements with the FDIC.
The following table illustrates the comparative components of noninterest expense for the periods presented ($ in thousands):
(1,020
-1.8
8,637
5.0
256
0.3
Net occupancy-premises
(140
-2.1
(458
-2.4
3.2
299
Other real estate expense:
671
2,156
(1,485
-68.9
3,526
3.6
Net (gain)/loss on sale
(2,706
(2,813
(6,152
(2,063
(4,089
Carrying costs
722
1,122
(400
-35.7
2,560
3,958
-35.3
Total other real estate expense
(4,698
(5,360
-98.9
352
13.8
567
(588
-4.8
177
0.5
Total noninterest expense
(5,652
-5.5
3,989
1.3
Changes in the various component of noninterest expense are discussed in further detail below. Management considers disciplined expense management a key area of focus in the support of improving shareholder value. During the second quarter of 2016, Trustmark completed a voluntary ERP as a proactive measure to manage noninterest expense. As a result of the ERP, 188 of the eligible associates retired by June 30, 2016. The ERP resulted in a one-time charge of $9.3 million to noninterest expense ($9.1 million included in salaries and employee benefits expense and $230 thousand included in other expense) during the second quarter of 2016 and $236 thousand of noninterest expense included in salaries and employee benefits expense during the third quarter of 2016.
67
Salaries and Employee Benefits
The decrease in salaries and employee benefits, the largest category of noninterest expense, for the three months ended September 30, 2016 when compared to the same time period in 2015 was principally due to the ERP completed during the second quarter of 2016. During the third quarter of 2016, Trustmark realized cost savings related to the ERP of $1.9 million in salaries and employee benefits expense, which was partially offset by the $236 thousand of additional pension expense related to the ERP, which resulted from additional settlements from pension lump sum elections, and $664 thousand of non-routine pension expense resulting from the de-risking strategy implemented for the plan assets in anticipation of the termination of the Plan on December 31, 2016. The increase in salaries and employee benefits for the nine months ended September 30, 2016 when compared to the same time period in 2015 was principally due to the ERP completed during the second quarter of 2016 and higher commission expense resulting from increased mortgage and insurance production. Excluding the non-routine expenses related to the ERP and the Plan termination, salaries and employee benefits for the nine months ended September 30, 2016 decreased $1.3 million, or 0.8%, when compared to the same time period in 2015.
Other Real Estate Expense
The decrease in other real estate expense for the three months ended September 30, 2016 compared with the same time period in 2015 was principally due to an increase in the net gain on the sale of other real estate and a decrease in write-downs of other real estate as well as declines in other real estate taxes. The decrease in other real estate expense for the nine months ended September 30, 2016 compared with the same time period in 2015 was principally due to an increase in the net gain on the sale of other real estate as well as declines in other real estate carrying costs. For additional analysis of other real estate and foreclosure expenses, please see the section captioned “Nonperforming Assets, Excluding Acquired Loans and Covered Other Real Estate.”
Other Expense
The following table illustrates the comparative components of other noninterest expense for the periods presented ($ in thousands):
Loan expense
3,336
3,416
(80
9,403
9,479
(76
-0.8
Amortization of intangibles
1,692
1,942
-12.9
5,180
5,892
(712
-12.1
Other miscellaneous expense
6,582
6,840
(258
-3.8
21,684
20,719
965
4.7
Total other expense
The increase in other expenses for the nine months ended September 30, 2016 when compared to the same time period in 2015 was principally due to increases in other miscellaneous expenses, primarily resulting from higher customer-related fraud losses, a property valuation adjustment recorded during the second quarter of 2016 related to properties transferred to assets held for sale and non-routine expenses related to the ERP during the second quarter of 2016, partially offset by a decline in franchise taxes. As previously reported, during the second quarter of 2016, Trustmark continued its measured approach to the optimization of its retail delivery channels by closing six branches with limited growth opportunities in the Alabama, Florida and Mississippi market regions. These six branches and a property previously purchased in anticipation of a future branch were transferred to assets held for sale during the second quarter at the lower of the current net book value or the fair value less costs to sell. A property valuation adjustment of $750 thousand was recorded as a result of transferring these properties to assets held for sale.
Results of Segment Operations
For a description of the methodologies used to measure financial performance and financial information by reportable segment, please see Note 17 – Segment Information included in Part I. Item 1. – Financial Statements – of this report. The following discusses changes in the results of operations of each reportable segment for the nine months ended September 30, 2016 and 2015.
Net interest income for the General Banking Division decreased $3.5 million, or 1.2%, when the nine months ended September 30, 2016 is compared with the same time period in 2015. The decline in net interest income was mostly due to declines in interest and fees on acquired loans and an increase in other interest expense, which were partially offset by increases in interest and fees on LHFS and LHFI. The provision for loan losses, net for the nine months ended September 30, 2016 totaled $11.7 million compared to $7.8 million for the same period in 2015, an increase of $4.0 million, or 51.2%. For more information on these net interest income items, please see the sections captioned “Financial Highlights” and “Results of Operations.”
Noninterest income for the General Banking Division decreased $1.2 million, or 1.5%, during the first nine months of 2016 compared to the same time period in 2015. Noninterest income for the General Banking Division represented 22.0% of total revenues for this segment for the first nine months of 2016 as opposed to 22.1% for the same time period in 2015. Noninterest income for the General Banking Division includes service charges on deposit accounts; bank card and other fees; mortgage banking, net; other income, net and securities losses, net. For more information on these noninterest income items, please see the analysis included in the section captioned “Noninterest Income.”
Noninterest expense for the General Banking Division increased $4.7 million, or 1.8%, during the first nine months of 2016 compared with the same time period in 2015, principally due to the non-routine expenses related to the ERP, increased commission expense as a result of higher mortgage loan production and non-routine pension expense resulting from the de-risking strategy implemented for the plan assets in anticipation of the termination of the Plan, partially offset by declines in other real estate expense. For more information on these noninterest expense items, please see the analysis included in the section captioned “Noninterest Expense.”
During the first nine months of 2016, net income for the Wealth Management Division increased $465 thousand, or 17.5%, when compared to the same time period in 2015. Net interest income for the Wealth Management Division increased $377 thousand when the first nine months of 2016 is compared to the same time period in 2015 due to an increase in the interest income earned on deposit accounts held by the Wealth Management Division. Noninterest income, which includes income related to investment management, trust and brokerage services, decreased $796 thousand, or 3.4%, when the first nine months of 2016 are compared to the same time period in 2015. The decrease in noninterest income for the Wealth Management Division was primarily attributable to declines in commissions and annuity income generated by the brokerage services unit and trust fees related to retirement planning and personal estate services, partially offset by an increase in trust asset management fee income from mutual funds and custody services. Noninterest expense for the Wealth Management Division decreased $1.2 million, or 6.1%, during the first nine months of 2016 compared to the same time period in 2015, principally due to decreases in salaries and employee benefits, primarily due to lower commissions and salary expense, and data processing charges related to software as well as a gain recorded in other expense during the first quarter of 2016 related to the recapture of funds from a trust account.
At September 30, 2016 and 2015, Trustmark held assets under management and administration of $10.777 billion and $10.285 billion, respectively, and brokerage assets of $1.619 billion and $1.557 billion, respectively.
Net income for the Insurance Division during the first nine months of 2016 decreased $167 thousand, or 3.9%, compared to the same time period in 2015. Noninterest income for the Insurance Division increased $383 thousand, or 1.4%, when the first nine months of 2016 are compared to the same time period in 2015. Insurance commissions, which make up predominantly all of noninterest income for the Insurance Division, totaled $10.1 million for the third quarter of 2016, an increase of $168 thousand, or 1.7%, compared to the third quarter of 2015, and an increase of $437 thousand, or 4.5%, compared to the second quarter of 2016. The increase in insurance commissions during the first nine months of 2016 when compared to the same time period in 2015 was primarily due to new business commission volume primarily in group health coverage partially offset by declines in business commission volume primarily in personal property and casualty coverage. Growth in new business commission volumes reflected both a continued focus on new business and the addition of experienced account executives with an established book of business during 2015. General business activity in Trustmark’s geographic markets continues to improve marginally, resulting in increases in the demand for coverage on inventories, property, equipment, general liability and workers’ compensation. Noninterest expense for the Insurance Division increased $502 thousand, or 2.4%, when the first nine months of 2016 is compared to the same time period in 2015, primarily due to higher salaries and commissions expense resulting from modest general merit increases and improved performance.
Income Taxes
For the three and nine months ended September 30, 2016, Trustmark’s combined effective tax rate was 21.4% and 22.2%, respectively, compared to 21.6% and 23.3%, respectively, for the same time periods in 2015. Trustmark invests in partnerships that provide income tax credits on a Federal and/or State basis (i.e., new market tax credits, low income housing tax credits or historical tax credits). The income tax credits related to these partnerships are utilized as specifically allowed by income tax law and are recorded as a reduction in income tax expense.
Financial Condition
Earning assets serve as the primary revenue streams for Trustmark and are comprised of securities, loans, federal funds sold, securities purchased under reverse repurchase agreements and other earning assets. Average earning assets totaled $11.406 billion, or 88.7% of total average assets, at September 30, 2016, compared to $10.700 billion, or 87.8% of total average assets, at September 30, 2015, an increase of $706.7 million, or 6.6%.
The securities portfolio is utilized by Management to manage interest rate risk, generate interest income, provide liquidity and use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering duration, composition and/or balance of the portfolio. The weighted-average life of the portfolio decreased to 3.9 years at September 30, 2016, compared to 5.2 years at December 31, 2015.
When compared with December 31, 2015, total investment securities increased by $20.9 million, or 0.6%, during the first nine months of 2016. This increase resulted primarily from purchases of government-sponsored enterprise (GSE) guaranteed securities and improvements in the fair market value of the available for sale securities, which were largely offset by maturities and pay-downs of the loans underlying these securities. Trustmark sold $25.0 million of securities during the first nine months of 2016, which generated a net loss of $310 thousand, compared to no securities sold during the first nine months of 2015.
During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale as securities held to maturity to mitigate the potential adverse impact of a rising interest rate environment on the fair value of the available for sale securities and the related impact on tangible common equity. The securities were transferred at fair value, which became the cost basis for the securities held to maturity. At the date of transfer, the net unrealized holding loss on the available for sale securities totaled approximately $46.6 million. The net unrealized holding loss is amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. At September 30, 2016, the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive loss (AOCL) in the accompanying consolidated balance sheets totaled $25.7 million ($15.8 million net of tax) compared to $34.0 million ($21.0 million net of tax) at December 31, 2015.
Available for sale securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in AOCL, a separate component of shareholders’ equity. At September 30, 2016, available for sale securities totaled $2.411 billion, which represented 67.8% of the securities portfolio, compared to $2.345 billion, or 66.4%, at December 31, 2015. At September 30, 2016, unrealized gains, net on available for sale securities totaled $38.2 million compared to $5.9 million at December 31, 2015. At September 30, 2016, available for sale securities consisted of obligations of states and political subdivisions, GSE guaranteed mortgage-related securities and direct obligations of government agencies and GSEs.
Held to maturity securities are carried at amortized cost and represent those securities that Trustmark both intends and has the ability to hold to maturity. At September 30, 2016, held to maturity securities totaled $1.143 billion and represented 32.2% of the total securities portfolio, compared with $1.188 billion, or 33.6%, at December 31, 2015.
Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of approximately 95% of the portfolio in GSE-backed obligations and other Aaa-rated securities as determined by Moody’s Investors Services (Moody’s). None of the securities owned by Trustmark are collateralized by assets which are considered sub-prime. Furthermore, outside of stock ownership in the FHLB of Dallas, FHLB of Atlanta and Federal Reserve Bank of Atlanta, Trustmark does not hold any other equity investment in a GSE.
As of September 30, 2016, Trustmark did not hold securities of any one issuer with a carrying value exceeding ten percent of total shareholders’ equity, other than certain GSEs which are exempt from inclusion. Management continues to closely monitor the credit quality as well as the ratings of the debt and mortgage-backed securities issued by the GSEs and held in Trustmark’s securities portfolio.
The following table presents Trustmark’s securities portfolio by amortized cost and estimated fair value and by credit rating, as determined by Moody’s, at September 30, 2016 ($ in thousands):
Amortized Cost
Estimated Fair Value
Aaa
2,251,235
94.9
2,286,307
94.8
Aa1 to Aa3
78,255
3.3
80,493
3.4
A1 to A3
362
369
Baa1 to Baa3
220
Not Rated (1)
42,647
1.8
43,558
100.0
1,090,297
95.4
1,117,552
95.3
39,783
41,965
389
421
441
12,344
1.1
12,752
Total securities held to maturity
Not rated issues primarily consist of Mississippi municipal general obligations
The table above presenting the credit rating of Trustmark’s securities is formatted to show the securities according to the credit rating category, and not by category of the underlying security. At September 30, 2016, approximately 94.8% of the available for sale securities and 95.4% of the held to maturity securities were rated Aaa.
LHFS
At September 30, 2016, LHFS totaled $242.1 million, consisting of $204.8 million of residential real estate mortgage loans in the process of being sold to third parties and $37.3 million of GNMA optional repurchase loans. At December 31, 2015, LHFS totaled $160.2 million, consisting of $124.2 million of residential real estate mortgage loans in the process of being sold to third parties and $36.0 million of GNMA optional repurchase loans. Please refer to the nonperforming assets table that follows for information on GNMA loans eligible for repurchase which are past due 90 days or more.
During the first quarter of 2015, Trustmark exercised its option to repurchase approximately $28.5 million delinquent loans serviced for GNMA. These loans were subsequently sold to a third party under different repurchase provisions. Trustmark retained the servicing for these loans, which are subject to guarantees by FHA/VA. As a result of this repurchase and sale, the loans were no longer carried as LHFS. The transaction resulted in a gain of $304 thousand, which is included in mortgage banking, net for the first nine months of 2015. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first nine months of 2016.
For additional information regarding the GNMA optional repurchase loans, please see the section captioned “Past Due LHFS” included in Note 3 – Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI of Part I. Item 1. – Financial Statements – of this report.
The table below shows the carrying value of the LHFI portfolio by loan type at September 30, 2016 and December 31, 2015 ($ in thousands):
10.2
11.6
Secured by 1- 4 family residential properties
21.2
23.3
25.6
24.5
4.2
3.0
18.9
2.3
2.4
11.7
10.4
5.8
5.9
LHFI increased $407.8 million, or 5.8%, compared to December 31, 2015. The increase in LHFI during the first nine months of 2016 represented net growth across all five of Trustmark’s market regions, primarily in the loans secured by real estate, state and other political subdivision loans categories and commercial and industrial loans.
LHFI secured by real estate increased $171.0 million, or 3.9%, during the first nine months of 2016 as growth in the Alabama, Texas, Mississippi and Florida market regions was partially offset by declines in the Tennessee market region. LHFI secured by construction, land development and other land decreased $58.0 million, or 7.0%, during the first nine months of 2016, primarily due to other construction loans that were moved to the appropriate permanent categories partially offset by new loans primarily in the other construction loans and 1-4 family construction categories. During the first nine months of 2016, $441.4 million in other construction loans were moved to the appropriate permanent categories upon completion, including $257.8 million in non-owner occupied, $71.6 million in owner occupied, $111.8 million in multi-family residential and $283 thousand in state and other political subdivision loans. Excluding all reclassifications between loan categories, growth in other construction loans across all five market regions totaled $363.4 million for the first nine months of 2016. The 1-4 family construction loan portfolio increased $14.6 million, or 9.5%, during the first nine months of 2016, principally due to growth in Trustmark’s Alabama, Texas and Tennessee market regions.
The commercial real estate loan portfolio increased $179.7 million, or 10.3%, during the first nine months of 2016, principally due to construction loans that moved to permanent financing. Excluding the reclassifications from other construction loans, the commercial real estate loans portfolio declined $150.3 million, or 8.7%, during the first nine months of 2016. The decrease in the commercial real estate loan portfolio, excluding the other construction reclassifications, was primarily attributable to declines in non-owner occupied loans in all five of Trustmark’s market regions as well as declines in owner occupied loans in the Mississippi, Texas and Tennessee market regions. Other real estate secured LHFI increased $106.5 million, or 50.4%, during the first nine months of 2016, primarily due to multi-family residential loans in Trustmark’s Texas, Tennessee, Mississippi and Alabama market regions that were moved from other construction loans to permanent financing. Excluding all reclassifications between loan categories, other real estate secured LHFI decreased $16.6 million, or 7.9%, during the first nine months of 2016. LHFI secured by 1-4 family residential properties declined $57.0 million, or 3.5%, during the first nine month of 2016, reflecting declines in the Mississippi, Tennessee, Texas and Florida market regions partially offset by growth in the Alabama market region. The decline in LHFI secured by 1-4 family residential properties reflects Trustmark’s decision in 2015 to sell the vast majority of these lower-rate, longer-term home mortgages in the secondary market, rather than replacing the run-off in its single-family loan portfolio.
The commercial and industrial loan portfolio increased $78.2 million, or 5.8%, during the first nine months of 2016, due to growth in the Tennessee, Alabama and Florida market regions, partially offset by declines in the Mississippi and Texas market regions. Trustmark’s exposure to the energy sector is primarily included in the commercial and industrial loan portfolio in Trustmark’s Mississippi and Texas market regions. At September 30, 2016 and December 31, 2015, energy-related LHFI had outstanding balances of approximately $255.7 million and $213.0 million, respectively, which represented approximately 3.4% of Trustmark’s total LHFI portfolio at September 30, 2016 compared to approximately 3.0% of the total LHFI portfolio at December 31, 2015. Trustmark has no loan exposure where the source of repayment, or the underlying security of such exposure, is tied to the realization of value from energy reserves. Should oil prices remain at current levels or below for a prolonged period of time, there is potential for downgrades to occur. Management will continue to monitor this exposure.
72
State and other political subdivision LHFI increased $141.4 million, or 19.2%, during the first nine months of 2016 principally due to growth in traditional public finance loans, such as investments that entail the use of tax anticipation notes, public school improvements, facility improvements and renovations, in all five of Trustmark’s market regions. The other loan portfolio, which includes lending to nonprofits and real estate investment trusts, increased $16.3 million, or 3.9%, during the first nine months of 2016, which primarily represented growth in Trustmark’s Tennessee, Mississippi and Alabama market regions partially offset by declines in the Texas market region.
The following table provides information regarding Trustmark’s home equity loans and home equity lines of credit which are included in the LHFI secured by 1-4 family residential properties for the periods presented ($ in thousands):
Home equity loans
54,009
61,635
Home equity lines of credit
382,172
376,998
Percentage of loans and lines for which Trustmark holds first lien
59.1
58.9
Percentage of loans and lines for which Trustmark does not hold first lien
40.9
41.1
Due to the increased risk associated with second liens, loan terms and underwriting guidelines differ from those used for products secured by first liens. Loan amounts and loan-to-value ratios are limited and are lower for second liens than first liens. Also, interest rates and maximum amortization periods are adjusted accordingly. In addition, regardless of lien position, the passing credit score for approval of all home equity lines of credit is higher than that of term loans. The allowance for loan losses, LHFI is also reflective of the increased risk related to second liens through application of a greater loss factor to this portion of the portfolio.
The following tables provide information regarding the interest rate terms of Trustmark’s LHFI as of September 30, 2016 and December 31, 2015 ($ in thousands). Trustmark’s variable rate LHFI are based primarily on various prime and LIBOR interest rate bases.
Fixed
Variable
226,515
540,170
1,543,286
49,167
1,098,404
817,749
148,036
169,644
494,052
927,330
149,988
20,085
779,194
96,779
191,134
247,671
4,630,609
2,868,595
311,049
513,674
1,573,640
75,861
1,116,689
619,787
160,147
51,081
611,198
732,013
149,742
19,393
682,028
52,587
210,186
212,310
4,814,679
2,276,706
In the following tables, LHFI reported by region (along with related nonperforming assets and net charge-offs) are associated with location of origination except for loans secured by 1-4 family residential properties (representing traditional mortgages), credit cards and indirect consumer auto loans. These loans are included in the Mississippi Region because they are centrally analyzed and approved as part of a specific line of business located at Trustmark’s headquarters in Jackson, Mississippi.
The following table presents the LHFI composition by region at September 30, 2016 and reflects a diversified mix of loans by region ($ in thousands):
LHFI Composition by Region
Tennessee
138,256
64,664
269,498
55,915
238,352
73,672
47,011
1,350,883
103,739
17,148
264,483
164,480
890,783
135,327
461,080
22,415
3,934
144,864
17,762
128,705
150,892
18,288
683,042
288,595
280,565
20,109
3,688
126,228
17,917
2,131
76,432
29,602
554,403
32,607
182,929
37,715
18,716
300,260
61,811
20,303
783,974
350,383
4,319,961
713,673
1,331,213
Construction, Land Development and Other Land Loans by Region
Lots
58,673
14,008
19,480
20,700
1,831
Development
49,186
6,315
7,246
20,929
619
14,077
Unimproved land
110,549
15,868
16,764
43,079
17,028
17,810
1-4 family construction
169,657
43,729
9,821
70,614
2,877
42,616
Other construction
378,620
58,336
11,353
114,176
33,560
161,195
land loans
Loans Secured by Nonfarm, Nonresidential Properties by Region
Non-owner occupied:
Retail
290,139
67,751
36,384
111,629
21,601
52,774
Office
232,940
32,747
31,247
78,121
6,212
84,613
Nursing homes/assisted living
97,159
90,351
6,808
Hotel/motel
192,610
46,418
21,482
50,589
25,916
48,205
Mini-storage
111,854
9,070
5,445
53,399
43,757
Industrial
88,693
9,498
9,236
24,944
5,254
39,761
Health care
25,162
2,587
837
21,738
Convenience stores
18,980
1,564
10,130
1,030
6,256
70,253
5,814
10,879
22,849
27,870
Total non-owner occupied loans
1,127,790
175,449
115,510
463,750
69,845
303,236
Owner-occupied:
144,046
15,775
23,995
77,336
6,971
19,969
Churches
86,329
8,785
2,125
44,829
23,370
7,220
Industrial warehouses
126,365
6,409
3,788
60,487
10,553
45,128
123,856
20,153
6,963
69,296
7,983
19,461
87,992
7,466
2,375
53,596
1,204
23,351
35,657
3,983
5,127
20,749
2,048
3,750
Restaurants
32,028
3,593
1,149
21,656
3,529
2,101
Auto dealerships
14,542
8,944
4,393
137,548
13,926
3,406
74,691
8,661
36,864
Total owner-occupied loans
788,363
89,034
48,970
427,033
65,482
157,844
Loans secured by nonfarm, nonresidential
74
Trustmark’s allowance for loan loss methodology is based on guidance provided in SEC Staff Accounting Bulletin (SAB) No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues,” as well as other regulatory guidance. Trustmark’s allowance has been developed using different factors to estimate losses based upon specific evaluation of identified individual LHFI considered impaired, estimated identified losses on various pools of LHFI and/or groups of risk rated LHFI with common risk characteristics and other external and internal factors of estimated probable losses based on other facts and circumstances. The level of Trustmark’s allowance reflects Management’s continuing evaluation of specific credit risks, loan loss experience, current loan portfolio growth, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. For a complete description of Trustmark’s allowance for loan loss methodology and the quantitative and qualitative factors included in the valuation allowance, please see Note 3 – Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI included in Part I. Item 1. – Financial Statements – of this report.
At September 30, 2016, the allowance for loan losses, LHFI, was $70.9 million, an increase of $3.3 million, or 4.8%, when compared with December 31, 2015. The increase in the allowance for loan loss was principally due to an increase in the required qualitative reserve for commercial LHFI across all five of Trustmark’s market regions during the first nine months of 2016, partially offset by a decline in the required specific reserve for impaired LHFI primarily in the Mississippi, Texas and Alabama market regions. Total allowance coverage of nonperforming LHFI, excluding specifically reviewed impaired LHFI, increased to 256.56% at September 30, 2016, compared to 210.32% at December 31, 2015 due to the increase in the allowance for loan losses, LHFI balance and a decrease in specifically reviewed impaired LHFI during the first nine months of 2016. Allocation of Trustmark’s $70.9 million allowance for loan losses, LHFI, represented 1.02% of commercial LHFI and 0.68% of consumer and home mortgage LHFI, resulting in an allowance to total LHFI of 0.95% as of September 30, 2016. This compares with an allowance to total LHFI of 0.95% at December 31, 2015, which was allocated to commercial LHFI at 1.05% and to consumer and mortgage LHFI at 0.66%.
The following tables present changes in the allowance for loan losses, LHFI by geographic market region for the periods presented ($ in thousands):
6,699
2,853
44,510
5,834
11,900
LHFI charged-off
(126
(3,945
(3,917
202
1,461
1,135
(38
169
(2,484
(74
(2,782
703
151
3,267
6,793
3,053
42,729
5,911
12,385
4,671
4,074
45,436
6,734
10,251
(245
(101
(9,185
(677
(1,198
1,191
1,794
229
(163
1,090
(7,391
(448
(1,161
(70
(1,430
(1,050
843
4,438
3,734
42,266
5,236
9,933
5,469
2,766
43,184
5,230
10,970
(777
(459
(7,215
(972
(5,470
240
1,897
5,042
1,205
(537
1,438
(2,173
(334
(4,265
1,861
1,718
5,680
75
3,647
3,920
47,290
5,674
9,085
(1,579
(13,333
(1,243
(1,738
272
2,158
4,771
906
1,240
579
(8,562
(337
(498
(765
3,538
1,346
Charge-offs exceeded recoveries for the three and nine months ended September 30, 2016 and 2015. Net charge-offs for the three and nine months ended September 30, 2016 totaled $5.2 million and $5.9 million, a decrease of $2.9 million, or 35.5%, and $3.5 million, or 37.1%, respectively, when compared to the same time periods in 2015. The decrease in net charge-offs when the three and nine months ended September 30, 2016 is compared to the same time periods in 2015 was primarily due to declines in the net charge-offs in the Mississippi market region, partially offset by an increase in net charge-offs in the Texas market region. Net charge-offs for the third quarter of 2016 increased $4.7 million when compared to the second quarter of 2016, principally due to the charge off of several substandard credits in Trustmark’s Texas and Mississippi market regions during the third quarter of 2016.
The provision for loan losses, LHFI represents the change in the estimated loan losses determined utilizing Trustmark’s allowance for loan loss methodology net of charge-offs and recoveries of LHFI charged against net income. The provision for loan losses, LHFI, for the first nine months of 2016 totaled 0.16% of average loans (LHFS and LHFI), compared with 0.11% of average loans (LHFS and LHFI) for the same time period in 2015. The increase in the provision for loan losses, LHFI for the third quarter of 2016 primarily reflects the net effect of revisions to the allowance for loan loss methodology for LHFI during 2015, growth in the LHFI portfolio and increased required reserves for commercial LHFI, partially offset by a decrease in net charge-offs of LHFI and a decline in the amount of specific reserve required for impaired LHFI, primarily in the Mississippi market region, when compared to the third quarter of 2015. The increase in the provision for loan losses, LHFI for the first nine months of 2016 primarily reflects the net effect of revisions to the allowance for loan loss methodology for LHFI during 2015 and growth in the LHFI portfolio and an increase in the amount of reserves required related to commercial LHFI in the Mississippi, Texas and Alabama market regions, partially offset by a decreases in the amount of charge-offs as well as specific reserves required related to impaired LHFI in the Mississippi market regions when compared to the first nine months of 2015. For a complete description of the revisions made to Trustmark’s allowance for loan loss methodology during 2015, please see Note 5 –LHFI and Allowance for Loan Losses, LHFI included in Part II. Item 8. – Financial Statements and Supplementary Data, of Trustmark’s 2015 Annual Report on Form 10-K.
76
Nonperforming Assets, Excluding Acquired Loans and Covered Other Real Estate
The table below provides the components of nonperforming assets, excluding acquired loans and covered other real estate, by geographic market region at September 30, 2016 and December 31, 2015 ($ in thousands):
Nonaccrual LHFI
1,403
1,776
3,719
41,968
40,754
6,620
5,106
700
2,496
Total nonaccrual LHFI
Other real estate
Total nonperforming assets
119,403
132,489
Nonperforming assets/total loans (LHFI and LHFS) and ORE
1.81
Loans past due 90 days or more
LHFS - Guaranteed GNMA serviced loans (1)
25,570
21,812
No obligation to repurchase
See the previous discussion of LHFS for more information on Trustmark’s serviced GNMA loans eligible for repurchase and the impact of Trustmark’s repurchases of delinquent mortgage loans under the GNMA optional repurchase program.
At September 30, 2016, nonaccrual LHFI totaled $54.4 million, or 0.70% of total LHFS and LHFI, reflecting a decrease of $902 thousand, or 0.01% of total LHFS and LHFI, relative to December 31, 2015. The decrease in nonaccrual LHFI was principally the result of substandard credits that were paid off or foreclosed in the Mississippi market region, returned to accrual status in the Florida market region, and charged off in the Mississippi and Texas market regions partially offset by LHFI migrating to nonaccrual status in the Mississippi, Florida and Tennessee market regions during the first nine months of 2016. LHFI migrating to nonaccrual status in Trustmark’s Mississippi market region totaled approximately $24.1 million during the first nine months of 2016. Of this total $16.2 million, or 67.1%, represented five substandard credits, three energy-related loans and two healthcare providers. As of September 30, 2016, nonaccrual energy-related LHFI totaled $12.3 million and represented 4.8% of Trustmark’s total energy-related portfolio. For additional information regarding nonaccrual LHFI, see the section captioned “Nonaccrual/Impaired LHFI” included in Note 3 – Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI in Part I. Item 1. – Financial Statements of this report.
Other Real Estate, Excluding Covered Other Real Estate
Other real estate, excluding covered other real estate, at September 30, 2016 decreased $12.2 million, or 15.8%, when compared with December 31, 2015. The decrease in other real estate, excluding covered other real estate, was primarily due to properties sold in Trustmark’s Florida, Alabama, Mississippi and Tennessee market regions as well as write-downs of properties in Trustmark’s Mississippi, Alabama, and Tennessee market regions partially offset by properties foreclosed in the Florida, Mississippi, Alabama and Tennessee market regions.
77
The following tables illustrate changes in other real estate, excluding covered other real estate, by geographic market region for the periods presented ($ in thousands):
69,502
18,031
28,052
14,435
7,432
13,748
89
7,534
5,910
(17,586
(2,186
(10,476
(2,888
(2,036
(671
(360
(798
450
90,748
21,849
31,059
14,094
14,039
833
1,155
886
(11,715
(1,390
(1,577
(940
(544
(7,264
(1,378
(903
(288
(209
(37
Adjustments
(841
23,822
30,374
13,180
9,840
6,739
1,683
10,524
8,819
946
(6,544
(14,680
(5,206
(3,882
(182
(1,143
(1,266
(977
21,196
35,324
17,397
10,292
8,300
9,043
4,565
3,248
1,079
8,897
(6,534
(8,492
(6,195
(1,373
(10,421
(724
(1,023
(429
(158
Other real estate is revalued on an annual basis or more often if market conditions necessitate. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged against the reserve for other real estate write-downs or net income in other real estate expense, if a reserve does not exist. Write-downs of other real estate, excluding covered other real estate, increased $1.3 million, or 54.5%, when the first nine months of 2016 is compared to the same time period in 2015. The increase in write-downs on other real estate, excluding covered other real estate, during the first nine months of 2016 compared to the same time period in 2015 was primarily due to $1.6 million of reserves for other real estate write-downs used or released during the first nine months of 2015 in the Alabama, Tennessee and Mississippi market regions.
Other real estate in Trustmark’s Florida market region included $8.4 million of BancTrust properties foreclosed during the first nine months of 2016, $349 thousand of write-downs of BancTrust other real estate and the sale of $10.7 million of BancTrust other real estate in Florida during the first nine months of 2016. Excluding other real estate resulting from the BancTrust merger, other real estate, excluding covered other real estate, decreased $3.3 million during the first nine months of 2016. During the third quarter of 2016, Trustmark foreclosed $7.5 million of BancTrust properties in the Florida market region, which principally consisted of two commercial properties totaling $7.2 million. Trustmark subsequently sold one of these properties which totaled $6.0 million during the third quarter of 2016.
For additional information regarding other real estate, including covered other real estate, see Note 6 – Other Real Estate and Covered Other Real Estate included in Part I. Item 1. – Financial Statements of this report.
As of September 30, 2016 and December 31, 2015, acquired loans consisted of the following ($ in thousands):
(1)Effective July 1, 2016, all acquired covered loans excluding the covered acquired loans secured by 1-4 family residential properties were reclassified to noncovered acquired loans.
Trustmark’s loss share agreement with the FDIC covering the acquired loans other than loans secured by 1-4 family residential properties expired on June 30, 2016. Trustmark’s loss share agreement with the FDIC covering the acquired loans secured by 1-4 family residential properties will expire in 2021. Effective July 1, 2016, all covered acquired loans excluding the covered acquired loans secured by 1-4 family residential properties were reclassified to noncovered acquired loans.
During the first nine months of 2016, noncovered and covered acquired loans declined $80.9 million, or 21.7%, and $13.8 million, or 77.9%, respectively, compared to balances at December 31, 2015. The decrease in noncovered acquired loans during the first nine months of 2016 was primarily the result of pay-downs and pay-offs of these acquired loans partially offset by the covered acquired loans reclassified to noncovered acquired loans as a result of the expiration of the related loss share agreement with the FDIC. Total acquired loans declined $94.7 million, or 24.3%, during the first nine months of 2016. Based on the most recent re-estimation of expected cash flows, Trustmark anticipates that acquired loan balances, excluding any settlement of debt, will decline approximately $25.0 million to $30.0 million during the fourth quarter of 2016. Trustmark also expects the yield on the acquired loans, excluding any recoveries, to be approximately 5.5% to 6.5% for the fourth quarter of 2016. As the balances in the acquired loan portfolio continue to run-off, Trustmark expects that the income benefit provided by this portfolio will also decline. For additional information regarding acquired loans, including changes in the net carrying value, see Note 4 – Acquired Loans included in Part I. Item 1. – Financial Statements of this report.
Trustmark’s deposits are its primary source of funding and consist of core deposits from the communities Trustmark serves. Deposits include interest-bearing and noninterest-bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. Total deposits were $9.686 billion at September 30, 2016 compared to $9.588 billion at December 31, 2015, an increase of $97.5 million, or 1.0%. During the first nine months of 2016, noninterest-bearing deposits increased $112.9 million, or 3.8%, primarily due to growth in commercial demand deposit accounts partially offset by seasonal declines in public demand deposit accounts, while interest-bearing deposits decreased $15.4 million, or 0.2%, primarily due to declines in interest-bearing demand deposit accounts and certificates of deposit. The increase in commercial demand deposit accounts during the first nine months of 2016 was principally due to growth in commercial regular demand deposit accounts, which was largely due to a large sale completed by a commercial customer during the third quarter of 2016.
Short-term Borrowings
Trustmark uses short-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings consist primarily of federal funds purchased, securities sold under repurchase agreements, short-term FHLB advances and GNMA optional repurchase loans. Short-term borrowings totaled $927.7 million at September 30, 2016, an increase of $74.1 million, or 8.7%, when compared with $853.7 million at December 31, 2015 as a result of the increase in earning assets, principally LHFI, out-pacing the growth in deposits. Federal funds purchased and securities sold under repurchase agreements totaled $514.9 million at September 30, 2016 compared to $441.0 million at December 31, 2015, an increase of $73.9 million, or 16.8%. Of these amounts $176.9 million and $144.0 million, respectively, represented customer related transactions, such as commercial sweep repurchase balances. Excluding customer related transactions, federal funds purchased totaled $338.0 million at September 30, 2016, an increase of $41.0 million when compared with $297.0 million at December 31, 2015 as Trustmark has chosen to use this attractively priced funding source. Other short-term borrowings decreased $175 thousand during the first nine months of 2016.
Long-term FHLB Advances
Defined Benefit Plans
As disclosed in Note 9 – Defined Benefit and Other Postretirement Benefits included in Part I. Item 1. – Financial Statements of this report, Trustmark maintains a noncontributory tax-qualified defined benefit pension plan (the Plan), in which substantially all associates who began employment prior to 2007 participate. The Plan provides retirement benefits that are based on the length of credited service and final average compensation, as defined in the Plan, and vest upon three years of service. Benefit accruals under the plan have been frozen since 2009, with the exception of certain associates covered through plans obtained in acquisitions that were subsequently merged into the Plan. Other than the associates covered through these acquired plans that were merged into the Plan, associates have not earned additional benefits, except for interest as required by law, since the Plan was frozen. Current and former associates who participate in the Plan retain their right to receive benefits that accrued before the Plan was frozen.
On July 26, 2016, the Board of Directors of Trustmark authorized the termination of the Plan, effective as of December 31, 2016. To satisfy commitments made by Trustmark to associates covered through acquired plans that were merged into the Plan (collectively, the “Continuing Associates”), the Board of Directors also approved the spin-off of the portion of the Plan associated with the accrued benefits of the Continuing Associates into a new plan titled the Trustmark Corporation Pension Plan for Certain Employees of Acquired Financial Institutions (the “Spin-Off Plan”), effective as of December 31, 2016, immediately prior to the termination of the Plan.
In order to terminate the Plan, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation (PBGC) requirements, Trustmark is required to fully fund the Plan on a termination basis and will contribute the additional assets necessary to do so. Based on plan assets and PBGC rules as of June 30, 2016, Trustmark estimates that termination of the Plan would require approximately $67.0 million (after giving effect to the necessary transfer of plan assets to the Spin-Off Plan) to fully fund the Plan on a termination basis and would result in a one-time pension settlement expense of approximately $12.0 million. Further, as a result of Trustmark’s de-risking investment strategy for the Plan as of June 30, 2016, the expected rate of return on plan assets during the second half of 2016 will be decreased from 6% to 2.5%. Accordingly, Trustmark’s increased periodic benefit costs for the Plan during the third quarter of 2016 was $664 thousand. Trustmark expects final distributions for the Plan to be made during the second quarter of 2017. Participants in the Plan will have a choice of receiving a lump sum cash payment or annuity payments under a group annuity contract purchased from an insurance carrier, subject to certain exceptions. As a result of the termination of the Plan, each participant will become fully vested in his or her accrued benefits under the Plan.
After the distribution of plan assets and termination of the Plan during the second quarter of 2017, Trustmark estimates that its projected benefit obligation and annual pension expense related to the Spin-Off Plan will be approximately $10.0 million and $900 thousand, respectively. As a result of these actions, Trustmark estimates that annual pension expense will be reduce by approximately $3.0 million to $4.0 million.
The Board of Directors reserved the right to defer or revoke the termination of the Plan if circumstances change such that deferral or revocation would be warranted, but has no intent to do so at this time.
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Legal Environment
Information required in this section is set forth under the heading “Legal Proceedings” of Note 11 – Contingencies included in Part I. Item 1. – Financial Statements – of this report.
Off-Balance Sheet Arrangements
Information required in this section is set forth under the heading “Lending Related” of Note 11 – Contingencies included in Part I. Item 1. – Financial Statements – of this report.
Contractual Obligations
Payments due from Trustmark under specified long-term and certain other binding contractual obligations were scheduled in our Annual Report on Form 10-K for the year ended December 31, 2015. The most significant obligations, other than obligations under deposit contracts and short-term borrowings, were for operating leases for banking facilities. There have been no material changes in Trustmark’s contractual obligations since year-end.
Capital Resources
At September 30, 2016, Trustmark’s total shareholders’ equity was $1.535 billion, an increase of $61.7 million, or 4.2%, from its level at December 31, 2015. During the first nine months of 2016, shareholders’ equity increased primarily as a result of net income of $79.5 million and an increase in the net unrealized gains on available for sale securities of $20.0 million, net of tax, partially offset by common stock dividends of $46.9 million. Trustmark utilizes a capital model in order to provide Management with a monthly tool for analyzing changes in its strategic capital ratios. This allows Management to hold sufficient capital to provide for growth opportunities and protect the balance sheet against sudden adverse market conditions, while maintaining an attractive return on equity to shareholders.
Trustmark and TNB are subject to minimum risk-based capital and leverage capital requirements, as described in the section captioned “Capital Adequacy” included in Part I. Item 1. – Business of Trustmark’s 2015 Annual Report on Form 10-K, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Effective January 1, 2016, Trustmark’s and TNB’s minimum risk-based capital requirements include the year-one phased in capital conservation buffer of 0.625%. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of Trustmark and TNB and limit Trustmark’s and TNB’s ability to pay dividends. As of September 30, 2016, Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered well-capitalized at September 30, 2016. To be categorized in this manner, Trustmark and TNB maintained minimum common equity Tier 1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and Tier 1 leverage ratios, and were not subject to any written agreement, order or capital directive, or prompt corrective action directive issued by their primary federal regulators to meet and maintain a specific capital level for any capital measures. There are no significant conditions or events that have occurred since September 30, 2016, which Management believes have affected Trustmark’s or TNB’s present classification.
In 2006, Trustmark enhanced its capital structure with the issuance of trust preferred securities and Subordinated Notes (the Notes). For regulatory capital purposes, the trust preferred securities currently qualify as Tier 1 capital. Trustmark intends to continue to utilize $60.0 million in trust preferred securities issued by Trustmark Preferred Capital Trust I (the Trust) as Tier 1 capital up to the regulatory limit, as permitted by the grandfather provision in the Dodd-Frank Act and the Basel III Final Rule.
Refer to the section captioned “Regulatory Capital” included in Note 14 – Shareholders’ Equity in Part I. Item 1. – Financial Statements of this report for an illustration of Trustmark’s and TNB’s actual regulatory capital amounts and ratios under regulatory capital standards in effect at September 30, 2016 and December 31, 2015.
Dividends on Common Stock
Dividends per common share for the nine months ended September 30, 2016 and 2015 were $0.69. Trustmark’s indicated dividend for 2016 is $0.92 per common share, which is the same as dividends per common share in 2015.
Liquidity
Liquidity is the ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs and other corporate purposes. Consistent cash flows from operations and adequate capital provide internally generated liquidity. Furthermore, Management maintains funding capacity from a variety of external sources to meet daily funding needs, such as those required to meet deposit withdrawals, loan disbursements and security settlements. Liquidity strategy also includes the use of wholesale funding sources to provide for the seasonal fluctuations of deposit and loan demand and the cyclical fluctuations of the economy that impact the availability of funds. Management keeps excess funding capacity available to meet potential demands associated with adverse circumstances.
The asset side of the balance sheet provides liquidity primarily through maturities and cash flows from loans and securities as well as the ability to sell certain loans and securities while the liability portion of the balance sheet provides liquidity primarily through noninterest and interest-bearing deposits. Trustmark utilizes federal funds purchased, FHLB advances, securities sold under repurchase agreements as well as the Federal Reserve Discount Window (Discount Window) and, on a limited basis as discussed below, brokered deposits to provide additional liquidity. Access to these additional sources represents Trustmark’s incremental borrowing capacity.
Deposit accounts represent Trustmark’s largest funding source. Average deposits totaled to $9.635 billion for the first nine months of 2016 and represented approximately 75.0% of average liabilities and shareholders’ equity, compared to average deposits of $9.691 billion, which represented 79.5% of average liabilities and shareholders’ equity for the first nine months of 2015.
Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. At September 30, 2016, brokered sweep Money Market Deposit Account (MMDA) deposits totaled $33.8 million compared to $42.3 million at December 31, 2015.
At September 30, 2016, Trustmark had $338.0 million in upstream federal funds purchased, compared to $297.0 million at December 31, 2015. Trustmark maintains adequate federal funds lines to provide sufficient short-term liquidity. The increase in upstream federal funds purchased was primarily the result of the increase in earning assets out-pacing the growth in deposits as Trustmark chose to utilize this attractively priced funding source.
Trustmark also maintains a relationship with the FHLB of Dallas, which provided $350.0 million of outstanding short-term advances and $750.0 million of outstanding long-term advances at September 30, 2016, compared to $350.0 million of outstanding short-term advances and $500.0 million of outstanding long-term advances at December 31, 2015. Trustmark has chosen to utilize the long-term FHLB advances with the FHLB of Dallas as a funding source due to the advantageous rates available in comparison to other sources of funding. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances with the FHLB of Dallas by $1.455 billion at September 30, 2016. In addition, at September 30, 2016, Trustmark had $1.1 million in FHLB advances outstanding with the FHLB of Atlanta, which were acquired in the BancTrust merger, compared to $1.2 million at December 31, 2015. Trustmark has non-member status and thus no additional borrowing capacity with the FHLB of Atlanta.
Additionally, Trustmark has the ability to enter into wholesale funding repurchase agreements as a source of borrowing by utilizing its unencumbered investment securities as collateral. At September 30, 2016, Trustmark had approximately $1.575 billion available in repurchase agreement capacity compared to $1.194 billion at December 31, 2015. The increase in repurchase agreement capacity at September 30, 2016, was primarily due to an increase in the unencumbered investment portfolio balance resulting from a lower public deposit pledge requirement and the seasonal decline in public deposits.
Another borrowing source is the Discount Window. At September 30, 2016, Trustmark had approximately $967.5 million available in collateral capacity at the Discount Window primarily from pledges of commercial and industrial LHFI, compared with $883.7 million at December 31, 2015.
TNB has outstanding $50.0 million in aggregate principal amount of the Notes due December 15, 2016. At September 30, 2016, the carrying amount of the Notes was $50.0 million. The Notes are unsecured and subordinate and junior in right of payment to TNB’s obligations to its depositors, its obligations under bankers’ acceptances and letters of credit, its obligations to any Federal Reserve Bank or the FDIC and its obligations to its other creditors, and to any rights acquired by the FDIC as a result of loans made by the FDIC to TNB.
During 2006, Trustmark completed a private placement of $60.0 million of trust preferred securities through a newly formed Delaware trust affiliate, the Trust. The trust preferred securities mature September 30, 2036 and are redeemable at Trustmark’s option. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase $61.9 million in aggregate principal amount of Trustmark’s junior subordinated debentures.
The Board of Directors of Trustmark currently has the authority to issue up to 20.0 million preferred shares with no par value. The ability to issue preferred shares in the future will provide Trustmark with additional financial and management flexibility for general corporate and acquisition purposes. At September 30, 2016, Trustmark had no shares of preferred stock issued and outstanding.
Liquidity position and strategy are reviewed regularly by Management and continuously adjusted in relationship to Trustmark’s overall strategy. Management believes that Trustmark has sufficient liquidity and capital resources to meet presently known cash flow requirements arising from ongoing business transactions.
Asset/Liability Management
Overview
Market risk reflects the potential risk of loss arising from adverse changes in interest rates and market prices. Trustmark has risk management policies to monitor and limit exposure to market risk. Trustmark’s primary market risk is interest rate risk created by core banking activities. Interest rate risk is the potential variability of the income generated by Trustmark’s financial products or services, which results from changes in various market interest rates. Market rate changes may take the form of absolute shifts, variances in the relationships between different rates and changes in the shape or slope of the interest rate term structure.
Management continually develops and applies cost-effective strategies to manage these risks. Management’s Asset/Liability Committee sets the day-to-day operating guidelines, approves strategies affecting net interest income and coordinates activities within policy limits established by the Board of Directors of Trustmark. A key objective of the asset/liability management program is to quantify, monitor and manage interest rate risk and to assist Management in maintaining stability in the net interest margin under varying interest rate environments.
Trustmark uses financial derivatives for management of interest rate risk. Management’s Asset/Liability Committee, in its oversight role for the management of interest rate risk, approves the use of derivatives in balance sheet hedging strategies. The most common derivatives employed by Trustmark are interest rate lock commitments, forward contracts (both futures contracts and options on futures contracts), interest rate swaps, interest rate caps and interest rate floors. As a general matter, the values of these instruments are designed to be inversely related to the values of the assets that they hedge (i.e., if the value of the hedged asset falls, the value of the related hedge rises). In addition, Trustmark has entered into derivatives contracts as counterparty to one or more customers in connection with loans extended to those customers. These transactions are designed to hedge interest rate, currency or other exposures of the customers and are not entered into by Trustmark for speculative purposes. Increased federal regulation of the derivatives markets may increase the cost to Trustmark to administer derivatives programs.
On April 4, 2013, Trustmark entered into a forward interest rate swap contract on junior subordinated debentures with a total notional amount of $60.0 million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under FASB ASC Topic 815, with the objective of protecting the quarterly interest payments on Trustmark’s $60.0 million of junior subordinated debentures issued to the Trust throughout the five-year period beginning December 31, 2014 and ending December 31, 2019 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate. Under the swap, which became effective on December 31, 2014, Trustmark pays a fixed interest rate of 1.66% per annum and receives a variable interest rate based on three-month LIBOR on a total notional amount of $60.0 million, with quarterly net settlements.
No ineffectiveness related to the interest rate swap designated as a cash flow hedge was recognized in the consolidated statements of income during the nine months ended September 30, 2016 and 2015. The accumulated net after-tax loss related to the effective cash flow hedge included in AOCL totaled $708 thousand and $160 thousand at September 30, 2016 and December 31, 2015, respectively. Amounts reported in AOCL related to this derivative are reclassified to other interest expense as interest payments are made on Trustmark’s variable rate junior subordinated debentures. During the next twelve months, Trustmark estimates that $442 thousand will be reclassified as an increase to other interest expense.
As part of Trustmark’s risk management strategy in the mortgage banking business, various derivative instruments such as interest rate lock commitments and forward sales contracts are utilized. Rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified period of time. Trustmark’s obligations under forward contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. The gross notional amount of Trustmark’s off-balance sheet obligations under these derivative instruments totaled $497.2 million at September 30, 2016, with a positive valuation adjustment of $1.6 million, compared to $298.6 million, with a positive valuation adjustment of $1.4 million at December 31, 2015.
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Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting under GAAP. The total notional amount of these derivative instruments were $338.5 million at September 30, 2016 compared to $264.5 million at December 31, 2015. These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of the MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net negative ineffectiveness of $1.2 million compared to a net positive ineffectiveness of $479 thousand for the three months ended September 30, 2016 and 2015, respectively, and a net negative ineffectiveness of $2.7 million compared to a net positive ineffectiveness of $3.9 million for the nine months ended September 30, 2016 and 2015, respectively. The net negative ineffectiveness was primarily due to the tightening in the mortgage spread during the first nine months of 2016 compared the same time period in 2015.
Trustmark offers certain interest rate derivatives products directly to qualified commercial lending clients seeking to manage their interest rate risk under loans they have entered into with TNB. Trustmark economically hedges interest rate swap transactions executed with commercial lending clients by entering into offsetting interest rate swap transactions with institutional derivatives market participants. Derivatives transactions executed as part of this program are not designated as qualifying hedging relationships under GAAP and are, therefore, carried on Trustmark’s financial statements at fair value with the change in fair value recorded in noninterest income in bank card and other fees. Because these derivatives have mirror-image contractual terms, in addition to collateral provisions which mitigate the impact of non-performance risk, the changes in fair value are expected to substantially offset. As of September 30, 2016, Trustmark had interest rate swaps with an aggregate notional amount of $350.3 million related to this program, compared to $359.3 million as of December 31, 2015.
Trustmark has agreements with its financial institution counterparties that contain provisions where if Trustmark defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Trustmark could also be deemed to be in default on its derivatives obligations.
As of September 30, 2016 and December 31, 2015, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $5.9 million and $2.6 million, respectively. As of September 30, 2016, Trustmark had posted collateral of $5.8 million against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at September 30, 2016, it could have been required to settle its obligations under the agreements at the termination value (which is expected to approximate fair market value).
Trustmark’s participation in the derivatives markets is subject to increased federal regulation of these markets. Trustmark believes that it may continue to use financial derivatives to manage interest rate risk and also to offer derivatives products to certain qualified commercial lending clients in compliance with the Volcker Rule. However, the increased federal regulation of the derivatives markets has increased the cost to Trustmark of administering its derivatives programs. Some of these costs (particularly compliance costs related to the Volcker Rule and other federal regulations) are expected to recur in the future.
Market/Interest Rate Risk Management
The primary purpose in managing interest rate risk is to invest capital effectively and preserve the value created by the core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.
84
Financial simulation models are the primary tools used by Management’s Asset/Liability Committee to measure interest rate exposure. Using a wide range of scenarios, Management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Trustmark’s balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of Trustmark’s balance sheet, resulting from both strategic plans and customer behavior. In addition, the model incorporates Management’s assumptions and expectations regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates.
Based on the results of the simulation models using static balances, the table below summarizes the effect various one-year interest rate shift scenarios would have on net interest income compared to a base case, flat scenario at September 30, 2016 and 2015. At September 30, 2016 and 2015, the impact of a 200 basis point drop scenario was not calculated due to the low interest rate environment.
Estimated % Change
in Net Interest Income
Change in Interest Rates
+200 basis points
1.0
-0.5
+100 basis points
0.7
-0.3
-100 basis points
-6.8
As shown in the table above, the interest rate shocks for the first nine months of 2016 illustrate little change in net interest income in rising rate scenarios while displaying modest exposure to a falling rate environment. The exposure to falling rates is primarily due to a downward repricing of various earning assets with minimal contribution from liabilities given the already low cost of deposits in the base scenario. Management cannot provide any assurance about the actual effect of changes in interest rates on net interest income. The estimates provided do not include the effects of possible strategic changes in the balances of various assets and liabilities throughout 2016 or additional actions Trustmark could undertake in response to changes in interest rates. Management will continue to prudently manage the balance sheet in an effort to control interest rate risk and maintain profitability over the long term.
Another component of interest rate risk management is measuring the economic value-at-risk for a given change in market interest rates. The economic value-at-risk may indicate risks associated with longer-term balance sheet items that may not affect net interest income at risk over shorter time periods. Trustmark uses computer-modeling techniques to determine the present value of all asset and liability cash flows (both on- and off-balance sheet), adjusted for prepayment expectations, using a market discount rate. The economic value of equity (EVE), also known as net portfolio value, is defined as the difference between the present value of asset cash flows and the present value of liability cash flows. The resulting change in EVE in different market rate environments, from the base case scenario, is the amount of EVE at risk from those rate environments. The following table summarizes the effect that various interest rate shifts would have on net portfolio value at September 30, 2016 and 2015. At September 30, 2016 and 2015, the impact of a 200 basis point drop scenario was not calculated due to the historically low interest rate environment.
in Net Portfolio Value
6.2
4.1
1.6
-10.4
-7.7
Trustmark determines the fair value of the MSR using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income and other ancillary income such as late fees. Management reviews all significant assumptions quarterly. Mortgage loan prepayment speeds, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.
By way of example, an increase in either the prepayment speed or discount rate assumption will result in a decrease in the fair value of the MSR, while a decrease in either assumption will result in an increase in the fair value of the MSR. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and discount rates. These fluctuations can be rapid and may continue to be significant. Therefore, estimating prepayment speed and/or discount rates within ranges that market participants would use in determining the fair value of the MSR requires significant management judgment.
At September 30, 2016, the MSR fair value was approximately $65.5 million, compared to $69.8 million at September 30, 2015. The impact on the MSR fair value of a 10% adverse change in prepayment speed or a 100 basis point increase in discount rate at September 30, 2016, would be a decline in fair value of approximately $2.7 million and $2.0 million, respectively, compared to a decline in fair value of approximately $2.5 million and $2.4 million, respectively, at September 30, 2015. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts.
Critical Accounting Policies
For an overview of Trustmark’s critical accounting policies, see the section captioned “Critical Accounting Policies” included in Part II. Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations, of Trustmark’s 2015 Annual Report on Form 10-K. There have been no significant changes in Trustmark’s critical accounting policies during the first nine months of 2016.
For additional information regarding Trustmark’s basis of presentation and accounting policies, see Note 1 – Business, Basis of Financial Statement Presentation and Principles of Consolidation included in Part I. Item 1. – Financial Statements of this report.
Accounting Policies Recently Adopted and Pending Accounting Pronouncements
For a complete list of recently adopted and pending accounting policies and the impact on Trustmark, see Note 18 – Accounting Policies Recently Adopted and Pending Accounting Pronouncements included in Part I. Item 1. – Financial Statements – of this report.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in the discussion of Market/Interest Rate Risk Management found in Management’s Discussion and Analysis.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by Trustmark’s Management, with the participation of its Chief Executive Officer and Treasurer and Principal Financial Officer (Principal Financial Officer), of the effectiveness of Trustmark’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and the Principal Financial Officer concluded that Trustmark’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There has been no change in Trustmark’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Trustmark’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
Trustmark’s wholly-owned subsidiary, TNB, has been named as a defendant in three lawsuits related to the collapse of the Stanford Financial Group. The first is a purported class action complaint that was filed on August 23, 2009 in the District Court of Harris County, Texas, by Peggy Roif Rotstain, Guthrie Abbott, Catherine Burnell, Steven Queyrouze, Jaime Alexis Arroyo Bornstein and Juan C. Olano (collectively, Class Plaintiffs), on behalf of themselves and all others similarly situated, naming TNB and four other financial institutions unaffiliated with Trustmark as defendants. The complaint seeks to recover (i) alleged fraudulent transfers from each of the defendants in the amount of fees and other monies received by each defendant from entities controlled by R. Allen Stanford (collectively, the Stanford Financial Group) and (ii) damages allegedly attributable to alleged conspiracies by one or more of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud on the asserted grounds that defendants
86
knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme. Plaintiffs have demanded a jury trial. Plaintiffs did not quantify damages.
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All pending legal proceedings described above are being vigorously contested. In accordance FASB Accounting Standards Codification (ASC) Topic 450-20, “Loss Contingencies,” Trustmark will establish an accrued liability for litigation matters when those matters present loss contingencies that are both probable and reasonably estimable. At the present time, Management believes, based on the advice of legal counsel and Management’s evaluation, that a loss in any such proceeding is not both probable and reasonably estimable. All matters will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. In view of the inherent difficulty of predicting the outcome of legal proceedings, Trustmark cannot predict the eventual outcomes of the currently pending matters or the timing of their ultimate resolution. Management currently believes, however, based upon the advice of legal counsel and Management’s evaluation and after taking into account its current insurance coverage, that the legal proceedings currently pending should not have a material adverse effect on Trustmark’s consolidated financial condition.
ITEM 1A.
RISK FACTORS
There has been no material change in the risk factors previously disclosed in Trustmark’s Annual Report on Form 10-K for its fiscal year ended December 31, 2015.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 11, 2016, the Board of Directors of Trustmark authorized a stock repurchase program under which up to $100.0 million of Trustmark’s common shares may be acquired through March 31, 2019. The following table provides information with respect to purchases by Trustmark or made on behalf of Trustmark of its common stock during the three months ended September 30, 2016 ($ in thousands, except per share amounts):
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan at the End of the Period
July 1, 2016 to July 31, 2016
99,250
August 1, 2016 to August 31, 2016
September 1, 2016 to September 30, 2016
DEFAULTS UPON SENIOR SECURITIES
None
MINE SAFETY DISCLOSURES
Not applicable
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
The exhibits listed in the Exhibit Index are filed herewith or are incorporated herein by reference.
EXHIBIT INDEX
31-a
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31-b
Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32-a
Certification by Chief Executive Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32-b
Certification by Principal Financial Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL Interactive Data.
All other exhibits are omitted, as they are inapplicable or not required by the related instructions.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRUSTMARK CORPORATION
BY:
/s/ Gerard R. Host
/s/ Louis E. Greer
Gerard R. Host
Louis E. Greer
President and Chief Executive Officer
Treasurer, Principal Financial Officer and
Principal Accounting Officer
DATE:
November 4, 2016