Trustmark Corporation — Q1 2014 Form 10-Q
Business context and period. Trustmark is a regional financial services company headquartered in Jackson, Mississippi, operating 209 offices across Alabama, Florida, Mississippi, Tennessee and Texas. This unaudited report covers the three months ended March 31, 2014; income and cash flow comparisons are with Q1 2013, while balance-sheet comparisons are with December 31, 2013.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / change |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $139.0 million | $133.3 million in Q1 2013; up about 4.3% |
| Net interest income | $94.9 million | $89.0 million; up 6.7% |
| Net interest margin, fully taxable equivalent | 3.92% | 3.98%; down 6 basis points |
| Net income / diluted EPS | $29.0 million / $0.43 | $24.9 million / $0.38 |
| Return on average assets / tangible equity | 0.99% / 12.93% | 0.93% / 10.82% |
| Assets / shareholders’ equity | $12.06 billion / $1.37 billion | Assets up $266.7 million; equity up $18.9 million since year-end |
| Loans held for investment (LHFI) | $5.92 billion | Up $124.9 million since year-end |
| Deposits | $10.12 billion | Up $262.2 million since year-end |
| Operating cash flow / ending cash | $57.4 million / $423.8 million | Operating cash flow was negative $10.6 million in Q1 2013 |
Noninterest income was $44.1 million, down 0.6% year over year; noninterest expense was $101.6 million, down 0.5%. The LHFI provision was a negative $805,000 (a provision release), versus a negative $3.0 million in Q1 2013; acquired-loan provision was $63,000. The allowance for LHFI was $67.5 million, or 1.14% of LHFI. Net recoveries on LHFI were $1.9 million.
At March 31, total liabilities were $10.68 billion. Major funding and debt balances included deposits of $10.12 billion, federal funds purchased and repurchase agreements of $259.3 million, short-term borrowings of $59.7 million, long-term FHLB advances of $8.3 million, subordinated notes of $49.9 million and junior subordinated debt securities of $61.9 million. Management reported adequate liquidity and capital; TNB met regulatory “well-capitalized” standards. Its total risk-based capital ratio was 14.07%, Tier 1 risk-based ratio 12.86%, and Tier 1 leverage ratio 8.97%.
Material changes versus comparable periods
- Net income increased 16.6% year over year, supported by higher net interest income and lower expenses. The 2013 comparison included $9.4 million of BancTrust transaction costs.
- Net interest income rose with acquired-loan income, taxable securities income and lower deposit costs. The margin nevertheless narrowed as fixed-rate loans repriced downward amid competition.
- Mortgage banking income fell 41.0% to $6.8 million. Mortgage production was $230.3 million, down 41.3%, and gains on loan sales fell to $1.8 million from $10.2 million.
- Credit indicators improved year over year: classified LHFI declined $20.2 million and criticized LHFI declined $63.2 million. Nonaccrual LHFI was $64.0 million, down $1.2 million from year-end; nonperforming assets excluding acquired loans and covered other real estate rose $3.8 million to $175.5 million.
- Other real estate excluding covered property increased $5.0 million from year-end to $111.5 million, including foreclosed BancTrust properties in Florida. Deposits grew, particularly noninterest-bearing balances; the $50 million brokered CD matured in February and was not renewed.
Outlook, risks and unusual items
Management described the economy as showing moderate improvement but noted uncertainty, local-market economic pressures and continued effects on asset growth, credit quality and earnings. It reported lower mortgage refinancing demand and cautioned that reduced mortgage production and projected higher rates could further pressure mortgage banking revenue. No specific earnings or revenue guidance was provided.
- Management estimated debit-card interchange requirements could reduce annual noninterest income by approximately $7 million to $10 million. Trustmark, having exceeded $10 billion in assets, expected to become subject to the standards by July 1, 2014; management was evaluating offsets.
- New regulatory capital rules generally were expected to apply beginning January 1, 2015 and could require more capital and common equity. Trustmark was evaluating the impact. Company-run stress testing was expected to begin using September 2014 data, with a filing requirement in March 2015.
- Interest-rate sensitivity modeling estimated annual net interest income could rise 2.6% under a 200-basis-point increase or decline 4.5% under a 100-basis-point decrease. Management cautioned that modeled results are not assurances of actual outcomes.
- Mortgage servicing rights were valued at approximately $67.6 million. A 10% adverse change in prepayment speed or a 100-basis-point increase in the discount rate was estimated to reduce fair value by $2.3 million or $2.2 million, respectively.
- Trustmark had $2.289 billion in unused credit commitments and $147.2 million maximum exposure under letters of credit. Stanford-related litigation remained unresolved; management said losses were not probable and could not estimate any reasonably possible loss. An overdraft-fee class settlement for $4.0 million had received final court approval in March 2014; the expense was recorded in 2013.
- Q1 unusual or significant items included a $389,000 gain on securities sales, a $7.4 million reduction in goodwill from finalizing BancTrust purchase accounting, and continued acquisition-related acquired-loan accretion. Trustmark sold its remaining $25.9 million of collateralized loan obligations, citing uncertainty about the Volcker Rule.
Most important facts for investors to verify
- Whether loan growth and improved credit indicators persist, and whether the negative loan-loss provision is sustainable; review nonperforming assets and the allowance relative to credit risk.
- Whether net interest margin continues to compress as loans reprice, and how acquired-loan accretion and recoveries affect reported earnings.
- Mortgage banking trends, including production, secondary-market margins, servicing-rights valuation and future repurchase or putback exposure.
- The actual impact of debit-card interchange rules, new capital requirements and stress-test results on earnings, capital and distributions.
- Liquidity capacity and funding mix, including deposit trends and availability of FHLB, repurchase-agreement and Discount Window capacity.
- Developments in Stanford-related and other litigation, and any changes to management’s loss estimates or contingency disclosures.