Trustmark Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Trustmark is a bank holding company headquartered in Jackson, Mississippi, operating 207 offices across Alabama, Florida, Mississippi, Tennessee and Texas. Financial amounts below are in U.S. dollars.
Financial performance and condition
- Revenue and earnings: Q2 net interest income was $105.3 million, up 6.1% from $99.2 million a year earlier; noninterest income was $44.1 million, up 1.0%. Net income increased 5.7% to $32.9 million, or $0.49 per diluted share, from $31.1 million, or $0.46. For the first six months, net income rose 10.6% to $61.9 million, or $0.92 per diluted share.
- Margins and returns: Net interest margin was 4.21% in Q2 versus 4.02% in Q2 2013, and 4.07% for the six-month period versus 4.00%. Six-month return on average assets was 1.05% versus 1.00%; Q2 was 1.10% versus 1.06%. Q2 return on average tangible equity was 13.90% versus 14.09%.
- Credit costs: Q2 total loan-loss provision was $4.1 million, versus a $6.4 million provision benefit in Q2 2013. Six-month provisions were $3.4 million, versus a $9.2 million benefit a year earlier. The six-month LHFI provision was a $454,000 benefit; acquired-loan provision was $3.8 million. Management cited a new consumer credit-score factor, which added about $1.4 million of Q2 provision.
- Balance sheet and lending: Total assets were $12.12 billion at June 30, up from $11.79 billion at year-end 2013. LHFI grew $388.1 million to $6.19 billion; deposits were essentially unchanged at $9.86 billion. Shareholders’ equity rose 3.3% to $1.40 billion.
- Credit quality: Nonaccrual LHFI increased 9.0% from year-end to $71.1 million; nonperforming assets excluding acquired loans and covered other real estate rose 3.7% to $178.1 million. However, classified and criticized LHFI were down 15.7% and 15.2%, respectively, year over year. LHFI allowance was $66.6 million, or 1.08% of LHFI, versus 1.15% at year-end. Six-month LHFI net recoveries were $654,000, down from $1.9 million.
- Cash flow: Six-month operating cash flow was $91.1 million, investing cash outflow $388.0 million and financing cash inflow $274.0 million. Cash and cash equivalents declined $22.8 million to $323.0 million.
- Funding, debt and liquidity: Deposits remained the primary funding source. Short-term borrowings increased $302.6 million from year-end to $620.5 million, primarily due to federal funds purchased and repurchase agreements. Long-term FHLB advances were $8.2 million; subordinated notes were $49.9 million and junior subordinated debt securities $61.9 million. Management reported $1.84 billion of additional FHLB Dallas capacity, $748.6 million of repurchase-agreement capacity and $927.2 million of Discount Window collateral capacity. TNB met “well-capitalized” regulatory guidelines; its total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 14.28%, 13.10% and 9.25%.
- Dividends: The quarterly dividend was $0.23 per share, unchanged year over year; management indicated a 2014 annual dividend of $0.92 per share.
Material changes versus comparable periods
- Six-month net interest income increased 6.4%, helped by acquired-loan interest and higher taxable securities income, as well as lower deposit costs. Management said loan repricing and competitive pricing pressure reduced LHFI yields.
- Mortgage banking income fell 34.5% for the first six months to $13.0 million. Mortgage loan production declined 32.3% to $552.6 million, reflecting lower refinance activity and reduced secondary-market gains.
- Six-month noninterest expense fell 2.4% to $204.4 million, largely reflecting the absence of prior-year BancTrust acquisition expenses and overdraft-litigation settlement costs. Salaries and services costs increased.
- Noninterest income was nearly flat for the six-month period: growth in wealth management, bank-card fees, insurance and other income was largely offset by lower mortgage banking income and deposit service charges.
- Investment securities totaled $3.53 billion. During 2013 Trustmark reclassified approximately $1.10 billion of securities to held-to-maturity; the remaining after-tax unrealized loss on transferred securities was $26.9 million at June 30, 2014. Available-for-sale securities had $22.6 million of net unrealized gains.
Outlook, commentary, risks and unusual items
- Outlook: No specific earnings or revenue guidance was provided. Management described economic conditions as moderately improving but said local-market weakness could continue to pressure growth, asset quality and earnings. It noted mortgage banking revenue could remain below recent historical levels amid weaker production and projected higher rates.
- Interest-rate exposure: Based on April 30, 2014 modeling, a 200-basis-point rate increase was estimated to raise one-year net interest income 1.1%; a 100-basis-point decrease was estimated to reduce it 3.2%. A 200-basis-point decline scenario was not calculated due to the low-rate environment. These are model estimates, not forecasts.
- Regulatory and operating risks: Trustmark expected new capital rules to require more capital and was evaluating the impact. It expected to conduct its first required company-run stress test using September 2014 data, with filing due in March 2015. Management estimated debit-card interchange rules could reduce annual noninterest income by $7–$10 million; Trustmark became subject to the standards beginning July 1, 2014.
- Legal and contingent exposures: Two Stanford Financial Group-related lawsuits remained in preliminary stages; plaintiffs had not quantified damages. Management said loss was not probable and no accrual was required, but a possible loss estimate could not be made. Unused credit commitments were $2.223 billion; letters of credit carried maximum exposure of $147.5 million.
- Other notable items: Trustmark recorded $389,000 of six-month securities gains after selling its remaining CLO holdings, citing Volcker Rule uncertainty. The company also completed the BancTrust purchase-price allocation, including a $7.4 million reduction in goodwill in Q1 2014. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the rise in nonaccrual loans and nonperforming assets persists, particularly the concentration of loans and other real estate in Trustmark’s five regional markets.
- Whether acquired-loan cash-flow estimates, related provisions and the FDIC indemnification asset change materially as acquired portfolios run off; the FDIC asset was $10.9 million at quarter-end.
- Whether mortgage production and gains continue to weaken, and how the estimated $7–$10 million annual interchange impact affects fee income.
- Whether higher short-term borrowings and repurchase funding remain manageable alongside deposit stability and available borrowing capacity.
- Developments in the Stanford-related litigation and any changes to management’s assessment that a loss is not probable.
- Implementation effects of new capital rules and stress testing, including implications for capital distributions and the dividend.