Trustmark Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Trustmark is a regional financial services company operating 214 offices across Alabama, Florida, Mississippi, Tennessee and Texas. Results include BancTrust from its February 15, 2013 acquisition.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $98.4 million | $85.3 million | $286.6 million | $258.7 million |
| Net income | $33.0 million | $29.9 million | $89.0 million | $89.6 million |
| Diluted EPS | $0.49 | $0.46 | $1.33 | $1.38 |
| Net interest margin, fully taxable equivalent | 3.94% | 4.06% | 3.98% | 4.14% |
| Noninterest income | $47.1 million | $44.9 million | $135.2 million | $132.4 million |
| Noninterest expense | $101.5 million | $83.5 million | $310.9 million | $257.2 million |
Q3 net income rose 10.5% year over year, while nine-month net income declined slightly. Higher net interest income and lower loan-loss provision supported quarterly results; substantially higher expenses, including BancTrust costs, weighed on year-to-date earnings. Q3 return on average assets was 1.11% versus 1.21%; nine-month return was 1.04% versus 1.22%.
For the first nine months, net cash provided by operating activities was $151.3 million, compared with $1.3 million in 2012. Investing activities used $149.0 million, versus providing $219.6 million; financing activities provided $101.9 million, versus using $214.4 million. Cash and due from banks ended the period at $335.7 million.
Financial position, liquidity and capital
- Assets and loans: Total assets were $11.81 billion, up from $9.83 billion at December 31, 2012. Loans held for investment were $5.70 billion; acquired loans were $875.1 million gross, largely reflecting BancTrust.
- Deposits: $9.79 billion, up 23.9% from year-end 2012. BancTrust contributed $1.67 billion of deposits at September 30.
- Borrowings and debt: Federal funds purchased and repurchase agreements totaled $342.5 million; short-term borrowings were $60.7 million; long-term FHLB advances were $8.6 million. Subordinated notes and junior subordinated debt were $49.9 million and $61.9 million, respectively. Trustmark redeemed BancTrust trust-preferred securities totaling $33 million during 2013.
- Equity and capital: Shareholders’ equity was $1.33 billion. Trustmark’s total risk-based capital ratio was 14.02%, Tier 1 risk-based ratio 12.69%, and Tier 1 leverage ratio 8.78%; TNB was reported well-capitalized. These ratios were down from year-end 2012. A $52.2 million accumulated other comprehensive loss, primarily from unrealized available-for-sale securities losses, reduced equity.
- Liquidity: Management reported sufficient liquidity and excess funding capacity. Available capacity included $1.76 billion of qualifying collateral for FHLB Dallas advances, $464.8 million of repurchase-agreement capacity and $895.2 million of Discount Window collateral capacity. The company discontinued Eurodollar deposits; the remaining $831,000 was closed in October 2013.
Material changes and credit quality
- BancTrust added $50.5 million of revenue and approximately $13.0 million of net income, excluding non-routine transaction expenses, through September 30. The first nine months included approximately $9.4 million of BancTrust merger expenses. Acquired-loan payoff recoveries contributed $4.2 million after tax to BancTrust results.
- Q3 net interest income increased, but margin compressed. Management attributed the nine-month margin decline to downward repricing of fixed-rate assets and a larger mix of lower-yielding securities, partly offset by acquired-loan income and lower deposit costs.
- Trustmark recorded a $11.4 million LHFI provision recapture for the first nine months, versus $7.3 million of provision expense in 2012; acquired-loan provision was $1.9 million. Net recoveries on LHFI were $1.3 million, compared with $13.3 million of net charge-offs in 2012.
- Nonaccrual LHFI decreased to $73.4 million from $82.4 million at year-end 2012. However, nonperforming assets excluding acquired loans and covered other real estate rose to $189.7 million from $160.6 million, mainly alongside higher other real estate. Other real estate was $116.3 million, including $40.1 million acquired from BancTrust.
- Classified LHFI declined $30.8 million and criticized LHFI declined $68.1 million year over year. The LHFI allowance was $68.6 million, or 1.20% of LHFI, down from $78.7 million and 1.41% at year-end.
Outlook, risks and unusual items
- Management described the economic outlook as uncertain despite moderate improvement, citing slower employment growth, consumer concerns and uncertainty related to the federal government shutdown and debt-ceiling debate. No specific earnings or revenue guidance was provided.
- Management said it remained cautious on certain real-estate lending and loan-policy exceptions, while continuing to make loans to qualified borrowers under its prudent standards. Key risks include regional economic conditions, credit deterioration, interest-rate changes, deposit withdrawals, competition, regulation and litigation.
- Management estimated the debit-card interchange-fee standards could reduce annual noninterest income by approximately $7 million to $10 million when Trustmark becomes subject to them, expected July 1, 2014. The final outcome of litigation concerning the rule was uncertain.
- In October, Trustmark reached an agreement in principle with FNMA for approximately $4.4 million to resolve specified mortgage repurchase obligations, subject to FNMA approval and reconciliation; the obligations were covered by an existing reserve. The overdraft-fee class-action settlement was $4.0 million, recorded in Q2, and preliminarily approved by the court in October; final approval was pending.
- Two Stanford-related lawsuits remained pending, with unquantified claims. Management said it did not consider losses probable and could not estimate any reasonably possible loss. The filing also cited sensitivity of mortgage servicing rights to prepayment and discount-rate assumptions.
- Regulatory capital rules expected to take effect for most banks in 2015 could require more capital; Trustmark was evaluating the impact. TNB’s merger with Somerville Bank received OCC approval in October as an affiliate reorganization.
Important facts for investors to verify
- Whether BancTrust integration delivers expected benefits and how acquired-loan performance and remaining purchase-accounting adjustments develop.
- Whether margin pressure, expense growth and the mortgage-banking slowdown continue, and how results compare after adjusting for acquisition and non-routine costs.
- Whether nonperforming assets and other real estate improve, and whether the lower allowance remains appropriate as credit conditions evolve.
- Final approval and implementation of the FNMA repurchase agreement and overdraft settlement, plus developments in the Stanford litigation.
- The actual effect of interchange-fee regulation and forthcoming capital rules on earnings and capital ratios.