Trustmark Corporation (10-Q): Quarter ended June 30, 2012
Business context: Trustmark is a Mississippi-based bank holding company operating banking, mortgage, insurance and wealth-management businesses through about 170 offices, primarily in Mississippi, Tennessee, Florida and Texas. The filing reports second-quarter and six-month 2012 results; balance-sheet comparisons are against December 31, 2011. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $86.4 | $87.8 | $173.4 | $174.2 |
| Noninterest income | $43.8 | $46.4 | $87.5 | $82.8 |
| Noninterest expense | $88.0 | $81.3 | $173.7 | $161.4 |
| Net income | $29.3 | $31.6 | $59.7 | $55.6 |
| Diluted EPS | $0.45 | $0.49 | $0.92 | $0.87 |
| Net interest margin, FTE | 4.15% | 4.29% | 4.17% | 4.29% |
- Q2 earnings declined year over year as higher expenses and lower net interest income outweighed improved mortgage banking and lower loan-loss provisioning. For the first half, earnings rose $4.1 million, with lower provisions and higher noninterest income more than offsetting expense growth.
- Q2 return on average assets was 1.20% (1.32% prior year); first-half return was 1.23% (1.17%). First-half return on average tangible common equity was 13.07%, versus 13.21%.
- First-half cash flow from operations was $5.5 million, versus $136.4 million in 2011; investing activities provided $193.4 million and financing activities used $116.8 million. Cash and cash equivalents ended the period at $284.7 million. Cash-flow comparisons include substantial mortgage-loan purchases/originations and sales.
- At June 30, total assets were $9.89 billion, deposits $8.00 billion and shareholders’ equity $1.26 billion. Deposits rose $429.5 million from year-end; total held-for-investment loans were $5.65 billion, down $206.9 million. Short-term borrowings and federal funds/repo liabilities together were about $376.3 million, down from $692.1 million at year-end. Subordinated notes were $49.9 million and junior subordinated debt securities $61.9 million.
- Trustmark and its bank subsidiary exceeded regulatory minimum capital standards; the bank was categorized as well-capitalized. Trustmark’s total risk-based capital ratio was 17.12%, Tier 1 risk-based ratio 15.26% and Tier 1 leverage ratio 10.63%.
- Six-month dividends were $0.46 per share; the board declared a $0.23 quarterly dividend payable September 15, 2012.
Material changes and unusual items
- Credit indicators improved: nonaccrual held-for-investment loans were $99.7 million, down $10.8 million from year-end; nonperforming assets excluding acquired loans and covered other real estate were $173.4 million, down $16.2 million. First-half net charge-offs fell to $8.7 million from $22.3 million; the allowance for held-for-investment loans was $84.8 million, or 1.50% of those loans.
- Loan-loss provisions for held-for-investment loans were $3.9 million in the first half, versus $15.7 million in 2011. Acquired-loan provisions added $1.5 million. Management attributed lower provisioning to reduced criticized loans and charge-offs, prior-period reserves, risk-rating upgrades and a smaller loan portfolio.
- Mortgage banking income rose to $18.5 million for the first half from $11.0 million, including $12.8 million of loan-sale gains versus $5.0 million. Mortgage servicing putback expenses rose to $7.1 million from $1.1 million; the company added about $4 million to its reserve in Q2, bringing the accrued reserve to $9.2 million.
- The March 2012 Bay Bank acquisition contributed a $3.6 million first-half bargain-purchase gain, partly offset by approximately $2.6 million of pretax non-routine transaction costs. Management reported a net after-tax earnings benefit of about $2.0 million, or $0.03 per share. The acquisition added about $12 million of Trustmark stock issuance.
- Other income included a $2.3 million write-down of the FDIC indemnification asset after improved expected cash flows and lower expected losses on Heritage covered loans. The asset stood at $25.3 million at quarter-end.
Outlook, risks and contingencies
- Management described the economy as showing moderate improvement but with an uncertain outlook. It reported continued caution in real-estate lending and ongoing efforts to reduce exposure to construction and land-development loans and indirect auto lending. No specific earnings or revenue guidance was provided.
- Management’s static-balance interest-rate scenarios estimated annual net interest income decreases of 0.6% for a 200-basis-point rise and 4.9% for a 100-basis-point decline. These are model estimates, not forecasts, and exclude potential management actions and balance-sheet changes.
- The proposed BancTrust merger, announced May 29, was expected to close in Q4 2012, subject to shareholder and regulatory approvals. BancTrust had $1.3 billion in loans and $1.8 billion in deposits at March 31. Trustmark expected to issue about 2.25 million shares and intended to repurchase $50 million of BancTrust preferred stock and warrants. Management noted potential integration, approval and transaction risks; post-merger assets could exceed $10 billion, potentially affecting debit interchange-fee treatment and deposit-insurance assessments.
- Two Stanford-related lawsuits and two putative class actions concerning overdraft fees remained pending; plaintiffs did not quantify damages. Management said the matters were being vigorously contested and that a material adverse outcome was not reasonably possible. The filing also reports $1.7 billion of commitments to extend credit and $157.1 million maximum exposure under letters of credit.
- Management cited local and national economic conditions, loan and collateral values, interest-rate volatility, mortgage repurchase claims, litigation, regulatory change and acquisition execution as risks. Proposed U.S. capital rules could require greater capital if adopted. The filing reported no material change to previously disclosed annual-report risk factors.
Important facts for investors to verify
- Whether credit quality continues to improve, especially in construction and commercial real estate, and whether the allowance remains adequate as nonperforming loans, TDRs and charge-offs evolve.
- Mortgage repurchase claims, the adequacy of the $9.2 million reserve and the effect of mortgage production, sale volumes and servicing-rights valuations on earnings.
- The BancTrust merger’s approval, closing, integration costs, share issuance, preferred-stock repurchase and resulting effects on capital, expenses and regulatory thresholds.
- Deposit mix and pricing, liquidity capacity, and the drivers of the sharp year-over-year decline in operating cash flow.
- Progress and potential financial exposure in Stanford and overdraft-fee litigation; the filing does not provide quantified claims or a clear maximum exposure.
- How lower asset yields, deposit repricing and interest-rate sensitivity affect net interest margin and future earnings.