TRUSTMARK CORP quarterly report, Q3 FY2014

Full document

Trustmark Corporation — Q3 2014 Form 10-Q

Business context and reporting period

Trustmark is a bank holding company headquartered in Jackson, Mississippi, with 207 offices across Alabama, Florida, Mississippi, Tennessee and Texas. This unaudited quarterly report covers the three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013.

Financial performance and condition

  • Q3 earnings: Net income was $33.6 million, or $0.50 per diluted share, versus $33.0 million and $0.49 a year earlier. For the first nine months, net income rose 7.3% to $95.5 million; diluted EPS was $1.41 versus $1.33.
  • Revenue and margin: Q3 net interest income was $106.2 million, up from $98.4 million; noninterest income was $42.9 million, down from $47.1 million. Nine-month net interest income increased 6.9% to $306.4 million, while noninterest income decreased 3.0% to $131.1 million. Fully taxable-equivalent net interest margin was 4.14% in Q3 and 4.09% year to date, versus 3.94% and 3.98%, respectively, in 2013.
  • Expenses and credit costs: Q3 noninterest expense declined 1.3% to $100.2 million; nine-month expense declined 2.0% to $304.6 million. Nine-month provision for LHFI was $2.6 million, compared with an $11.4 million provision reversal in 2013; provision for acquired loans was $5.0 million versus $1.9 million.
  • Assets and lending: Total assets were $12.10 billion, up from $11.79 billion at year-end. LHFI grew $534.8 million to $6.33 billion; net LHFI and acquired loans together were $6.84 billion. Securities totaled $3.53 billion.
  • Credit quality: Nonaccrual LHFI increased to $88.3 million from $65.2 million at year-end. Management attributed most of the increase to three Mississippi credit relationships totaling $24.8 million. Nonperforming assets, excluding acquired loans and covered ORE, were $185.4 million; the reported ratio was 2.82%, versus 2.84% at year-end. LHFI allowance was $70.1 million, or 1.11% of LHFI, versus 1.15% at year-end. Net recoveries were $1.1 million for the first nine months.
  • Funding and liquidity: Deposits declined $346.7 million to $9.51 billion. Noninterest-bearing deposits rose about $60.0 million, while interest-bearing deposits fell about $406.7 million. Short-term borrowings increased to $924.5 million from $318.0 million, including $250.0 million of short-term FHLB advances and higher federal funds purchased. Cash and due from banks was $237.5 million, down from $345.8 million at year-end.
  • Cash flows and capital: Nine-month operating cash flow was $159.6 million, investing cash flow was negative $477.9 million, and financing cash flow was positive $210.1 million; cash and cash equivalents decreased $108.3 million. Shareholders’ equity rose 4.4% to $1.42 billion. Trustmark’s total risk-based capital ratio was 14.70%; TNB’s was 14.44%, and TNB met well-capitalized standards.
  • Shareholder returns: Dividends were $0.23 per share for Q3 and $0.69 year to date, unchanged from 2013 year-over-year. The board declared a $0.23 quarterly dividend payable December 15, 2014.

Material changes and management commentary

  • Higher net interest income reflected growth in earning assets, acquired-loan interest and recoveries, taxable securities income, and lower deposit costs. Management cautioned that acquired-loan payoff recoveries contributed to margin and that their future impact is difficult to determine. Q3 margin declined 7 basis points from Q2; management expected margin excluding acquired loans to remain relatively stable in Q4.
  • Mortgage banking income fell 33.4% year to date to $18.9 million, largely due to lower loan-sale gains, volumes and spreads. Mortgage production also declined. Management said mortgage banking revenue could remain below recent historical levels in Q4 and beyond.
  • Insurance and wealth management revenues grew year over year. Deposit service charges and bank-card fees declined; Trustmark attributed lower deposit charges partly to fewer overdrafts and NSF occurrences and lower bank-card fees partly to interchange income.
  • Management described economic conditions as moderately improving but uncertain, with market volatility and interest-rate uncertainty. It reported continued LHFI portfolio growth and lower classified and criticized balances year over year, while remaining cautious in certain real-estate lending.

Guidance, risks, contingencies and unusual items

  • No formal earnings or full-year financial guidance is provided. Management’s stated Q4 expectations include relatively stable net interest margin excluding acquired loans, with continued but uncertain acquired-loan recovery effects; mortgage banking revenue may remain weaker.
  • Interest-rate sensitivity modeling estimated net interest income would rise 2.9% under an immediate +200-basis-point shock and fall 4.9% under a -100-basis-point shock, compared with a flat-rate base case. Management noted these are model estimates, not assurances.
  • Key risks include credit deterioration, regional economic and property-market changes, interest-rate and deposit behavior, mortgage origination and servicing exposures, competition, litigation, regulatory changes and execution of expense and growth initiatives.
  • Two Stanford Financial Group-related lawsuits remain pending; plaintiffs have not quantified damages. Management said a loss was not probable and no accrual was required, while noting any reasonably possible loss could not be estimated. Prior overdraft/NSF class-action litigation was settled for $4.0 million in 2013; the settlement is final.
  • Trustmark disclosed immaterial cash-flow statement classification errors for prior periods: certain bank-owned life insurance and partnership investments had been classified as operating rather than investing activities. The corrections changed operating and investing cash-flow subtotals, but not ending cash or other financial statement amounts.
  • Management recorded additional loan-loss provisions associated with 2014 methodology changes: approximately $1.4 million for consumer credit-score factors in Q2 and $822,000 for smaller commercial nonaccrual loans in Q3. New Basel III capital rules were expected to require more capital; management was evaluating their impact.

Most important facts for investors to verify

  • Whether the increase in nonaccrual loans—especially the three Mississippi relationships—and the higher LHFI provision indicate further credit deterioration.
  • How much net interest income and margin depend on acquired-loan payoff recoveries, and whether underlying margin stabilizes as management expects.
  • Whether deposit outflows and increased short-term wholesale funding continue, and how available borrowing capacity supports liquidity.
  • Whether mortgage banking weakness and debit interchange fee pressure are offset by growth in insurance, wealth management and expense controls.
  • The eventual outcomes of the Stanford-related litigation, mortgage servicing putback exposure and implementation of new regulatory capital requirements.