Trustmark Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Trustmark is a bank holding company headquartered in Jackson, Mississippi, with approximately 170 offices across Mississippi, Tennessee, Florida and Texas. Amounts below are in millions except per-share data and ratios.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $85.3 | $85.7 | $258.7 | $259.9 |
| Noninterest income | $44.9 | $44.3 | $132.4 | $127.1 |
| Net income | $29.9 | $27.0 | $89.6 | $82.6 |
| Diluted EPS | $0.46 | $0.42 | $1.38 | $1.29 |
| Net interest margin, FTE | 4.06% | 4.17% | 4.14% | 4.25% |
| Net loan-loss provision | $5.5 | $8.0 | $10.9 | $23.6 |
- At September 30, total assets were $9.87 billion, deposits $7.80 billion, shareholders’ equity $1.28 billion, and loans held for investment (LHFI) $5.53 billion. Total deposits rose 3.1% from year-end 2011; LHFI fell $329.5 million.
- Allowance for LHFI losses was $83.5 million, or 1.51% of LHFI. Nine-month net charge-offs declined to $13.3 million from $27.7 million in 2011.
- Operating cash flow for the first nine months was $1.3 million, versus $133.2 million in 2011; investing cash flow was $219.6 million and financing cash flow was negative $214.4 million. Cash and cash equivalents ended the period at $209.2 million. Operating cash flow was affected by loan-held-for-sale activity and other working-capital movements.
- Funding included $7.80 billion of deposits, $492.3 million of federal funds purchased, repurchase agreements and short-term borrowings, $49.9 million of subordinated notes, and $61.9 million of junior subordinated debt securities. Management said liquidity and capital resources were sufficient for known needs; substantial additional borrowing capacity was available.
- Trustmark reported total risk-based capital of 17.25% and a Tier 1 leverage ratio of 10.83%; its bank subsidiary met the well-capitalized regulatory guidelines.
Changes versus comparable periods
- Q3 net income increased 10.9% year over year; nine-month net income increased 8.5%. Lower loan-loss provisioning and lower quarterly noninterest expense supported results, while net interest income and margin declined.
- Nine-month noninterest income increased 4.2%, led by mortgage banking, whose revenue rose to $29.6 million from $20.8 million. Loan-sale gains were $21.9 million versus $7.3 million, reflecting greater sales and higher margins.
- Nine-month noninterest expense rose 4.2% to $257.2 million, or 1.9% excluding business combinations. Salary and benefit costs and loan expenses increased; ORE/foreclosure expense and FDIC assessments decreased.
- Nonperforming assets, excluding acquired loans and covered other real estate, declined to $163.1 million from $189.5 million at December 31, 2011. Nonaccrual LHFI fell to $80.7 million from $110.5 million.
- LHFI contracted, principally from paydowns in 1–4 family mortgages and a planned reduction in construction/land-development and indirect auto lending. Deposits increased, while short-term borrowings declined about $199.8 million from year-end.
Outlook, commentary, risks and unusual items
- Management described economic conditions as showing moderate improvement but said the outlook remained uncertain. It cited continued pressure on asset growth, credit quality and earnings, and noted possible indirect effects from European financial-market volatility. No numerical earnings guidance was provided.
- Interest-rate simulations estimated annual net interest income would be approximately unchanged with a 100-basis-point increase and down 5.2% with a 100-basis-point decrease from the September 30, 2012 base case. Management cautioned that actual results may differ and that model estimates omit future strategic balance-sheet changes.
- Bay Bank was acquired March 16, 2012 for approximately $22 million in cash and stock. Its results contributed $10.0 million of revenue and $1.2 million of net income through September 30. A $3.6 million bargain-purchase gain and approximately $2.6 million of transaction expenses were recognized; management estimated their combined after-tax effect increased nine-month net income by about $2.0 million, or $0.03 per share.
- The proposed BancTrust Financial Group merger remained subject to regulatory approval. The parties extended the latest possible closing date to February 28, 2013; management anticipated closing in Q1 2013. Trustmark intended to repurchase BancTrust’s $50 million of Treasury-issued preferred stock and related warrants. Integration, approval and timing risks remain.
- Mortgage loan servicing putback expenses were $7.2 million for the first nine months, versus $2.5 million a year earlier; the reserve was $8.6 million at September 30. A second-quarter review added approximately $4.0 million to the reserve. Management considered the reserve appropriate, but future claims are uncertain.
- An overdraft-processing change effective October 1, 2012 was expected by management to reduce annual service-charge income by approximately $3.0 million. If the BancTrust merger takes Trustmark above the $10 billion asset threshold, debit-card interchange rules could reduce annual income by an estimated $6–$8 million; the filing anticipated compliance by July 2014.
- Two Stanford-related lawsuits and two putative overdraft-fee class actions were pending. Damages in the described cases were unquantified. Management said the cases were being vigorously contested and that a material adverse outcome was not reasonably possible.
- Management identified proposed regulatory capital rules as a potential requirement for banks to hold more capital and common equity. Trustmark also cited credit deterioration, local economic conditions, real-estate values, mortgage repurchase claims, interest-rate changes, merger execution, and regulatory change as risks.
Important facts for investors to verify
- Whether the BancTrust merger received approval and closed as anticipated, and its actual funding, integration costs and capital impact.
- Whether credit-quality improvement continued, particularly in construction and commercial real estate; monitor nonperforming assets, charge-offs, criticized loans, ORE and allowance coverage.
- Whether mortgage repurchase claims exceed the $8.6 million reserve and whether mortgage banking gains and hedging results remain sustainable.
- The realized effect of the overdraft-processing change and any post-merger interchange-fee and FDIC-assessment costs.
- How the low operating cash flow, deposit mix, borrowing capacity and interest-rate sensitivity evolve; review liquidity and capital disclosures alongside reported earnings.