Trustmark Corporation — Q3 2011 Form 10-Q
Business context and period. Trustmark is a Mississippi-based bank holding company operating banking, mortgage, wealth-management and insurance businesses across Mississippi, Florida, Tennessee and Texas. This unaudited filing covers the quarter and nine months ended September 30, 2011; income comparisons are year over year, while balance-sheet comparisons are principally with December 31, 2010. Amounts below are rounded.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $85.7m | $87.6m | $259.9m | $263.5m |
| Provision for loan losses | $8.0m | $12.3m | $23.6m | $37.8m |
| Noninterest income | $44.3m | $44.0m | $127.1m | $127.3m |
| Noninterest expense | $85.5m | $84.4m | $246.8m | $245.2m |
| Net income | $27.0m | $25.9m | $82.6m | $75.5m |
| Diluted EPS | $0.42 | $0.40 | $1.29 | $1.18 |
- Margins and returns: Q3 fully taxable-equivalent net interest margin was 4.17%, down from 4.39%; nine-month margin was 4.25%, down from 4.43%. Q3 return on average assets was 1.12% versus 1.11%; nine-month return was 1.15% versus 1.09%.
- Cash flow: Net cash provided by operating activities was $133.2m for the first nine months, compared with $127.0m in 2010. Cash and cash equivalents ended the period at $245.1m.
- Balance sheet at September 30: Total assets were $9.706bn, up from $9.554bn at year-end 2010. Deposits were $7.570bn, up 7.5%; shareholders’ equity was $1.222bn, up from $1.149bn.
- Loans and securities: Loans held for investment excluding covered loans were $5.784bn, down $276.5m from year-end; investment securities totaled approximately $2.548bn, up $229.9m. The allowance for loan losses was $89.5m, or 1.55% of loans excluding loans held for sale.
- Borrowings and liquidity: Short-term liabilities were $675.6m, down $449.9m from year-end, reflecting lower short-term FHLB advances and other borrowings. Management cited deposits, a liquid securities portfolio and available borrowing sources; qualifying collateral supported up to $1.887bn of additional FHLB advances, with further repurchase-agreement and Federal Reserve Discount Window capacity also available.
- Capital: TNB was classified as well-capitalized. At September 30, its total risk-based capital ratio was 16.38%, Tier 1 risk-based ratio 14.38%, and Tier 1 leverage ratio 10.12%. Trustmark’s total risk-based ratio was 16.78%.
Material changes and notable items
- Net income rose 4.3% in Q3 and 9.4% for the first nine months. Lower loan-loss provisioning supported earnings, while lower net interest income and slightly higher noninterest expense were offsets.
- Credit indicators improved overall: nonperforming assets excluding covered assets fell to $189.2m from $229.6m at year-end; nonaccrual loans fell to $99.6m from $142.9m. Nine-month net charge-offs declined to $27.7m from $47.0m, and the provision fell to $23.6m from $37.8m.
- Some indicators warrant attention: troubled debt restructurings rose to $27.7m from $19.2m at year-end, and loans more than 90 days past due totaled $36.1m versus $19.4m. Of the latter, $33.0m were GNMA-serviced loans eligible for repurchase and fully FHA/VA-guaranteed; Trustmark said it did not exercise the repurchase option during the first nine months.
- The April 15 Heritage Banking Group acquisition added $11.1m in revenue and $5.9m in net income through September 30. The transaction generated a $7.5m pretax bargain-purchase gain ($4.6m after tax, about $0.07 per share). The FDIC agreed to cover 80% of losses on specified acquired loans and real estate; the acquired assets are separately identified as covered. No FDIC clawback payable was recorded at quarter-end.
- Loan balances declined as Trustmark reduced construction/land-development and indirect auto exposure, and sold its remaining $33.0m student-loan portfolio. Securities growth partly offset loan contraction. Management attributed margin pressure to lower asset yields, premium amortization and a shift toward lower-yielding securities, partly offset by lower deposit costs.
Outlook, risks and contingencies
- The filing gives no specific earnings or revenue guidance. Management described continued economic uncertainty and pressure on local-market asset quality and earnings, and said it would maintain prudent underwriting, monitor credit and market conditions, and preserve excess funding capacity.
- Management’s interest-rate simulations estimated annual net interest income could decline 1.9% under a 200-basis-point rate increase and 4.7% under a 100-basis-point decrease, based on static September 30 balances. Management cautioned that actual outcomes may differ and that the estimates omit potential balance-sheet actions.
- Risks include deterioration in loan performance or collateral values, regional real-estate exposure, interest-rate and securities-market changes, funding and deposit behavior, regulatory changes, and acquisition-integration challenges. The filing notes that implementation of Dodd-Frank and possible Basel III requirements may affect costs, revenues or capital needs; Trustmark was exempt from the debit-interchange fee limits at the time.
- Two Stanford Financial Group-related lawsuits involving TNB remained pending; damages were not quantified. Management, citing counsel, said a material adverse outcome was not reasonably possible and expected no material effect on consolidated results or financial position. Mortgage servicing putback expense was $2.5m for the first nine months versus $1.1m a year earlier; accrued putback expense was $2.0m at September 30.
- Other unusual or valuation-sensitive items include the Heritage bargain-purchase gain and the FDIC indemnification asset, mortgage servicing rights, foreclosed real estate, and loan-loss estimates. Management reported no other-than-temporary impairment in securities for the nine-month period.
Important facts for investors to verify
- Whether improved nonperforming-asset and charge-off trends continue, particularly given higher TDRs and 90-day-past-due balances; distinguish covered assets from noncovered loans.
- How much reported earnings growth depended on the Heritage acquisition and its one-time bargain-purchase gain, and how acquired covered-asset cash flows and FDIC reimbursements perform.
- Whether deposit growth and reduced wholesale borrowing persist, and whether reported liquidity capacity remains available on acceptable terms.
- How net interest margin responds to low rates, securities reinvestment and deposit pricing, compared with management’s interest-rate sensitivity estimates.
- The status and potential exposure from Stanford-related litigation and mortgage-servicing representations-and-warranties claims.
- Whether regulatory implementation, including any future change in Trustmark’s asset-threshold status, affects interchange income, deposit-insurance costs or capital requirements.