Trustmark Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Trustmark is a Mississippi-based financial services company operating in Florida, Mississippi, Tennessee and Texas. Dollar amounts below are in millions unless otherwise stated; balance-sheet comparisons are with December 31, 2009.
Financial performance and condition
- Q3 earnings: Net income was $25.9 million, versus $25.5 million a year earlier; diluted EPS was $0.40 versus $0.39. Net interest income was $87.6 million, down 1.5%; fully taxable-equivalent net interest margin was 4.39%, up from 4.28%.
- Nine-month results: Net income was $75.5 million versus $68.6 million; net income available to common shareholders was also $75.5 million versus $59.2 million, and diluted EPS was $1.18 versus $1.03. The common-income increase reflects both lower credit provision and the absence of preferred dividends and discount accretion in 2010.
- Revenue and costs: Nine-month net interest income was $263.5 million, down 0.9%; total noninterest income was $127.3 million, down 0.5%; noninterest expense was $245.2 million, up 5.4%. The FTE net interest margin was 4.43%, compared with 4.22% in 2009. Higher foreclosure-related costs were a principal driver of expense growth.
- Credit costs: The nine-month loan-loss provision was $37.8 million, down from $59.4 million. Net charge-offs were $47.0 million versus $51.3 million; however, Q3 net charge-offs increased to $18.5 million from $14.5 million in Q3 2009.
- Credit quality: Nonperforming assets were $244.0 million, up 5.5% from year-end, and equaled 3.84% of loans and other real estate, versus 3.48%. Nonaccrual loans rose to $159.3 million from $141.2 million. The allowance was $94.5 million, or 1.57% of loans. Florida represented 7.7% of loans but 39.9% of nonperforming assets.
- Balance sheet: Assets were $9.42 billion, down from $9.53 billion; loans were $6.00 billion, down $321 million; and deposits were $7.03 billion, down $163 million (2.3%). Securities totaled $2.14 billion. Shareholders’ equity was $1.16 billion, up $48.7 million.
- Cash flow and funding: For the nine months, operating cash flow was $127.0 million, investing cash flow was $105.2 million and financing cash outflow was $249.6 million; cash and cash equivalents declined $17.4 million to $196.1 million. Short-term liabilities were $951.5 million; subordinated notes were $49.8 million and junior subordinated debt was $70.1 million. Management cited deposits, securities and external borrowing facilities as liquidity sources.
- Capital and returns: Trustmark’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 15.75%, 13.75% and 10.26%, respectively. Trustmark National Bank was reported well-capitalized. The nine-month return on average assets was 1.09%; the common dividend was $0.23 per share for Q3.
Material changes versus comparable periods
- Nine-month common earnings rose 27.6%, supported by a $21.7 million reduction in loan-loss provision and the elimination of preferred-stock charges; the benefit was partly offset by $12.6 million higher noninterest expense.
- Loan balances contracted as Trustmark reduced construction and land-development lending, discontinued indirect auto financing and faced weak credit demand. Construction, land development and other land loans declined to $615.6 million from $830.1 million at year-end; indirect auto loans declined to $239.3 million from $386.0 million.
- Mortgage banking income increased 11.3% to $24.8 million for nine months, including favorable hedge ineffectiveness, while loan-sale gains declined. Securities increased $220.1 million from year-end, mainly from agency-security purchases.
- Noninterest expense growth was concentrated in other real estate and foreclosure costs. Other real estate was $84.7 million; nine-month write-downs were $15.3 million versus $6.2 million a year earlier.
Outlook, commentary and risks
- Management described the economic recovery as fragile, with weak labor markets, uncertainty and tight credit conditions continuing to pressure asset quality and earnings. It reported no significant change to underwriting standards, while tightening commercial real estate concentration limits and reducing policy exceptions.
- No specific earnings or financial guidance was provided. Management said it expected growth in foreclosure-related expenses to slow after substantially completing 2010 Florida property reappraisals.
- Interest-rate simulations estimated annual net interest income decreases of 1.4% under a 200-basis-point increase and 4.1% under a 100-basis-point decrease. Management cautioned that estimates depend on assumptions and do not include possible balance-sheet actions.
- Trustmark exited TARP in December 2009. A proposed Cadence Financial merger was terminated October 6, 2010, after Cadence accepted another proposal; Trustmark is due a $2.0 million termination fee, expected to be recognized in Q4 2010.
- Trustmark National Bank faces a purported class action relating to Stanford Financial Group. The company considers the claims without merit and intends to defend them; management said it could not estimate a potential loss range and did not expect pending litigation to materially affect consolidated results or financial position.
- Off-balance-sheet commitments to extend credit were $1.6 billion; maximum letter-of-credit exposure was $186.0 million. The Dodd-Frank Act may change regulatory, deposit-insurance and revenue requirements; management said the eventual impact was uncertain.
Important facts for investors to verify
- Whether nonperforming loans, foreclosed-property valuations and charge-offs continue to rise, particularly in Florida and in construction and commercial real estate portfolios.
- Whether lower loan balances and deposit contraction affect net interest income, funding costs and liquidity; review the stated borrowing capacity and its availability under stress.
- Whether foreclosure expense growth slows as management anticipates, and whether mortgage-banking gains and hedge results remain sustainable.
- The timing and accounting recognition of the $2.0 million Cadence termination fee, and developments in the Stanford-related litigation and other claims.
- Implementation costs and business effects of Dodd-Frank, including any changes to deposit assessments, interchange income and consumer-finance regulation.