Trustmark Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011 unless otherwise noted. Trustmark is a Mississippi-based bank holding company serving markets in Mississippi, Tennessee, Florida and Texas, with banking, mortgage, insurance and wealth-management businesses.
Financial performance
- Profit: Net income was $30.3 million, up 26% from $24.0 million in Q1 2011. Basic and diluted EPS were both $0.47, versus $0.38 and $0.37, respectively. Return on average assets rose to 1.25% from 1.02%; return on average tangible common equity was 13.41%, versus 11.65%.
- Revenue and margins: Net interest income was $86.9 million, up from $86.4 million. Fully taxable-equivalent net interest margin declined 11 basis points to 4.19%, reflecting lower yields on repricing assets and a shift toward lower-yielding securities; lower deposit costs partly offset the pressure. Total noninterest income increased 20% to $43.8 million, including $1.1 million of securities gains.
- Noninterest items and expenses: Noninterest expense rose 7% to $85.8 million (3% excluding business combinations). The increase included approximately $2.6 million of Bay Bank transaction costs, higher salaries and benefits, and higher loan expense.
- Credit costs: Loan-loss provision for held-for-investment loans was $3.3 million, down from $7.5 million; acquired-loan provision was a $0.2 million credit. Net charge-offs were $1.9 million, or 0.13% of average loans, compared with $7.6 million, or 0.51%, a year earlier.
- Cash flow: Operating cash flow was $36.3 million, versus $100.0 million in Q1 2011. Investing activities provided $23.9 million and financing activities used $49.3 million. Cash and cash equivalents ended the quarter at $213.5 million, up $10.9 million during the quarter.
Financial position, liquidity and capital
- Total assets were $9.93 billion, up from $9.73 billion at year-end. Held-for-investment loans were $5.77 billion, down $82.7 million; acquired loans totaled $174.3 million. Available-for-sale securities were $2.60 billion.
- Deposits increased 6.9% to $8.09 billion, primarily due to seasonal public deposits and the Bay Bank acquisition. Short-term borrowings declined to $336.9 million from $692.1 million, mainly as deposit growth reduced funding needs. Subordinated notes were $49.8 million and junior subordinated debt was $61.9 million.
- Shareholders’ equity was $1.24 billion. Trustmark National Bank’s regulatory capital ratios were 16.33% total risk-based, 14.50% Tier 1 risk-based and 10.31% Tier 1 leverage; the bank met the filing’s well-capitalized criteria. Management stated that liquidity and capital were sufficient for presently known needs.
- The quarterly dividend remained $0.23 per share; the filing reported an indicated 2012 dividend of $0.92 per share.
Changes and unusual items
- Trustmark completed its acquisition of Bay Bank & Trust on March 16, 2012, for approximately $22.0 million in cash and stock. The acquired business added deposits and loans; its preliminary purchase-price allocation was expected to be finalized in Q2.
- A $2.8 million bargain-purchase gain and approximately $2.6 million of nonroutine transaction expenses together increased Q1 net income by approximately $1.2 million, or about $0.02 per share, according to management.
- Noninterest-income growth also reflected stronger mortgage banking, including $6.5 million in net loan-sale gains, and a $0.8 million arranger fee. Mortgage servicing putback expense increased to $1.9 million from $0.6 million.
- Nonperforming assets, excluding acquired loans and covered other real estate, fell to $181.5 million from $189.5 million; nonaccrual loans declined to $105.8 million. Troubled debt restructurings increased to $37.1 million from $34.2 million.
Management commentary, outlook and risks
- Management described the economic outlook as uncertain: employment and some activity indicators improved, but unemployment remained elevated, housing depressed and global markets a downside risk. No specific earnings or revenue guidance was provided.
- Trustmark said it was reducing exposure to construction and land-development lending and indirect auto loans, while maintaining prudent underwriting. Loan balances declined during the quarter, including a reduction in indirect auto loans.
- Management’s interest-rate simulations estimated annual net interest income decreases of 1.7% under a 200-basis-point rate increase and 4.8% under a 100-basis-point decrease, based on static balances. The filing cautions that actual results may differ and the estimates exclude potential management actions.
- Key risks include deterioration in borrower performance or property values, concentrations in regional real estate markets, interest-rate and securities-market movements, mortgage servicing and putback claims, deposit and funding competition, regulatory changes and acquisition integration.
- Two Stanford Financial Group-related lawsuits remained pending; management said a material adverse outcome was not reasonably possible. A separate overdraft-fee class action was dismissed without prejudice in April 2012, so similar claims could be refiled. Letters of credit exposed Trustmark to maximum potential credit losses of $161.7 million; commitments to extend credit totaled $1.7 billion.
- Trustmark had no direct or indirect exposure to European sovereign or non-sovereign debt and no Eurozone funding dependence, according to management. The filing also noted that future asset growth above the $10 billion threshold could affect debit-interchange revenue and FDIC assessment costs.
Important facts for investors to verify
- How much of Q1 earnings growth is repeatable after removing the Bay Bank bargain-purchase gain and transaction costs?
- Whether the decline in nonperforming assets and charge-offs continues, and whether the allowance remains adequate as criticized loans and TDRs evolve.
- Whether net interest margin pressure persists as assets reprice and the securities mix changes.
- Bay Bank’s finalized purchase accounting, integration costs and contribution to future earnings and deposits.
- Potential exposure from mortgage repurchase claims, the Stanford-related litigation and any renewed overdraft-fee litigation.
- Liquidity and capital effects if deposits, seasonal public funds, or wholesale funding availability change; also monitor the possible implications of crossing $10 billion in assets.