Add
TRMK to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| TRMK > SEC Filings for TRMK > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
The following provides a narrative discussion and analysis of Trustmark Corporation's (Trustmark) financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements and the supplemental financial data included elsewhere in this report.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document are not statements of historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements relating to anticipated future operating and financial performance measures, including net interest margin, credit quality, business initiatives, growth opportunities and growth rates, and relating to the anticipated investment by the U.S. Treasury in Trustmark as part of its Capital Purchase Program, among other things and encompass any estimate, prediction, expectation, projection, opinion, anticipation, outlook or statement of belief included therein as well as the management assumptions underlying these forward-looking statements. Should one or more of these risks materialize, or should any such underlying assumptions prove to be significantly different, actual results may vary significantly from those anticipated, estimated, projected or expected.
These risks could cause actual results to differ materially from current expectations of Management and include, but are not limited to, changes in the level of nonperforming assets and charge-offs, local, state and national economic and market conditions, including the extent and duration of current volatility in the credit and financial markets, material changes in market interest rates, the costs and effects of litigation and of unexpected or adverse outcomes in such litigation, competition in loan and deposit pricing, as well as the entry of new competitors into our markets through de novo expansion and acquisitions, changes in existing regulations or the adoption of new regulations, natural disasters, acts of war or terrorism, changes in consumer spending, borrowings and savings habits, technological changes, changes in the financial performance or condition of Trustmark's borrowers, the ability to control expenses, changes in Trustmark's compensation and benefit plans, greater than expected costs or difficulties related to the integration of new products and lines of business and other risks described in Trustmark's filings with the Securities and Exchange Commission.
Although Management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Trustmark undertakes no obligation to update or revise any of this information, whether as the result of new information, future events or developments or otherwise.
OVERVIEW
Business
Trustmark is a multi-bank holding company headquartered in Jackson, Mississippi,
incorporated under the Mississippi Business Corporation Act on August 5,
1968. Trustmark commenced doing business in November 1968. Through its
subsidiaries, Trustmark operates as a financial services organization providing
banking and financial solutions through approximately 150 offices and 2,600
associates predominantly within the states of Florida, Mississippi, Tennessee
and Texas.
Trustmark National Bank (TNB), Trustmark's wholly-owned subsidiary, accounts for over 98% of the assets and revenues of Trustmark. Initially chartered by the state of Mississippi in 1889, TNB is also headquartered in Jackson, Mississippi. In addition to banking activities, TNB provides investment and insurance products and services to its customers through its wholly-owned subsidiaries, Trustmark Investment Advisors, Inc., The Bottrell Insurance Agency, Inc. (Bottrell), TRMK Risk Management, Inc., and Fisher-Brown, Incorporated (Fisher-Brown). TNB also owns all of the stock of Trustmark Securities, Inc., an inactive subsidiary.
Trustmark also engages in banking activities through its wholly-owned subsidiary, Somerville Bank & Trust Company (Somerville), headquartered in Somerville, Tennessee. Somerville presently has five locations in Somerville, Hickory Withe and Rossville, Tennessee. Trustmark also owns all of the stock of F. S. Corporation and First Building Corporation, both inactive nonbank Mississippi corporations.
In order to facilitate a private placement of trust preferred securities, Trustmark formed a Delaware trust affiliate, Trustmark Preferred Capital Trust I (Trustmark Trust). Also, as a result of the acquisition of Republic Bancshares of Texas, Inc., Trustmark owns Republic Bancshares Capital Trust I (Republic Trust), a Delaware trust affiliate. As defined in applicable accounting standards, both Trustmark Trust and Republic Trust, wholly-owned subsidiaries of Trustmark, are considered variable interest entities for which Trustmark is not the primary beneficiary. Accordingly, the accounts of both trusts are not included in Trustmark's consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Trustmark's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the financial services industry. Application of these accounting principles requires Management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual financial results could differ from those estimates.
Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. There have been no significant changes in Trustmark's critical accounting estimates during the first nine months of 2008.
FINANCIAL HIGHLIGHTS
Trustmark's net income totaled $23.4 million in the third quarter of 2008, which represented basic and diluted earnings per share of $0.41. Trustmark's third quarter 2008 net income produced returns on average tangible equity and average assets of 15.16% and 1.02%, respectively. During the first nine months of 2008, Trustmark's net income totaled $67.1 million, which represented basic and diluted earnings per share of $1.17. Trustmark's performance during this period resulted in returns on average tangible equity and average assets of 14.80% and 0.99%, respectively.
Selected Income Statement Data
($ in thousands, except per share data)
Quarter Ended Nine Months Ended
9/30/2008 9/30/2007 9/30/2008 9/30/2007
Net interest income-fully taxable
equivalent $ 81,638 $ 77,369 $ 238,573 $ 228,003
Taxable equivalent adjustment 2,242 2,283 6,810 7,143
Net interest income 79,396 75,086 231,763 220,860
Provision for loan losses 14,473 4,999 59,728 6,783
Net interest income after provision for
loan losses 64,923 70,087 172,035 214,077
Noninterest income 41,950 41,569 138,932 120,190
Noninterest expense 72,734 68,488 212,174 206,727
Income before income taxes 34,139 43,168 98,793 127,540
Income taxes 10,785 14,087 31,708 42,774
Net income $ 23,354 $ 29,081 $ 67,085 $ 84,766
Earnings per common share - basis $ 0.41 $ 0.51 $ 1.17 $ 1.47
Earnings per common share - diluted 0.41 0.51 1.17 1.46
Dividends per common share 0.23 0.22 0.69 0.66
Return on average assets 1.02 % 1.31 % 0.99 % 1.29 %
Return on average tangible equity 15.16 % 20.41 % 14.80 % 20.19 %
|
Non-GAAP Disclosures
Management is presenting, in the accompanying table, adjustments to net income
as reported in accordance with generally accepted accounting principles
resulting from significant items occurring during the periods presented.
Management believes this information will help users compare Trustmark's current
results to those of prior periods as presented in the table below ($ in
thousands):
Quarter Ended Nine Months Ended
9/30/2008 9/30/2007 9/30/2008 9/30/2007
Net Income as reported-GAAP $ 23,354 $ 29,081 $ 67,085 $ 84,766
Adjustments (net of taxes):
MasterCard Class A Common - - (3,308 ) -
Visa Litigation Contingency - - (936 ) -
Hurricane Katrina - - - (665 )
- - (4,244 ) (665 )
Net Income adjusted for specific items
(Non-GAAP) $ 23,354 $ 29,081 $ 62,841 $ 84,101
|
MasterCard Class A Common
During the second quarter of 2008, MasterCard offered Class B shareholders the
right to convert their stock into marketable Class A shares. Trustmark exercised
its right to convert its shares and sold them through a liquidation program. The
conversion and sale resulted in an after-tax gain of $3.3 million.
Visa Litigation Contingency
In the first quarter of 2008, Trustmark recognized an after-tax gain of $936
thousand resulting from the Visa initial public offering. This gain more than
offsets an after-tax accrual of $494 thousand that Trustmark recorded in the
fourth quarter of 2007 for the Visa litigation contingency relating to the Visa
USA Inc. antitrust lawsuit settlement with American Express and other pending
Visa litigation (reflecting Trustmark's share as a Visa member).
Hurricane Katrina
In the third quarter of 2005, immediately following the aftermath of Hurricane
Katrina, Trustmark estimated possible pre-tax losses resulting from this storm
of $11.7 million. Trustmark revised these estimates quarterly and any subsequent
adjustments are reflected in the table above, net of taxes. At September 30,
2008, the allowance for loan losses included $364 thousand related to possible
Hurricane Katrina losses.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the principal component of Trustmark's income stream and
represents the difference, or spread, between interest and fee income generated
from earning assets and the interest expense paid on deposits and borrowed
funds. Fluctuations in interest rates, as well as volume and mix changes in
earning assets and interest-bearing liabilities, can materially impact net
interest income. The net interest margin (NIM) is computed by dividing fully
taxable equivalent net interest income by average interest-earning assets and
measures how effectively Trustmark utilizes its interest-earning assets in
relationship to the interest cost of funding them. The accompanying Yield/Rate
Analysis Table shows the average balances for all assets and liabilities of
Trustmark and the interest income or expense associated with earning assets and
interest-bearing liabilities. The yields and rates have been computed based on
interest income and expense adjusted to a fully taxable equivalent (FTE) basis
using a 35% federal marginal tax rate for all periods shown. Nonaccruing loans
have been included in the average loan balances, and interest collected prior to
these loans having been placed on nonaccrual has been included in interest
income. Loan fees included in interest income associated with the average loan
balances are immaterial.
Net interest income-FTE for the three and nine months ended September 30, 2008, increased $4.3 million and $10.6 million, respectively, when compared with the same time periods in 2007. Trustmark has expanded its net interest margin in a falling rate environment during the third quarter of 2008. This was accomplished through continued deposit pricing discipline, afforded to Trustmark due to a strong liquidity position and stable deposit base. In addition, net interest income has now begun to recognize the full impact of the decision to purchase securities during 2008 given the opportunities afforded by a positively sloped yield curve. The combination of these factors resulted in a six basis point increase in NIM to 3.95%, when the first nine months of 2008 is compared with the same time period in 2007, while the third quarter NIM of 4.01% was twelve basis points higher than in the third quarter of 2007. For additional discussion, see Market/Interest Rate Risk Management included later in Management's Discussion and Analysis.
Average interest-earning assets for the first nine months of 2008 were $8.074 billion, compared with $7.845 billion for the same time period in 2007, an increase of $229.5 million. The increase was primarily due to an increase in average total loans during the first nine months of 2008, which increased $254.0 million, or 3.7%, relative to the same time period in 2007. The increase in average total loans was partially offset by a decrease of $22.3 million in fed funds sold and reverse repos. However, interest rates continued to fall during the first nine months of 2008 which contributed to a decline in the yield on loans of 101 basis points when compared to the same time period in 2007. Although average total securities decreased slightly during the first nine months of 2008, recent purchases have provided significantly higher yields when compared to previous periods partially due to a slightly longer duration of the securities portfolio. The overall yield of securities during 2008 has increased 53 and 32 basis points when compared to the third quarter of 2007 and the nine months ended September 30, 2007, respectively. This improvement has helped to offset decreasing loan yields seen during the periods discussed above. The combination of these factors resulted in a decline in interest income-FTE of $38.6 million, or 9.4%, when the first nine months of 2008 is compared with the same time period in 2007. The impact of these factors is also illustrated by the yield on total earning assets decreasing from 6.99% for the first nine months of 2007, to 6.14% for the same time period of 2008, a decrease of 85 basis points.
Average interest-bearing liabilities for the first nine months of 2008 totaled $6.549 billion compared with $6.326 billion for the same time period in 2007, an increase of $223.5 million, or 3.5%. However, the mix of these liabilities has changed when these two periods are compared. Management's strategy of disciplined deposit pricing resulted in a 1.8% increase in interest-bearing deposits during the first nine months of 2008 while the combination of federal funds purchased, securities sold under repurchase agreements and borrowings increased by 16.3%. The impact of utilizing these higher cost interest-bearing liabilities was offset somewhat by the decrease in the overall yield of 220 basis points on these products when the first nine months of 2008 is compared with the same time period in 2007. As a result of these factors, total interest expense for the first nine months of 2008 decreased $49.2 million, or 27.0%, when compared with the same time period in 2007.
Yield/Rate Analysis
Table
($ in thousands)
Quarter Ended September 30,
2008 2007
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning
assets:
Federal funds sold
and securities
purchased under
reverse repurchase
agreements $ 17,401 $ 98 2.24 % $ 30,201 $ 397 5.22 %
Securities - taxable 1,006,996 12,117 4.79 % 720,214 7,181 3.96 %
Securities -
nontaxable 114,823 1,946 6.74 % 133,585 2,422 7.19 %
Loans (including
loans held for sale) 6,927,270 105,706 6.07 % 6,970,434 129,394 7.36 %
Other earning assets
(1) 37,323 407 4.34 % 33,341 482 5.74 %
Total
interest-earning
assets 8,103,813 120,274 5.90 % 7,887,775 139,876 7.04 %
Cash and due from
banks 246,515 260,997
Other assets 810,449 759,626
Allowance for loan
losses (88,643 ) (70,950 )
Total Assets $ 9,072,134 $ 8,837,448
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing
deposits $ 5,637,582 32,860 2.32 % $ 5,451,646 50,423 3.67 %
Federal funds
purchased and
securities sold under
repurchase agreements 659,312 3,123 1.88 % 491,488 5,898 4.76 %
Other borrowings 276,712 2,653 3.81 % 434,064 6,186 5.65 %
Total
interest-bearing
liabilities 6,573,606 38,636 2.34 % 6,377,198 62,507 3.89 %
Noninterest-bearing
demand deposits 1,415,402 1,423,745
Other liabilities 136,229 135,469
Shareholders' equity 946,897 901,036
Total Liabilities and
Shareholders' Equity $ 9,072,134 $ 8,837,448
Net Interest Margin 81,638 4.01 % 77,369 3.89 %
Less tax equivalent
adjustment 2,242 2,283
Net Interest Margin
per Consolidated
Statements of Income $ 79,396 $ 75,086
|
(1) The prior period has been restated to include the addition of Federal Home Loan Bank and Federal Reserve Bank stock in other earning assets.
Yield/Rate Analysis
Table
($ in thousands)
Nine Months Ended September 30,
2008 2007
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning
assets:
Federal funds sold
and securities
purchased under
reverse repurchase
agreements $ 23,607 $ 445 2.52 % $ 45,868 $ 1,830 5.33 %
Securities - taxable 835,800 29,053 4.64 % 816,955 25,279 4.14 %
Securities -
nontaxable 115,143 5,975 6.93 % 139,128 7,591 7.29 %
Loans (including
loans held for sale) 7,061,176 334,370 6.33 % 6,807,184 373,583 7.34 %
Other earning assets
(1) 38,583 1,454 5.03 % 35,706 1,615 6.05 %
Total
interest-earning
assets 8,074,309 371,297 6.14 % 7,844,841 409,898 6.99 %
Cash and due from
banks 253,127 297,154
Other assets 789,792 749,314
Allowance for loan
losses (84,217 ) (71,929 )
Total Assets $ 9,033,011 $ 8,819,380
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing
deposits $ 5,660,264 113,104 2.67 % $ 5,561,700 152,464 3.67 %
Federal funds
purchased and
securities sold under
repurchase agreements 565,304 9,215 2.18 % 423,853 14,725 4.64 %
Other borrowings 323,616 10,405 4.29 % 340,173 14,706 5.78 %
Total
interest-bearing
liabilities 6,549,184 132,724 2.71 % 6,325,726 181,895 3.84 %
Noninterest-bearing
demand deposits 1,405,244 1,467,671
Other liabilities 137,395 127,900
Shareholders' equity 941,188 898,083
Total Liabilities and
Shareholders' Equity $ 9,033,011 $ 8,819,380
Net Interest Margin 238,573 3.95 % 228,003 3.89 %
Less tax equivalent
adjustment 6,810 7,143
Net Interest Margin
per Consolidated
Statements of Income $ 231,763 $ 220,860
|
(1) The prior period has been restated to include the addition of Federal Home Loan Bank and Federal Reserve Bank stock in other earning assets.
Provision for Loan Losses
The provision for loan losses is determined by Management as the amount
necessary to adjust the allowance for loan losses to a level, which, in
Management's best estimate, is necessary to absorb probable losses within the
existing loan portfolio. The provision for loan losses reflects loan quality
trends, including the levels of and trends related to nonaccrual loans, past due
loans, potential problem loans, criticized loans, net charge-offs or recoveries
and growth in the loan portfolio among other factors. Accordingly, the amount of
the provision reflects both the necessary increases in the allowance for loan
losses related to newly identified criticized loans, as well as the actions
taken related to other loans including, among other things, any necessary
increases or decreases in required allowances for specific loans or loan pools.
Quarter Ended Nine Months Ended
PROVISION FOR LOAN LOSSES 9/30/2008 9/30/2007 9/30/2008 9/30/2007
Florida $ 3,167 $ 3,364 $ 36,869 $ 3,940
Mississippi (1) 8,476 (798 ) 14,950 764
Tennessee (2) 27 1,153 3,246 781
Texas 2,803 1,280 4,663 1,298
Total provision for loan losses $ 14,473 $ 4,999 $ 59,728 $ 6,783
|
(1) - Mississippi includes Central and Southern Mississippi Regions
(2) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions
As shown in the table above, the provision for loan losses for the first nine months of 2008 totaled $59.7 million, or 1.13% of average loans, compared with $6.8 million during the same time period in 2007. For the third quarter of 2008, the provision for loans losses totaled $14.5 million or 0.83% of average loans, compared with $5.0 million during the same time period in 2007. Trustmark's provision for the first nine months of 2008 was impacted by an increase of $59.8 million in nonaccrual loans when compared to September 30, 2007.
The increase in the provision for loan losses for the nine months ended September 30, 2008, is primarily attributed to continued credit deterioration in the construction and land development portfolio for Trustmark's Florida Panhandle market as well as net risk-rate downgrades for commercial loans in Trustmark's Mississippi market. Nonaccrual loans in the Florida market totaled $71.1 million at September 30, 2008, an increase of $51.6 million when compared to September 30, 2007. Trustmark continues to devote significant resources to managing credit risks resulting from the slowdown in residential real estate. Trustmark's Management believes that the Florida construction and land development portfolio is appropriately risk rated and adequately reserved based on current conditions. In Trustmark's Mississippi market, the provision for loan losses for the first nine months of 2008 totaled $15.0 million compared with $764 thousand for the same time period in 2007. The provision for 2008 was impacted by increased provisions for the indirect consumer portfolio as well as specific downgrades for three commercial loans.
See the section captioned "Loans and Allowance for Loan Losses" elsewhere in this discussion for further analysis of the provision for loan losses.
Noninterest Income
Trustmark's noninterest income continues to play an important role in improving
net income and total shareholder value. Total noninterest income before
security gains, net for the first nine months of 2008 increased $18.4 million,
or 15.3%, compared to the same time period in 2007, primarily as a result of a
$15.0 million increase in net revenues from mortgage banking, net. For the third
quarter of 2008, noninterest income before security gains, net increased $402
thousand, or 1.0% when compared to the third quarter of 2007. The comparative
components of noninterest income for the three and nine months ended September
30, 2008 and 2007 are shown in the accompanying table.
The single largest component of noninterest income continues to be service charges for deposit products and services, which totaled $39.7 million for the first nine months of 2008 compared with $40.3 million for the first nine months of 2007, a decrease of $600 thousand, or 1.5%. This decline was due to a decrease in NSF revenues which was negatively impacted by the issuance of U.S. Government Economic Stimulus checks as well as a reduction in service charges due to a shift in the relative mix of deposit products towards lower cost or free accounts.
Noninterest Income ($ in thousands) . . . |
|
|