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TRMK > SEC Filings for TRMK > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for TRUSTMARK CORP


7-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 unaudited consolidated financial statements and the supplemental financial data included elsewhere in this report.

Description of Business

Trustmark, a Mississippi business corporation incorporated in 1968, is a bank holding company headquartered in Jackson, Mississippi. Trustmark's principal subsidiary is Trustmark National Bank (TNB), initially chartered by the State of Mississippi in 1889. At September 30, 2013, TNB had total assets of $11.691 billion, which represented approximately 99.0% of the consolidated assets of Trustmark.

Through TNB and its other subsidiaries, Trustmark operates as a financial services organization providing banking and other financial solutions through 214 offices and 3,110 full-time equivalent associates located in the states of Alabama (primarily in the central and southern regions of that state, which are collectively referred to herein as Trustmark's Alabama market), Florida (primarily in the northwest or "Panhandle" region of that state, which is referred to herein as Trustmark's Florida market), Mississippi, Tennessee (in Memphis and the Northern Mississippi regions, which are collectively referred to herein as Trustmark's Tennessee market), and Texas (primarily in Houston, which is referred to herein as Trustmark's Texas market). The principal products produced and services rendered by TNB and Trustmark's other subsidiaries are as follows:

Trustmark National Bank

Commercial Banking - TNB provides a full range of commercial banking services to corporations and other business customers. Loans are provided for a variety of general corporate purposes, including financing for commercial and industrial projects, income producing commercial real estate, owner-occupied real estate and construction and land development. TNB also provides deposit services, including checking, savings and money market accounts and certificates of deposit as well as treasury management services.

Consumer Banking - TNB provides banking services to consumers, including checking, savings, and money market accounts as well as certificates of deposit and individual retirement accounts. In addition, TNB provides consumer customers with installment and real estate loans and lines of credit.

Mortgage Banking - TNB provides mortgage banking services, including construction financing, production of conventional and government insured mortgages, secondary marketing and mortgage servicing. At September 30, 2013, TNB's mortgage loan portfolio totaled approximately $1.007 billion, while its portfolio of mortgage loans serviced for others, including Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA), totaled approximately $5.435 billion.

Insurance - TNB provides a competitive array of insurance solutions for business and individual risk management needs. Business insurance offerings include services and specialized products for medical professionals, construction, manufacturing, hospitality, real estate and group life and health plans.
Individual customers are also provided life and health insurance, and personal line policies. TNB provides these services through Fisher Brown Bottrell Insurance, Inc. (FBBI), a Mississippi corporation which is based in Jackson, Mississippi.

Wealth Management and Trust Services - TNB offers specialized services and expertise in the areas of wealth management, trust, investment and custodial services for corporate and individual customers. These services include the administration of personal trusts and estates as well as the management of investment accounts for individuals, employee benefit plans and charitable foundations. TNB also provides corporate trust and institutional custody, securities brokerage, financial and estate planning, retirement plan services as well as life insurance and other risk management services provided by FBBI.
TNB's wealth management division is also served by Trustmark Investment Advisors, Inc. (TIA), a Securities and Exchange Commission (SEC)-registered investment adviser. TIA provides customized investment management services for TNB. During the third quarter of 2012, Trustmark completed the sale and reorganization of $929.0 million of assets managed by TIA for the Performance Funds Trust (Performance Funds) to Federated Investors, Inc. (Federated) and certain of Federated's subsidiaries. TIA no longer serves as investment adviser or custodian to the Performance Funds. However, Performance Funds held by Trustmark wealth management clients at the time of the reorganization were converted to various pre-determined Federated funds, and remain in Trustmark wealth management accounts. At September 30, 2013, Trustmark held assets under management and administration of $10.447 billion and brokerage assets of $1.288 billion.


New Market Tax Credits (NMTC) - TNB provides an intermediary vehicle for the provision of loans or investments in Low-Income Communities (LICs) through its subsidiary Southern Community Capital, LLC (SCC). SCC is a Mississippi limited liability company and a certified Community Development Entity (CDE). The primary mission of SCC is to provide investment capital for LICs, as defined by
Section 45D of the Internal Revenue Code, or Low-Income Persons (LIPs). As a certified CDE, SCC was able to apply to the Community Development Financial Institutions Fund (CDFI Fund) to receive a NMTC allocation to offer its investor, TNB, in exchange for equity investments in qualified projects. In April 2013, SCC was awarded a $50.0 million allocation by the CDFI Fund under the calendar year 2012 allocation round of the NMTC Program.

Somerville Bank & Trust Company

Somerville Bank & Trust Company (Somerville), headquartered in Somerville, Tennessee, provides banking services in the eastern Memphis metropolitan statistical area (MSA) through five offices. At September 30, 2013, Somerville had total assets of $204.5 million.

On October 3, 2013, TNB received approval from the Office of the Comptroller of the Currency (OCC) to merge Somerville with and into TNB, with TNB as the surviving entity in the merger. TNB and Somerville are both wholly owned subsidiaries of Trustmark; as such, the proposed merger represents a business reorganization between affiliates.

Capital Trusts

Trustmark Preferred Capital Trust I (Trustmark Trust) is a Delaware trust affiliate formed in 2006 to facilitate a private placement of $60.0 million in trust preferred securities. As defined in applicable accounting standards, Trustmark Trust is considered a variable interest entity for which Trustmark is not the primary beneficiary. Accordingly, the accounts of the trust are not included in Trustmark's consolidated financial statements.

Executive Overview

While the economy has shown moderate signs of improvement, the outlook remains uncertain. Estimated employment growth in the United States continued to decline during the third quarter of 2013 to average 143,000 jobs created per month, compared to an average 207,000 and 196,000 jobs per month during the first and second quarters of 2013, respectively. However, the unemployment rate fell slightly to 7.2% as the number of people that reportedly exited the labor force exceeded the number of people that reportedly entered the labor force looking for employment. Consumer confidence was reported to have declined slightly during the third quarter of 2013, as consumers reportedly had concerns about the short-term outlook for both jobs and earnings. However, these reports also indicated that consumers' assessments regarding current business and labor market conditions were positive.

In the October 2013 "Summary of Commentary on Current Economic Conditions by Federal Reserve Districts," the twelve Federal Reserve Districts' reports suggested overall economic activity continued to expanded at a modest to moderate pace during the third quarter reporting period. According to the Federal Reserve Districts' reports, the Districts remain cautiously optimistic in their outlook for future economic activity, although many noted an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate. These moderate signs of improvement in the economy have caused increased uncertainty regarding the Federal Reserve's stimulus program and potential tightening of monetary policy.

The OCC's "Fact Sheets" for the Southern District, which includes all of Trustmark's market regions, dated September 25, 2013, reported substantial improvement in economic conditions over the past year, but the pace of recovery was uneven through the district. The OCC reported that overall financial conditions for financial institutions in the Southern District continued to improve and metrics for key financial areas were positive. Most banks within the district with asset quality issues have reportedly had success in reducing problem assets and other real estate owned. The OCC reported a significant decrease in the number of problem banks and has terminated many enforcement actions since 2012. According to the OCC, considerable work remains as national banks struggle to stabilize shrinking net interest margins, but capital and liquidity levels are strong and economic conditions continue to improve. Doubts surrounding the sustainability of these signs of improvement are expected to persist for some time, especially as the magnitude of economic distress facing local markets place continued pressure on asset growth, asset quality and earnings, with the potential for undermining the stability of the banking organizations that serve these markets.

The European financial crisis has created risks and uncertainties affecting the global economy. As global markets react to potential resolutions of the European financial crisis and potential economic policy changes in Europe, assets, liabilities and cash flows with no direct connection to the European Union could be influenced. The potential impact on markets within the United States and on the economy of the United States is difficult to predict.
Trustmark has no direct or indirect exposure to any debt of European sovereign and non-sovereign issuers, nor is it dependent upon any funding sources in the Eurozone for any short- or long-term liquidity. However, Trustmark, as a member of the global economy, could be indirectly affected if events in the Eurozone broadly cause widening of interest rate spreads or otherwise increase global market volatility.


On March 29, 2013, TNB announced the signing of a definitive Branch Purchase and Assumption Agreement (the Agreement) pursuant to which TNB would acquire the two branches of SOUTHBank, F.S.B. (SOUTHBank), serving the Oxford, Mississippi market. TNB completed its purchase of the two branches from SOUTHBank effective as of the close of business on July 26, 2013. Pursuant to the Agreement, TNB assumed deposit accounts of approximately $11.7 million in addition to purchasing the two physical branch offices. The transaction was not material to Trustmark's consolidated financial statements and was not considered a business combination in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, "Business Combinations."

On February 15, 2013, Trustmark completed its merger with BancTrust Financial Group, Inc. (BancTrust), a 26-year-old bank holding company headquartered in Mobile, Alabama. In accordance with the terms of the definitive agreement, the holders of BancTrust common stock received 0.125 of a share of Trustmark common stock for each share of BancTrust common stock in a tax-free exchange.
Trustmark issued approximately 2.24 million shares of its common stock for all issued and outstanding shares of BancTrust common stock. The total value of the 2.24 million shares of Trustmark common stock issued to the BancTrust shareholders on the acquisition date was approximately $53.5 million, based on a closing stock price of $23.83 per share of Trustmark common stock on February 15, 2013. At closing, Trustmark repurchased the $50.0 million of BancTrust preferred stock and associated warrant issued to the U.S. Department of Treasury under the Capital Purchase Program for approximately $52.6 million.

The acquisition of BancTrust is consistent with Trustmark's strategic plan to selectively expand the Trustmark franchise. The acquisition provided Trustmark entry into more than 15 markets in Alabama and enhanced the Trustmark franchise in the Florida Panhandle. See Note 2 - Business Combinations included elsewhere in this report for additional information regarding the BancTrust acquisition.

Management has continued to carefully monitor the impact of illiquidity in the financial markets, values of securities and other assets, loan performance, default rates and other financial and macro-economic indicators, in order to navigate the challenging economic environment. Trustmark has continued to experience improvements in credit quality on loans held for investment (LHFI).
As of September 30, 2013, classified LHFI balances decreased $30.8 million, or 11.2%, while criticized LHFI balances decreased $68.1 million, or 19.5%, when compared to balances at September 30, 2012. The volume of classified and criticized LHFI decreased year-over-year primarily as a result of noted improvement in repayment capacity of borrowers and subsequent upgrade of those credits to a pass category as well as repayment of several credits of significant size.

TNB did not make significant changes to its loan underwriting standards during the first nine months of 2013. TNB's willingness to make loans to qualified applicants that meet its traditional, prudent lending standards has not changed.
TNB adheres to interagency guidelines regarding concentration limits of commercial real estate loans. As a result of the economic downturn, TNB remains cautious in granting credit involving certain categories of real estate as well as making exceptions to its loan policy.

Management has continued its practice of maintaining excess funding capacity to provide Trustmark with adequate liquidity for its ongoing operations. In this regard, Trustmark benefits from its strong deposit base, its highly liquid investment portfolio and its access to funding from a variety of external funding sources such as upstream federal funds lines, Federal Home Loan Bank (FHLB) advances and brokered deposits.

Critical Accounting Policies

Trustmark's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) 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 2013.


Recent Legislative and Regulatory Developments

On June 7, 2012, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and the OCC jointly issued proposed rules to enhance regulatory capital requirements. The proposed rules were designed to address perceived shortcomings in the existing regulatory capital requirements that became evident during the recent financial crisis by implementing capital requirements in the Dodd-Frank Act and international capital regulatory standards by the Basel Committee. The proposed rules would have increased and revised the federal bank agencies' current minimum risk-based and leverage capital ratio requirements; introduced new risk-weight calculation methods for the "standardized" denominator; adopted a minimum common equity Tier 1 risk-based capital requirement; revised regulatory capital components and calculations; required regulatory capital buffers above the minimum risk-based capital requirements for certain banking organizations; and more generally restructured the agencies' capital rules. Many of the proposed rules would have applied to all depository institutions, bank holding companies with consolidated assets of $500 million or more, and savings and loan holding companies. The proposed rules also addressed the relevant provisions of the Dodd-Frank Act, including removal of references to credit ratings in the capital rules and implementation of a capital floor, known as the "Collins Amendment."

The new final rule revising regulatory capital requirements was issued by the FRB on July 2, 2013, and approved by the FDIC and the OCC on July 9, 2013. The new final capital rule adopts many of the new standards and requirements that were included in the proposed rules, such as a new common equity Tier 1 requirement and higher minimum Tier 1 requirements. The new final capital rule contains three key changes from the proposed rules in an effort to reduce the burden on smaller banking organizations. First, the new final capital rule does not change the current treatment of residential mortgage exposures. Second, banking organizations that are not subject to the advanced approaches capital rules can opt not to incorporate most amounts reported as accumulated other comprehensive income (AOCI) in the calculation of their regulatory capital, which is consistent with the treatment of AOCI under the current rules.
Finally, smaller depository institution holding companies (those with assets less than $15 billion) and most mutual holding companies will be allowed to continue to count as Tier 1 capital most existing trust preferred securities that were issued prior to May 19, 2010 rather than phasing such securities out of regulatory capital. Most banking organizations will be required to apply the new capital rules on January 1, 2015. It is expected that banking organizations subject to the new final capital rules, including Trustmark, will be required to hold a greater amount of capital and a greater amount of common equity than they are currently required to hold. Management is currently evaluating the impact the new final capital rules will have on Trustmark.

On January 18, 2013, the Consumer Financial Protection Bureau (CFPB), FRB, FDIC, OCC, Federal Housing Finance Agency, and National Credit Union Administration, issued a final rule implementing amendments to the Truth in Lending Act made by the Dodd-Frank Act. The final rule imposes heightened appraisal requirements for higher-priced mortgage loans and becomes mandatory on January 18, 2014. The six agencies subsequently issued a proposed rule on July 10, 2013, that would create exemptions from these appraisal requirements for loans of $25,000 or less, certain "streamlined" refinancings, and certain loans secured by manufactured housing. If implemented, this proposal is expected to provide creditors with some relief from the mortgage appraisal requirements. Management is currently evaluating the impact the proposed rules could have on Trustmark.

On July 30, 2013, the FRB, OCC, and the FDIC proposed guidance describing supervisory expectations for company-run stress tests conducted by medium-sized firms with between $10 billion and $50 billion in total consolidated assets.
The guidance relates to annual company-run stress tests that were mandated by previous rules finalized in October 2012. If implemented, this proposal is expected to provide firms with greater clarity as to the stress test requirements. Because Trustmark did not exceed the $10 billion threshold until February 2013, it will not be subject to these stress test requirements until September 2014, with a formal filing requirement of March 2015.

Financial Highlights

Trustmark reported net income of $33.0 million, or basic and diluted earnings per common share of $0.49 in the third quarter of 2013, compared to $29.9 million, or basic and diluted earnings per common share of $0.46, in the third quarter of 2012. Trustmark's performance during the quarter ended September 30, 2013, produced a return on average tangible common equity of 14.92% and a return on average assets of 1.11% compared to a return on average tangible common equity of 12.61% and a return on average assets of 1.21% during the quarter ended September 30, 2012. During the nine months ended September 30, 2013, Trustmark's net income totaled $89.0 million, or basic and diluted earnings per common share of $1.33, a decrease of $552 thousand and $0.06 and $0.05 when compared to the nine months ended September 30, 2012. Trustmark's performance during the nine months ended September 30, 2013, produced a return on average tangible common equity of 13.25% and a return on average assets of 1.04%, an increase of 0.34% and a decrease of 0.18%, respectively, when compared to the nine months ended September 30, 2012. Trustmark's performance for the three and nine months ended September 30, 2013 was significantly impacted by the BancTrust acquisition. Highlights of the impact of the BancTrust acquisition are provided in the discussion below, while additional details are provided in the appropriate sections included elsewhere in this report. Trustmark's Board of Directors declared a quarterly cash dividend of $0.23 per common share. The dividend is payable December 15, 2013, to shareholders of record on December 1, 2013.


At September 30, 2013, nonperforming assets, excluding acquired loans and covered other real estate, totaled $189.7 million, an increase of $29.2 million, or 18.2%, compared to December 31, 2012, and total nonaccrual LHFI were $73.4 million, representing a decrease of $9.0 million relative to December 31, 2012.
Total net recoveries for the nine months ended September 30, 2013 were $1.3 million compared to total net charge-offs of $13.3 million for the same time period in 2012.

As discussed elsewhere in this report under the heading "Executive Overview", Trustmark completed its merger with BancTrust on February 15, 2013. At September 30, 2013, the carrying value of loans and deposits resulting from the BancTrust acquisition was $859.9 million and $1.667 billion, respectively. The operations of BancTrust are included in Trustmark's operating results from February 15, 2013, and added revenue of $50.5 million and net income, excluding non-routine merger expenses, of approximately $13.0 million through September 30, 2013. Included in noninterest expense for the first nine months of 2013 are non-routine BancTrust merger expenses totaling approximately $9.4 million (change in control and severance expense of $1.4 million included in salaries and employee benefits; professional fees, contract termination and other expenses of $7.9 million included in other expense). Such operating results are not necessarily indicative of future operating results.

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