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TRMK > SEC Filings for TRMK > Form 10-Q on 8-May-2014All Recent SEC Filings

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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 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 March 31, 2014, TNB had total assets of $12.054 billion, which represented approximately 99.97% 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 209 offices and 3,114 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 March 31, 2014, TNB's mortgage loan portfolio totaled approximately $1.002 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 $5.514 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 customers. At March 31, 2014, Trustmark held assets under management and administration of $11.138 billion and brokerage assets of $1.489 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 single member 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 is able to apply to the Community Development Financial Institutions Fund (CDFI Fund) to receive NMTC allocations to offer investors in exchange for equity investments in qualified projects.

Capital Trusts

Trustmark Preferred Capital Trust I (the 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, the 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

Recent Economic and Industry Developments

The economy has continued to show moderate signs of improvement; however, lingering economic concerns resulting from the cumulative weight of soft U.S. labor markets, slowing growth in emerging markets and uncertainty resulting from the timing and implementation by the Federal Reserve Board of its recently consummated tapering of its quantitative easing program remain. The passage of a two-year budget agreement in the U.S., which excluded large tax increases or spending cuts, the recent passage by Congress of an increase in the Federal government's debt ceiling, suggestions that Europe may be emerging from its economic recession, and strengthening business and consumer confidence should reduce economic uncertainty during 2014. However, doubts surrounding the sustainability of these signs of improvement are expected to persist for some time, especially as the magnitude of economic distress facing the local markets in which Trustmark operates places continued pressure on asset growth, asset quality and earnings, with the potential for undermining the stability of the banking organizations that serve these markets.

Severe winter weather was responsible for lower than expected economic activity across the United States in January and February 2014. Estimated employment growth in the United States for the first quarter of 2014 was reported to average approximately 178,000 jobs created per month. However, the unemployment rate remained at 6.7% due to the increase in the number of people who reportedly rejoined the labor force. Consumer confidence reported improvement in March as consumer expectations improved after declines in February. Consumers reportedly were moderately more optimistic about future job prospects and the overall economy but less optimistic about income growth. In the April 2014 "Summary of Commentary on Current Economic Conditions by Federal Reserve Districts," the twelve Federal Reserve Districts' reports suggested overall economic activity continued to expand at a moderate pace during the first quarter reporting period. According to the Federal Reserve Districts' reports, consumer spending in most districts increased as weather conditions improved and foot traffic returned, and most districts reported improvements in auto sales, tourism and manufacturing during the first quarter reporting period. According to the Federal Reserve Districts' reports, strengthening loan demand and improvements in credit quality during the first quarter of 2014 were reported by the majority of the twelve districts, and while most districts reported mixed or declining residential mortgage borrowing, overall the districts reported growth in commercial loan volumes and commercial mortgage lending.

While interest rates remain low by historical standards, recent increases in rates reduced the demand for mortgage refinancings, leading to a drop in mortgage origination and sales activity in the first three months of 2014. In the Federal Deposit Insurance Corporation's (FDIC) fourth quarter 2013 "Quarterly Banking Profile," (published February 26, 2014) insured institutions reported, in the aggregate, that lower expenses for loan-loss provisions and a reduction in litigation reserves contributed to 16.9% year-over-year increase in quarterly net income despite the year-over-year decline in quarterly revenues primarily due to reduced mortgage lending activity. The FDIC insured institutions also reported in the fourth quarter 2013 "Quarterly Banking Profile," in the aggregate, a 9.6% increase in net income for the full year 2013 compared to the previous year as loan-loss provisions lowered for the fourth consecutive year to the smallest annual total since 2006. The FDIC insured institutions also reported in the fourth quarter 2013 "Quarterly Banking Profile," in the aggregate, the lowest fourth-quarter total for net charge-offs since 2006 as charge-offs in all major loan categories had year-over-year declines, improved noncurrent levels across all major loan categories, declines in loan-loss reserves for the fifteenth consecutive quarter as net charge-offs taken out of reserves exceed the provisions added to reserves, and increased equity capital as the industry's core capital (leverage) ratio edged up to its highest level in the twenty-three years that the current capital standards have been in effect.

Financial Highlights

Trustmark continued to achieve solid financial results in the first quarter of 2014, reflecting the fourth consecutive quarter of growth in the loans held for investment (LHFI) portfolio as well as continued improvement in credit quality. Trustmark reported net income of $29.0 million, or basic and diluted earnings per share of $0.43 in the first quarter of 2014, compared to $24.9 million, or basic and diluted earnings per share of $0.38 in the first quarter of 2013. Trustmark's performance during the quarter ended March 31, 2014, produced a return on average tangible equity of 12.93% and a return on average assets of 0.99% compared to a return on average tangible equity of 10.82% and a return on average assets of 0.93% during the quarter ended March 31, 2013. Trustmark's Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable June 15, 2014, to shareholders of record on June 1, 2014.

Net income for the first quarter of 2014 increased $4.1 million, or 16.6%, compared to the same time period in 2013. As discussed in greater detail below, the $5.9 million, or 6.7%, increase in net interest income, primarily resulting from increases in interest and fees on acquired loans and taxable interest on securities, was partially offset by a $2.2 million, or 72.9%, decrease in the negative provision for loan losses, LHFI. The slight decline in noninterest income, principally due to declines in mortgage banking, net, was more than offset by the decrease in noninterest expense, which primarily resulted from the negative year-over-year comparison of non-routine transaction expenses from the acquisition of BancTrust Financial Group, Inc. (BancTrust). Please see the section captioned "Results of Operations" below for a more complete overview of Trustmark's financial performance for the first three months of 2014.

Trustmark's provision for loan losses, LHFI, for the three months ended March 31, 2014 totaled a negative $805 thousand, a decrease of $2.2 million, or 72.9%, when compared to a negative provision for loan losses, LHFI of $3.0 million for the three months ended March 31, 2013. The negative provision during the first quarter of 2014 reflects an increase in the reserve for commercial LHFI, which was more than offset by an increase in the net recovery provision, changes in the quantitative and qualitative reserve factors, and improved credit quality. Please see the section captioned "Provision for Loan Losses, LHFI," for additional information regarding the provision for loan losses, LHFI. At March 31, 2014, nonperforming assets, excluding acquired loans and covered other real estate, totaled $175.5 million, an increase of $3.8 million, or 2.2%, compared to December 31, 2013, and total nonaccrual LHFI were $64.0 million, representing a decrease of $1.2 million, or 1.9%, relative to December 31, 2013. Total net recoveries of LHFI for the three months ended March 31, 2014 and 2013 were $1.9 million and $1.1 million, respectively, an increase of $745 thousand, or 65.9%.

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 LHFI. As of March 31, 2014, classified LHFI balances decreased $20.2 million, or 8.6%, while criticized LHFI balances decreased $63.2 million, or 20.2%, when compared to balances at March 31, 2013. 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 three months of 2014. 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 and Federal Home Loan Bank (FHLB) advances.

At close of business on December 31, 2013, Trustmark consolidated its wholly owned subsidiary Somerville Bank & Trust Company (Somerville) into TNB. TNB and Somerville were both wholly owned subsidiaries of Trustmark; as such, the merger represented a business reorganization between affiliates under common control. Trustmark anticipates that this consolidation will enhance productivity and efficiency with elimination of duplicate functions and operating systems as well as support revenue growth with the addition of a broader product line for Somerville's customers. Trustmark is committed to investments to support profitable revenue growth as well as reengineering and efficiency opportunities to enhance shareholder value.

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 policies during the first three months of 2014.

Recent Legislative Developments

In early July 2013, the Federal Reserve Board (FRB), FDIC and the Office of the Comptroller of the Currency (OCC) jointly promulgated a final rule revising regulatory capital requirements 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 Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and international capital regulatory standards by the Basel Committee. The new final capital rule adopts a new common equity Tier 1 requirement, higher minimum Tier 1 requirements, new risk-weight calculation methods for the "standardized" denominator, revised regulatory components and calculations, required capital buffers above the minimum risk-based capital requirements for certain banking organizations, and more generally restructures the agencies' capital rules. Many of the final rules apply to all depository institutions, and bank holding companies with assets of $500 million or more, and savings and loan holding companies. The final 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." Importantly, the new final capital rule does not change the current treatment of residential mortgage exposures. Also, 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 (loss) (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. Trustmark currently has outstanding such securities that it counts as Tier 1 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 (TILA) made by the Dodd-Frank Act. The final rule imposes heightened appraisal requirements for higher-priced mortgage loans and became mandatory on January 18, 2014. After notice and comment, the six agencies subsequently issued a final rule on December 12, 2013, that created exemptions from these appraisal requirements for loans of $25,000 or less, certain "streamlined" refinancings, and certain loans secured by manufactured housing. The newly final rule is expected to provide creditors with some relief from the mortgage appraisal requirements. Trustmark has implemented the appropriate policies, procedures, and training to assure compliance with these new rules. Trustmark's operations and consolidated financial statements were not impacted by the implementation of these new rules.

In October 2012, the FRB, FDIC and OCC published final rules implementing the company-run stress test requirements mandated by the Dodd-Frank Act. The final rules require institutions with average total consolidated assets between $10 billion and $50 billion to conduct an annual company-run stress test using data as of September 30 of each year under one base and at least two stress scenarios as provided by the agencies. Stress test results must be provided to the agencies by March 31 of the following year. 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. Trustmark anticipates that the capital ratios, as reflected in the stress test calculations under the required stress test scenarios, will be an important factor considered by the agencies in evaluating the capital adequacy of Trustmark and TNB and whether proposed payments of dividends or stock repurchases are consistent with prudential expectations.

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