Trustmark Corporation Announces Second Quarter 2016 Financial Results

JACKSON, Miss.--(BUSINESS WIRE)--Trustmark Corporation (NASDAQ:TRMK) reported net income of $21.5 million in the second quarter of 2016, representing diluted earnings per share of $0.32. Excluding a one-time charge related to a voluntary early retirement program, net income totaled $27.2 million, which represented $0.40 in diluted earnings per share. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share payable September 15, 2016, to shareholders of record on September 1, 2016.

Printer friendly version of earnings release with consolidated financial statements and notes: http://www.businesswire.com/cgi-bin/mmg.cgi?eid=51388104&lang=en.

Second Quarter Highlights

• Loans held for investment increased $137.2 million, or 7.6% annualized, from the prior quarter and $958.1 million, or 14.9%, year-over-year
• Continued solid credit quality, reflecting reductions in nonperforming assets
• Revenue excluding income on acquired loans increased 1.2% linked quarter, or 4.8% annualized, and 2.0% year-over-year to total $132.6 million in the second quarter
• Voluntary early retirement program resulted in one-time, pre-tax charge of $9.3 million in the second quarter; expected pre-tax savings of approximately $4.2 million for the remainder of 2016 and $8.5 million in 2017
• Routine noninterest expense – which excludes ORE, intangible amortization and the one-time voluntary early retirement charge – remained well controlled at $98.0 million

Gerard R. Host, President and CEO, stated, “Trustmark achieved another quarter of solid financial results. We continued to maintain and expand customer relationships by growing loans across our five-state franchise, while maintaining solid credit quality. Our other lines of business continued to perform well, reflecting strength in insurance commissions, wealth management revenue and mortgage loan-production volume. Routine noninterest expense remained well controlled. Furthermore, this past quarter – as part of the J.D. Power 2016 U.S. Retail Banking Satisfaction Study – Trustmark was recognized as having the 'Highest Customer Satisfaction with Retail Banking in the South Central Region'*. We appreciate this recognition from our customers and thank our associates for their commitment to excellent customer service. Thanks to our associates, solid profitability and strong capital base, Trustmark remains well positioned to continue meeting the needs of our customers and creating long-term value for our shareholders.”

Balance Sheet Management

• Continued diversified legacy loan growth demonstrates the value of Trustmark’s five-state franchise
• Noninterest-bearing deposits represented 30.3% of total average deposits, contributing to a total cost of deposits of 0.13%
• Solid capital base continues to provide flexibility in pursuing growth opportunities

Loans held for investment totaled $7.4 billion at June 30, 2016, reflecting an increase of 1.9% from the prior quarter and 14.9% year-over-year. Relative to the prior quarter, commercial and industrial loans expanded $98.0 million, driven primarily by growth in Tennessee, Mississippi and Alabama. Other real estate secured loans, which include multifamily projects, increased $50.0 million as growth in Mississippi, Tennessee, Texas and Alabama more than offset a marginal reduction in Florida. Construction, land development and other land loans increased $20.9 million, primarily reflecting funding of existing construction loans in Texas, Alabama, Florida and Mississippi. Loans to state and other political subdivisions increased $18.4 million, principally driven by growth in Mississippi. During the quarter, Trustmark sold the vast majority of lower-rate, longer-term home mortgages in the secondary market, rather than replacing the runoff in its single-family loan portfolio; as a result, the single-family mortgage portfolio decreased by $20.0 million.

Acquired loans totaled $339.0 million at June 30, 2016, down $25.7 million from the prior quarter. Collectively, loans held for investment and acquired loans totaled $7.7 billion at June 30, 2016, up $111.4 million, or 6.0% annualized, from the prior quarter.

Deposits totaled $9.5 billion at June 30, 2016, decreasing 1.1% from the prior quarter. Trustmark continues to maintain an attractive, low-cost deposit base with a total cost of deposits of 0.13%. The favorable mix of interest-bearing liabilities yielded a total cost of funds of 0.29% for the second quarter of 2016.

Trustmark’s capital position remained solid, reflecting the consistent profitability of its diversified financial services businesses. During the second quarter, Trustmark repurchased approximately 34 thousand of its common shares. The repurchase program, which is subject to market conditions and management discretion, will continue to be implemented through open market repurchases or privately negotiated transactions. At June 30, 2016, Trustmark’s tangible equity to tangible assets ratio was 8.97%, while its total risk-based capital ratio was 13.82%. Tangible book value per share was $16.76 at June 30, 2016, up 7.6% year-over-year.

Credit Quality

• Nonperforming loans and other real estate decreased 7.9% and 3.2%, respectively, from the prior quarter
• Net charge-offs were negligible, representing approximately 0.03% of average loans for the second quarter
• Allowance for loan losses represented 231.13% of nonperforming loans, excluding specifically reviewed impaired loans
• Allowance for held for investment and acquired loans represented 1.09% of total held for investment and acquired loans

Criticized and classified loans declined during the second quarter, reflecting continued solid credit quality. Compared to the prior quarter, criticized and classified loan balances decreased 3.7% and 3.3%, respectively. Compared to balances one year earlier, criticized and classified loan balances decreased 10.4% and 5.4%, respectively.

At June 30, 2016, nonperforming loans totaled $65.1 million, down 7.9% linked quarter and 4.8% year-over-year. Other real estate totaled $69.5 million, reflecting a decline of 3.2% from the prior quarter and 23.4% from the same period one year earlier.

Allocation of Trustmark's $71.8 million allowance for loan losses represented 1.05% of commercial loans and 0.70% of consumer and home mortgage loans, resulting in an allowance to total loans held for investment of 0.97% at June 30, 2016, representing a level management considers commensurate with the inherent risk in the loan portfolio. Collectively, the allowance for both held for investment and acquired loan losses represented 1.09% of total loans, which include held for investment and acquired loans.

Unless noted otherwise, all of the above credit quality metrics exclude acquired loans and other real estate covered by FDIC loss-share agreement.

Revenue Generation

• Net interest income (FTE) excluding income on acquired loans totaled $92.9 million in the second quarter, remaining stable from the prior quarter and up 5.1% year-over-year
• Insurance and wealth management revenue demonstrated solid growth, increasing 12.2% and 8.1%, respectively, from the prior quarter as well as 2.5% and 3.2%, respectively, year-over-year
• Mortgage loan-production volume increased 31.4% linked-quarter and decreased 3.1% from the same period one year earlier

Net interest income (FTE) in the second quarter totaled $100.9 million, which resulted in a net interest margin of 3.56%. Compared to the prior quarter, net interest income (FTE) increased $1.7 million, which reflects continued growth in interest income from both the held for sale and held for investment loan portfolios, in addition to a higher level of recoveries from the acquired loan portfolio. The yield on acquired loans in the second quarter totaled 9.26% and included recoveries from settlement of debt of $2.9 million; this compares to $1.2 million in recoveries from settlement of debt in the prior quarter. The net interest margin (FTE) excluding both acquired loans and yield maintenance payments totaled 3.38% in the second quarter, remaining unchanged from the prior quarter.

Noninterest income totaled $44.2 million in the second quarter, increasing 2.2% linked quarter. Relative to the prior quarter, service charges on deposit accounts remained stable, while bank card and other fees increased 7.5%. Other, net increased 54.5%, or $484 thousand, from the prior quarter primarily because of growth in other miscellaneous income.

Insurance revenue totaled $9.6 million in the second quarter, representing an increase of 12.2% from the prior quarter and 2.5% from the same period one year earlier. The performance this quarter was primarily driven by the commercial property and casualty line of business. Wealth management revenue in the second quarter totaled $8.0 million, up 8.1% and 3.2% from the prior quarter and year-over-year, respectively. The linked-quarter increase reflects growth in both the trust management business and annuity income.

Mortgage banking revenue in the second quarter totaled $6.7 million, down $2.0 million from the prior quarter and $2.8 million year-over-year. The linked-quarter change primarily reflects expanded secondary marketing gains that were more than offset by an unfavorable mortgage servicing hedge ineffectiveness and a lower level of mark-to-market gains on mortgage loans held for sale. Mortgage loan production in the second quarter totaled $404.0 million, up 31.4% from the prior quarter and down 3.1% year-over-year.

Noninterest Expense

• Authorized the termination of a frozen noncontributory tax-qualified defined benefit pension plan, effective as of December 31, 2016
• Delivery channel optimization: closed the previously announced six branch offices across Alabama, Mississippi and Florida

Trustmark continued proactive measures to manage noninterest expense. During the second quarter, Trustmark announced the results of its voluntary early retirement program. Of those eligible for the program, 188 associates, or 6.38% of the workforce, retired by June 30, 2016. As previously mentioned, a one-time, pre-tax charge of $9.3 million related to this program was incurred during the second quarter. The result of this program is expected to produce pre-tax savings of approximately $4.2 million for the remainder of 2016 and $8.5 million for full year 2017.

Excluding ORE expense and intangible amortization of $2.9 million and the one-time voluntary early retirement charge of $9.3 million, routine noninterest expense in the second quarter totaled $98.0 million. Salaries and benefits expense – excluding $9.1 million of the one-time voluntary early retirement charge – was $58.0 million, which increased marginally from the prior quarter as a result of higher mortgage-production commissions. Services and fees remained stable from the prior quarter, while ORE and foreclosure expense increased $1.0 million. Other expense – excluding the remaining $230 thousand of the one-time voluntary early retirement charge – totaled $12.4 million, up $439 thousand on a comparable basis from the prior quarter.

On July 26, 2016, Trustmark’s Board of Directors authorized the termination of a frozen noncontributory tax-qualified defined benefit pension plan (the “Plan”), which will be effective December 31, 2016. A one-time, pre-tax pension settlement expense of approximately $12.0 million will be recognized when paid by Trustmark during the second quarter of 2017. Additionally, Trustmark elected to de-risk the Plan’s investment portfolio, thus reducing the expected rate of return on the Plan’s investment assets. As a result, Trustmark estimates that the periodic benefit cost will increase by $1.2 million in the second half of 2016. The expected net pre-tax savings, once completed, from the termination of the Plan are estimated to total between $3.0 to $4.0 million annually. Trustmark remains committed to investments that promote profitable revenue growth as well as reengineering and efficiency opportunities to enhance shareholder value.

Additional Information

As previously announced, Trustmark will conduct a conference call with analysts on Wednesday, July 27, 2016, at 10:00 a.m. Central Time to discuss the Corporation’s financial results. Interested parties may listen to the conference call by dialing (877) 317-3051 or by clicking on the link provided under the Investor Relations section of our website at www.trustmark.com, which will also include a slide presentation Management will review during the conference call. A replay of the conference call will also be available through Wednesday, August 10, 2016, in archived format at the same web address or by calling (877) 344-7529, passcode 10088419.

Trustmark Corporation is a financial services company providing banking and financial solutions through 194 offices in Alabama, Florida, Mississippi, Tennessee and Texas.

Forward-Looking Statements

Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future” or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. 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, 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. You should be aware that the occurrence of the events described under the caption “Risk Factors” in Trustmark’s filings with the Securities and Exchange Commission could have an adverse effect on our business, results of operations and financial condition. 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.

Risks that could cause actual results to differ materially from current expectations of Management 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 conditions in the housing and real estate markets in the regions in which Trustmark operates and the extent and duration of the current volatility in the credit and financial markets as well as crude oil prices, changes in our ability to measure the fair value of assets in our portfolio, material changes in the level and/or volatility of market interest rates, the performance and demand for the products and services we offer, including the level and timing of withdrawals from our deposit accounts, the costs and effects of litigation and of unexpected or adverse outcomes in such litigation, our ability to attract noninterest-bearing deposits and other low-cost funds, competition in loan and deposit pricing, as well as the entry of new competitors into our markets through de novo expansion and acquisitions, economic conditions, including the potential impact of issues relating to the European financial system and monetary and other governmental actions designed to address the level and volatility of interest rates and the volatility of securities, currency and other markets, the enactment of legislation and changes in existing regulations or enforcement practices or the adoption of new regulations, changes in accounting standards and practices, including changes in the interpretation of existing standards, that affect our consolidated financial statements, changes in consumer spending, borrowings and savings habits, technological changes, changes in the financial performance or condition of our borrowers, changes in our ability to control expenses, changes in our compensation and benefit plans, greater than expected costs or difficulties related to the integration of acquisitions or new products and lines of business, cyber-attacks and other breaches which could affect our information system security, natural disasters, environmental disasters, acts of war or terrorism, and other risks described in our filings with the Securities and Exchange Commission.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Except as required by law, we undertake no obligation to update or revise any of this information, whether as the result of new information, future events or developments or otherwise.

*Disclaimer

Trustmark National Bank received the highest numerical score among 15 retail banks in the South Central region in the J.D. Power 2016 Retail Banking Satisfaction Study, based on 76,233 total responses, measuring opinions of consumers with their primary banking provider, surveyed April 2015-February 2016. Your experiences may vary. Visit jdpower.com.

TRUSTMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIALS
June 30, 2016
($ in thousands)
(unaudited)

Note 1 - Securities Available for Sale and Held to Maturity

The following table is a summary of the estimated fair value of securities available for sale and the amortized cost of securities held to maturity ($ in thousands):

During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale to securities held to maturity. The securities were transferred at fair value, which became the cost basis for the securities held to maturity. At the date of transfer, the net unrealized holding loss on the available for sale securities totaled approximately $46.6 million ($28.8 million, net of tax). The net unrealized holding loss is amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. At June 30, 2016, the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive (loss) income in the accompanying balance sheet totaled approximately $28.3 million ($17.5 million, net of tax).

Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of approximately 95% of the portfolio in GSE-backed obligations and other Aaa rated securities as determined by Moody’s. None of the securities owned by Trustmark are collateralized by assets which are considered sub-prime. Furthermore, outside of stock ownership in the Federal Home Loan Bank of Dallas, Federal Home Loan Bank of Atlanta and Federal Reserve Bank, Trustmark does not hold any other equity investment in a GSE.

Note 2 – Loan Composition

TRUSTMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIALS
June 30, 2016
($ in thousands)
(unaudited)

Note 3 – Yields on Earning Assets and Interest-Bearing Liabilities

The following table illustrates the yields on earning assets by category as well as the rates paid on interest-bearing liabilities on a tax equivalent basis:

Reflected in the table above are yields on earning assets and liabilities, along with the net interest margin which equals reported net interest income-FTE, annualized, as a percent of average earning assets. In addition, the table includes net interest margin excluding acquired loans, which equals reported net interest income-FTE excluding interest income on acquired loans, annualized, as a percent of average earning assets excluding average acquired loans. The net interest margin increased 2 basis points during the second quarter of 2016. This increase was primarily due to an increase in recoveries on acquired loans of $1.6 million during the second quarter of 2016 compared to the first quarter of 2016.

The net interest margin included yield maintenance payments on prepaid securities of $33 thousand during the second quarter of 2016 compared to $389 thousand during the first quarter of 2016. Excluding the yield maintenance payments on prepaid securities, the net interest margin excluding acquired loans was not impacted during the second quarter of 2016 and totaled 3.38% during the first quarter of 2016.

Note 4 – Mortgage Banking

Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that offsets the changes in fair value of mortgage servicing rights (MSR) attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting under generally accepted accounting principles (GAAP). Changes in the fair value of these exchange-traded derivative instruments, including administrative costs, are recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of the MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net negative ineffectiveness of $1.9 million for the quarter ended June 30, 2016 compared to a net positive ineffectiveness of $2.1 million for the quarter ended June 30, 2015.

The following table illustrates the components of mortgage banking revenues included in noninterest income in the accompanying income statements:

TRUSTMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIALS
June 30, 2016
($ in thousands)
(unaudited)

Note 5 – Salaries and Employee Benefit Plans

Early Retirement Program

In April 2016, Trustmark announced a voluntary early retirement program for associates age 60 and above with five or more years of service. The cost of this program is reflected in a one-time, pre-tax charge of approximately $9.3 million (salaries and benefits of $9.1 million and other miscellaneous expense of $230 thousand), or $0.085 per basic share net of tax, in Trustmark’s second quarter 2016 earnings. During the second half of 2016, pre-tax salary and employee benefits expense savings resulting from the implementation of the early retirement program are expected to total $4.2 million, or $0.039 per basic share net of tax. In 2017, these pre-tax salary and employee benefits expense savings are expected to total approximately $8.5 million, or $0.077 per basic share net of tax.

Defined Benefit Pension Plan

Trustmark maintains a noncontributory tax-qualified defined benefit pension plan (the “Plan”), in which substantially all associates who began employment prior to 2007 participate. The Plan provides retirement benefits that are based on the length of credited service and final average compensation, as defined in the Plan, and vest upon three years of service. Benefit accruals under the Plan have been frozen since 2009, with the exception of certain associates covered through plans obtained in acquisitions that were subsequently merged into the Plan. Other than the associates covered through these acquired plans that were merged into the Plan, associates have not earned additional benefits, except for interest as required by law, since the Plan was frozen. Current and former associates who participate in the Plan retain their right to receive benefits that accrued before the Plan was frozen.

On July 26, 2016, the Board of Directors of Trustmark authorized the termination of the Plan, effective as of December 31, 2016. To satisfy commitments made by Trustmark to associates (collectively, the “Continuing Associates”) covered through acquired plans that were merged into the Plan, the Board also approved the spin-off of the portion of the Plan associated with the accrued benefits of Continuing Associates into a new plan titled the Trustmark Corporation Pension Plan for Certain Employees of Acquired Financial Institutions (the “Spin-Off Plan”), effective as of December 31, 2016, immediately prior to the termination of the Plan.

In order to terminate the Plan, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, Trustmark is required to fully fund the Plan on a termination basis (approximately $67 million after giving effect to the necessary transfer of Plan assets to the Spin-Off Plan) and will contribute the additional assets necessary to do so. The final distributions will be made from current plan assets of approximately $55 million and a one-time pension settlement expense of approximately $12 million (pre-tax) will be recognized when paid by Trustmark during the second quarter of 2017. Further, as a result of Trustmark’s de-risking investment strategy for the Plan as of June 30, 2016, the expected rate of return on Plan assets during the second half of 2016 will be decreased from 6% to 2.5%. Accordingly, Trustmark anticipates that its periodic benefit cost for the Plan for this period will increase by approximately $1.2 million (pre-tax). Participants in the Plan will have a choice of receiving a lump sum cash payment or annuity payments under a group annuity contract purchased from an insurance carrier, subject to certain exceptions. As a result of the termination of the Plan, each participant will become fully vested in his or her accrued benefits under the Plan.

After the distribution of Plan assets during the second quarter of 2017, Trustmark estimates that its projected benefit obligation and annual pension expense related to the Spin-Off Plan will be approximately $10 million and $900 thousand (pre-tax), respectively, and these actions will reduce annual pension expense by approximately $3-$4 million (pre-tax).

The Board reserved the right to defer or revoke the termination of the Plan if circumstances change such that deferral or revocation would be warranted, but has no intent to do so at this time.

Note 6 – Other Noninterest Income and Expense

Other noninterest income consisted of the following for the periods presented ($ in thousands):

Trustmark invests in partnerships that provide income tax credits on a Federal and/or State basis (i.e., new market tax credits, low income housing tax credits and historical tax credits). The income tax credits related to these partnerships are utilized as specifically allowed by income tax law and are recorded as a reduction in income tax expense.

Other noninterest expense consisted of the following for the periods presented ($ in thousands):

TRUSTMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIALS
June 30, 2016
($ in thousands)
(unaudited)

Note 7 – Non-GAAP Financial Measures

In addition to capital ratios defined by U.S. generally accepted accounting principles (GAAP) and banking regulators, Trustmark utilizes various tangible common equity measures when evaluating capital utilization and adequacy. Tangible common equity, as defined by Trustmark, represents common equity less goodwill and identifiable intangible assets.

Trustmark believes these measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of Trustmark’s capitalization to other organizations. These ratios differ from capital measures defined by banking regulators principally in that the numerator excludes shareholders’ equity associated with preferred securities, the nature and extent of which varies across organizations. In Management’s experience, many stock analysts use tangible common equity measures in conjunction with more traditional bank capital ratios to compare capital adequacy of banking organizations with significant amounts of goodwill or other tangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions.

These calculations are intended to complement the capital ratios defined by GAAP and banking regulators. Because GAAP does not include these capital ratio measures, Trustmark believes there are no comparable GAAP financial measures to these tangible common equity ratios. Despite the importance of these measures to Trustmark, there are no standardized definitions for them and, as a result, Trustmark’s calculations may not be comparable with other organizations. Also there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its consolidated financial statements in their entirety and not to rely on any single financial measure. The following table reconciles Trustmark’s calculation of these measures to amounts reported under GAAP.

TRUSTMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIALS
June 30, 2016
($ in thousands)
(unaudited)

Note 7 – Non-GAAP Financial Measures (continued)

Trustmark discloses certain non-GAAP financial measures, including net income adjusted for significant non-routine transactions, because Management uses these measures for business planning purposes, including to manage Trustmark’s business against internal projected results of operations and to measure Trustmark’s performance. Trustmark views net income adjusted for significant non-routine transactions as a measure of our core operating business, which excludes the impact of the items detailed below, as these items are generally not operational in nature. This non-GAAP measure also provides another basis for comparing period-to-period results as presented in the accompanying selected financial data table and the audited consolidated financial statements by excluding potential differences caused by non-operational and unusual or non-recurring items. Readers are cautioned that these adjustments are not permitted under GAAP. Trustmark encourages readers to consider its consolidated financial statements and the notes related thereto in their entirety, and not to rely on any single financial measure.

The following table presents adjustments to net income and select financial ratios as reported in accordance with GAAP resulting from significant non-routine items occurring during the periods presented ($ in thousands, except per share data):