Trustmark Corporation Announces Third Quarter 2017 Financial Results

JACKSON, Miss.--(BUSINESS WIRE)-- Trustmark Corporation (NASDAQ:TRMK) reported net income of $34.6 million in the third quarter of 2017, representing diluted earnings per share of $0.51. This level of earnings resulted in a return on average tangible common equity of 11.95% and a return on average assets of 0.99%. Included in the third quarter financial results was a specific reserve for loan losses related to Hurricane Harvey that reduced net income by $687 thousand, or $0.01 per share. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share payable December 15, 2017, to shareholders of record on December 1, 2017.

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Gerard R. Host, President and CEO, stated, “Trustmark continued to gain momentum in the third quarter as reflected by its solid financial results. We continued to experience loan growth across our franchise while maintaining strong credit quality as evidenced by declining levels of nonperforming assets and historically low net charge-offs. Our low-cost, core deposit base remains a significant strength of the organization. Our mortgage, insurance and wealth management businesses continued to provide complementary revenue sources to our traditional banking business. While we continue to make investments to enhance the customer experience, we remain focused on disciplined expense management. 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 loan growth
• Attractive core deposit base

Loans held for investment totaled $8.4 billion at September 30, 2017, reflecting an increase of $111.3 million, or 1.3%, from the prior quarter and $908.1 million, or 12.1%, from the prior year. Loans secured by nonfarm, nonresidential properties increased $63.5 million during the quarter, driven by growth in Mississippi, Florida, Alabama and Texas. Other real estate secured loans increased $50.0 million due to growth in Texas, Mississippi, Alabama and Tennessee. Construction, land development and other land loans increased $28.1 million as growth in construction lending in Alabama and Texas were offset in part by declines in Tennessee and Mississippi. Other loans, which include finance companies, mortgage warehousing and REITs, increased $41.4 million, driven by growth in Mississippi, Alabama and Tennessee. Commercial and industrial loans fell $66.4 million, as growth in Tennessee was more than offset by declines in Mississippi, Texas and Alabama.

Acquired loans totaled $283.8 million at September 30, 2017, a decrease of $31.2 million from the prior quarter. Collectively, loans held for investment and acquired loans totaled $8.7 billion at September 30, 2017, up $80.1 million from the prior quarter.

Securities available for sale and held to maturity declined $116.1 million in the third quarter as part of Trustmark’s interest rate risk management strategy and in accordance with Trustmark’s focus on enhancing the composition of its earning assets profile. At September 30, 2017, the balance of securities available for sale and held to maturity totaled $3.5 billion.

Deposits totaled $10.2 billion at September 30, 2017, a decrease of $191.6 million, or 1.8%, from the prior quarter as growth in consumer deposits was more than offset by a seasonal decline in public funds. Trustmark continues to maintain an attractive, low-cost deposit base with a total cost of deposits of 0.25%. The favorable mix of interest-bearing liabilities yielded a total cost of funds of 0.53% for the third quarter of 2017.

Trustmark’s capital position remained solid, reflecting the consistent profitability of its diversified financial services businesses. At September 30, 2017, Trustmark’s tangible equity to tangible assets ratio was 8.79%, while its total risk-based capital ratio was 13.19%. Tangible book value per share was $17.49 at September 30, 2017, up 4.4% year to date.

Credit Quality

• Specific reserve for loan losses related to Hurricane Harvey
• Recoveries exceeded charge-offs

In the aftermath of Hurricane Harvey, which made landfall in the Texas Gulf Coast region on August 25, 2017, Trustmark initiated a process to assess the storm’s impact on the company and its customers. Fortunately, none of Trustmark’s Houston area facilities sustained damage and reopened as soon as practical following the storm. Trustmark identified all loans where the collateral, project or mailing addresses were located within FEMA designated disaster zip codes and proactively surveyed customers to determine the extent of any damages. Trustmark achieved coverage of approximately 97% of the $1.3 billion of outstanding loans within the designated disaster area. Potential loss exposure was calculated based upon customer responses as to the extent of damage suffered and applicable insurance coverage. Actual results were extrapolated to the remainder of the population. As a result, management increased its allowance for loan losses due to the storm by $1.1 million, which reduced third quarter net income by $687 thousand, or $0.01 per share.

At September 30, 2017, nonperforming loans totaled $69.3 million while other real estate totaled $48.4 million. Collectively, nonperforming assets decreased $6.5 million, or 5.2%, linked quarter and $1.8 million, or 1.5%, year-over-year. Recoveries exceeded charge-offs by $476 thousand during the third quarter.

Allocation of Trustmark's $80.3 million allowance for loan losses represented 1.02% of commercial loans and 0.73% of consumer and home mortgage loans, resulting in an allowance to total loans held for investment of 0.96% at September 30, 2017, 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 0.99% of total held for investment and acquired loans. Allowance for loan losses represented 301.50% of nonperforming loans, excluding specifically reviewed impaired loans.

Unless noted otherwise, all of the above credit quality metrics exclude acquired loans.

Revenue Generation

• Continued growth in net interest income
• Insurance revenue increases

Net interest income (FTE) in the third quarter totaled $108.9 million, which resulted in a net interest margin of 3.47%. Compared to the prior quarter, net interest income (FTE) increased $2.0 million, which reflects continued growth in interest income from the held for sale and held for investment loan portfolios as well as growth in interest and fees on acquired loans. During the third quarter of 2017, the yield on acquired loans totaled 8.78% and included $1.3 million in recoveries from the settlement of debt, which represented approximately 1.78% of the annualized total acquired loan yield. Excluding acquired loans, the net interest margin for the third quarter of 2017 totaled 3.34%, a decline of 3 basis points compared to the second quarter of 2017, primarily due to higher costs of interest-bearing deposits.

Noninterest income totaled $44.5 million in the third quarter, a decline of $5.7 million, or 11.4%, compared to the prior quarter and $236 thousand, or 0.5%, compared to the same period in the previous year. Excluding non-routine, non-taxable proceeds from life insurance acquired as part of a previous acquisition of $4.9 million in the second quarter of 2017, noninterest income declined $816 thousand linked quarter.

Service charges on deposit accounts totaled $11.2 million for the third quarter of 2017, an increase of $468 thousand, or 4.4%, from the prior quarter and a decline of $454 thousand, or 3.9%, year-over-year. The linked quarter change was attributable to a seasonal increase in occurrences of consumer overdrafts while the year-over-year decline reflects a decrease in consumer and business service charges and occurrences of overdrafts. Bank card and other fees totaled $7.2 million in the third quarter, a decline of $220 thousand, or 3.0%, linked quarter and an increase of $394 thousand, or 5.8%, year-over-year. The linked quarter decline reflected a seasonal reduction in interchange income as well as reduced revenue from customer derivatives while increased interchange income and other fees drove the increase year-over-year.

Mortgage banking revenue in the third quarter totaled $4.4 million, down $4.6 million from the prior quarter and $2.9 million year-over-year. The linked quarter decline was primarily due to the net negative mortgage hedge ineffectiveness and a negative mortgage valuation adjustment. Mortgage loan-production volume for the third quarter totaled $341.5 million. Insurance revenue totaled $10.4 million in the third quarter, representing an increase of $653 thousand, or 6.7%, from the prior quarter and $324 thousand, or 3.2%, from the same period one year earlier. These increases were primarily driven by growth in the commercial property and casualty lines of business. Wealth management revenue in the third quarter totaled $7.5 million, down $144 thousand, or 1.9%, from the prior quarter and $41 thousand, or 0.5%, year-over-year. The linked quarter decline was attributable to lower trust fees and brokerage commissions.

Other income, net totaled $3.7 million during the third quarter and included $2.7 million of non-taxable proceeds from bank-owned life insurance, compared to $5.6 million in the previous quarter, which included $4.9 million of non-taxable proceeds from life insurance acquired as part of a previous acquisition.

Expense Management

• Core expense remains well-controlled
• Salary and benefit expense declined linked quarter

Noninterest expense totaled $103.1 million during the third quarter, a decline of $19.0 million, or 15.6%, from the prior quarter. Excluding the non-routine charges related to the termination of Trustmark’s defined benefit pension plan of $17.6 million as well as charges related to the RB Bancorporation merger of $3.2 million in the second quarter, noninterest expense increased $1.9 million. Excluding other real estate expense ($864 thousand) and intangible amortization ($1.5 million), core noninterest expense in the third quarter totaled $100.7 million. Salaries and benefits expense totaled $58.8 million, a marginal decrease from the prior quarter when excluding the aforementioned non-routine pension plan termination charge.

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, October 25, 2017 at 8:30 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. A replay of the conference call will also be available through Wednesday, November 8, 2017, in archived format at the same web address or by calling (877) 344-7529, passcode 10112612.

Trustmark Corporation is a financial services company providing banking and financial solutions through 198 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.