 | News Release |
Trustmark Corporation Announces Second Quarter 2012 Financial Results
and Declares $0.23 Quarterly Cash Dividend
Jackson, Miss. – July 24, 2012 – Trustmark Corporation (NASDAQ:TRMK) announced net income available to common shareholders of $29.3 million in the second quarter of 2012, which represented diluted earnings per common share of $0.45. Trustmark’s performance during the quarter produced a return on average tangible common equity of 12.74% and a return on average assets of 1.20%. During the first six months of 2012, Trustmark’s net income available to common shareholders totaled $59.7 million, which represented diluted earnings per common share of $0.92. Trustmark’s performance during the first half of 2012 resulted in a return on average tangible common equity of 13.07% and a return on average assets of 1.23%. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per common share payable September 15, 2012, to shareholders of record on September 1, 2012.
Gerard R. Host, President and CEO, stated, “Trustmark continued to achieve solid financial performance in the second quarter. Total revenue for the quarter exceeded $130 million due in part to solid performance in our banking, mortgage banking, wealth management and insurance businesses. Credit quality continued to improve as evidenced by significantly lower nonaccrual loans and provisioning levels. In May, we announced plans to acquire BancTrust Financial Group, a $2.0 billion financial institution based in Mobile, Alabama. This transaction, which is expected to close during the fourth quarter of 2012, is subject to approval by regulatory authorities and BancTrust’s shareholders. Thanks to our dedicated associates, solid profitability and strong capital base, Trustmark remains well-positioned to continue meeting the needs of our customers and creating value for our shareholders.”
Credit Quality
| · | Classified and criticized loans declined $20.7 million and $35.2 million, respectively, relative to the prior quarter |
· | Allowance for loan losses represented 186.5% of nonperforming loans, excluding impaired loans |
Trustmark continued to experience significant improvements in credit quality. Nonperforming loans totaled $99.7 million at June 30, 2012, a decline of 5.8% from the prior quarter and 17.6% from the prior year. Foreclosed other real estate experienced similar improvement, declining 2.7% from the prior quarter and 18.1% from levels one year earlier to total $73.7 million. Collectively, nonperforming assets totaled $173.4 million at June 30, 2012, the lowest level since year end 2008. All of the above metrics exclude acquired loans and other real estate covered by FDIC loss-share agreements.
Net charge-offs during the second quarter of 2012 totaled $6.7 million. The second quarter provision for loan losses totaled $650 thousand for non-acquired loans as sufficient reserves were previously established for both impaired and other substandard credits, net loan risk rate upgrades and balance reductions on criticized credits. During the second quarter, Trustmark experienced a $20.7 million, or 6.7%, decline in classified loans and a $35.2 million, or 8.8%, decline in criticized loans relative to the prior quarter. Relative to figures one year earlier, classified loan balances decreased $68.0 million, or 19.0%, while criticized loan balances decreased $80.0 million, or 18.0%.
Allocation of Trustmark’s $84.8 million allowance for loan losses represented 1.81% of commercial loans and 0.81% of consumer and home mortgage loans, resulting in an allowance to total loans of 1.50% at June 30, 2012, which represents a level management considers to be commensurate with the inherent risk in the loan portfolio. The allowance for loan losses represented 186.5% of nonperforming loans, excluding impaired loans. All of the above metrics exclude acquired loans.
Capital Strength
| · | Tangible common equity to tangible assets expanded to 9.90% |
| · | Total risk-based capital ratio increased to 17.12% |
Trustmark’s solid capital position reflects the consistent profitability of its diversified financial services businesses as well as prudent balance sheet management. At June 30, 2012, tangible common equity totaled $948.0 million and represented 9.90% of tangible assets while the total risk-based capital ratio was 17.12%. Trustmark’s strong capital base provides the opportunity to support organic loan growth in an improving economy and enhance long-term shareholder value.
Balance Sheet Management
| · | Average earning assets totaled $8.7 billion |
| · | Net interest income (FTE) totaled $89.9 million |
Loans held for investment and acquired loans totaled $5.8 billion at June 30, 2012, a decrease of $139.3 million from the prior quarter due principally to a $105.0 million decline in single family mortgage loans. During the quarter, many customers took advantage of the opportunity to refinance existing mortgages at more attractive rates. In fact, Trustmark’s mortgage production totaled $465.1 million in the second quarter, an increase of 12.1% from the prior quarter and 84.9% from levels one year earlier. Trustmark elected to sell the vast majority of these lower rate, longer term home mortgages in the secondary market rather than replacing the runoff in its single family loan portfolio. Trustmark’s decision to discontinue indirect auto financing continued to be reflected in loan totals as this portfolio declined $16.2 million in the second quarter. In addition, current economic conditions continued to constrain the demand for credit as reflected by a $32.6 million decline in nonfarm, nonresidential loans.
During the second quarter of 2012, average earning assets remained stable at $8.7 billion while average deposits increased $223.8 million, or 2.9%, relative to the prior quarter to total $8.0 billion. Average noninterest-bearing deposits increased 6.9% to represent 25.0% of average deposits in the second quarter of 2012.
Prudent asset and liability management, including disciplined loan and deposit pricing, continued to produce solid net interest income and a strong net interest margin. Net interest income (FTE) totaled $89.9 million during the second quarter, resulting in a net interest margin of 4.15%, four basis points lower than the prior quarter. The decrease is due to the downward repricing of fixed rate loans and securities, partially offset by improvements in the accreted yield on acquired covered loans and modest declines in the cost of interest-bearing deposits.
Noninterest Income
| · | Noninterest income totaled $43.8 million, representing 33.6% of total revenue |
| · | Mortgage, Insurance and Wealth Management income expand |
Trustmark continued to achieve solid financial results from its diverse financial services businesses. Mortgage banking income during the second quarter totaled $11.2 million, an increase of $3.9 million from the prior quarter. Performance in mortgage banking continued to reflect stable mortgage servicing income, solid secondary marketing gains, and successful hedging programs. During the quarter, mortgage banking results included mark-to-market adjustments on mortgage loans held for sale of $3.1 million due largely to increased refinancing activity resulting from lower mortgage rates.
Insurance revenue during the second quarter totaled $7.2 million, an increase of 8.7% from the prior quarter due to increased commercial insurance business as well as a firming of insurance rates. Insurance revenue increased 4.6% from levels one year earlier. Wealth management income increased 4.7% relative to the prior quarter to total $5.8 million due to growth in trust fees and brokerage service revenues. During the second quarter, Trustmark announced the pending sale of its proprietary mutual fund business. While not a material transaction financially, this transaction will allow Trustmark to fully embrace open architecture in its wealth management business and focus additional resources on managing client relationships.
Service charges on deposit accounts totaled $12.6 million in the second quarter, reflecting a 3.3% seasonal increase from the prior quarter and a 1.8% decrease from levels one year earlier. Bank card and other fee income increased 11.1% from the prior quarter and 19.3% from the prior year to $8.2 million due in part to increased debit card usage and other banking fees.
Other noninterest income declined $4.9 million relative to the prior quarter, principally due to acquisition related activities. During the second quarter, the fair values associated with the Bay Bank acquisition were finalized and resulted in a bargain purchase gain of $881 thousand in addition to the $2.8 million recorded in the first quarter of 2012. In addition, the FDIC indemnification asset on acquired covered loans from the Heritage transaction was reduced by $2.3 million during the second quarter as a result of the re-estimation of cash flows and loan payoffs.
Noninterest Expense
| · | ORE/Foreclosure expense declined to lowest level in 12 quarters |
| · | Noninterest expense remained well-controlled |
Noninterest expense in the second quarter increased $2.2 million, or 2.5%, relative to the prior quarter to total $88.0 million. Excluding acquisition expenses related to the Bay Bank merger recorded in the first quarter of $2.6 million ($1.9 million in contract termination and other expenses included in other expense and $672 thousand of change in control and severance expense included in salaries and benefits), noninterest expense increased $4.8 million in the second quarter. Salaries and benefits expense increased $1.2 million, or 2.6%, in the second quarter relative to recurring expenses in the prior quarter. Approximately $730 thousand of this increase is attributable to the first full quarter of the Bay Bank acquisition.
ORE/Foreclosure expense totaled $2.4 million, a decline of 38.8% relative to the prior quarter and 49.2% when compared to figures one year earlier. Services and fees totaled $11.8 million in the second quarter, an increase of $1.0 million relative to the prior quarter. This increase includes costs associated with the installation of new computer software systems and expenses related to the realignment of certain business units.
Other expense totaled $14.9 million in the second quarter, an increase of $3.7 million when compared to recurring expenses in the prior quarter. During the second quarter of 2012, Trustmark updated its quarterly analysis of mortgage loan repurchase exposure. This analysis, along with recent trends of increased mortgage loan repurchase activity in the mortgage industry, resulted in Trustmark providing an additional reserve of approximately $4.0 million in the second quarter. At June 30, 2012, the reserve for mortgage loan repurchases totaled $9.2 million. Notwithstanding significant changes in future behaviors and the demand patterns of investors, Trustmark believes that it is appropriately reserved for potential mortgage loan repurchase requests.
ADDITIONAL INFORMATION
As previously announced, Trustmark will conduct a conference call with analysts on Wednesday, July 25, 2012, 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)317-6789, passcode 10008303, 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 Thursday, August 9, 2012, in archived format at the same web address or by calling (877)344-7529, passcode 10008303.
Trustmark is a financial services company providing banking and financial solutions through approximately 170 offices in 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 in this report 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 the extent and duration of the current volatility in the credit and financial markets, 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 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 new products and lines of business, natural disasters, environmental disasters, acts of war or terrorism, the expected timing and likelihood of completion of the proposed merger with BancTrust Financial Group, Inc., (BancTrust), including the timing, receipt and terms and conditions of required regulatory approvals of the proposed merger that could reduce anticipated benefits or cause the parties to abandon the merger, the diversion of management’s time and attention from Trustmark’s ongoing business during this time period, the ability to maintain relationships with customers, employees or suppliers as well as the ability to successfully integrate the businesses and realize cost savings and any other synergies and the risk that the credit ratings of the combined company or its subsidiaries may be different from what the companies expect; the risk that the proposed merger with BancTrust is terminated prior to completion and results in significant transaction costs to Trustmark, 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.
Trustmark Investor Contacts:
Louis E. Greer
Treasurer and
Principal Financial Officer
601-208-2310
F. Joseph Rein, Jr.
Senior Vice President
601-208-6898
Trustmark Media Contact:
Melanie A. Morgan
Senior Vice President
601-208-2979
Note 1 – Business Combinations
BancTrust Financial Group, Inc.
On May 29, 2012, Trustmark Corporation (Trustmark) and BancTrust Financial Group, Inc. (BancTrust) announced the signing of a definitive agreement pursuant to which BancTrust will merge into Trustmark. BancTrust has 49 offices throughout Alabama and the Florida Panhandle with $1.3 billion in loans and $1.8 billion in deposits at March 31, 2012.
Under the terms of the definitive agreement, which was approved unanimously by the Boards of Directors of both companies, holders of BancTrust common stock will receive 0.125 of a share of Trustmark common stock for each share of BancTrust common stock in a tax-free exchange. Trustmark will issue approximately 2,245,923 shares of its common stock for all issued and outstanding shares of BancTrust common stock. Based upon a price of $24.66 per share of Trustmark common stock, the transaction is valued at approximately $55.4 million, or $3.08 per share of BancTrust common stock. Trustmark intends to repurchase the $50.0 million of BancTrust preferred stock and associated warrant issued to the U.S. Department of Treasury under the Capital Purchase Program.
The transaction is expected to close during the fourth quarter of 2012 and is subject to approval by regulatory authorities and BancTrust’s shareholders, as well as certain other customary closing conditions.
Bay Bank & Trust Company
On March 16, 2012, Trustmark National Bank (TNB) completed its merger with Bay Bank & Trust Co. (Bay Bank), a 76-year old financial institution headquartered in Panama City, Florida. Trustmark acquired all outstanding common stock of Bay Bank for approximately $22 million in cash and stock, comprised of $10 million in cash and the issuance of approximately 510 thousand shares of Trustmark common stock value at $12 million. This acquisition was accounted for under the acquisition method in accordance with FASB ASC Topic 805, “Business Combinations.” Accordingly, the assets and liabilities, both tangible and intangible, are recorded at their estimated fair values as of the acquisition date. The purchase price allocation was deemed preliminary as of March 31, 2012 and was finalized in the second quarter of 2012.
The statement of assets purchased and liabilities assumed in the Bay Bank acquisition is presented below at their estimated fair values as of the acquisition date of March 16, 2012 ($ in thousands):
| Assets | | | |
| Cash and due from banks | | $ | 88,154 | |
| Securities available for sale | | | 26,369 | |
| Acquired noncovered loans | | | 97,914 | |
| Premises and equipment, net | | | 9,466 | |
| Identifiable intangible assets | | | 7,017 | |
| Other real estate | | | 2,569 | |
| Other assets | | | 3,471 | |
| Total Assets | | | 234,960 | |
| | | | | |
| Liabilities | | | | |
| Deposits | | | 208,796 | |
| Other liabilities | | | 526 | |
| Total Liabilities | | | 209,322 | |
| | | | | |
| Net assets acquired at fair value | | | 25,638 | |
| Consideration paid to Bay Bank | | | 22,003 | |
| | | | | |
| Bargain purchase gain | | | 3,635 | |
| Income taxes | | | - | |
| Bargain purchase gain, net of taxes | | $ | 3,635 | |
The bargain purchase gain represents the excess of the net of the estimated fair value of the assets acquired and liabilities assumed over the consideration paid to Bay Bank. Initially, Trustmark recognized a bargain purchase gain of $2.8 million during the first quarter of 2012 and subsequently increased the bargain purchase gain $881 thousand during the second quarter of 2012 as the fair values associated with the Bay Bank acquisition were finalized. The gain of $3.6 million recognized by Trustmark is considered a gain from a bargain purchase under FASB ASC Topic 805 and is included in other noninterest income. Included in noninterest expense during the first quarter of 2012 are non-routine Bay Bank transaction expenses totaling approximately $2.6 million (change in control and severance expense of $672 thousand included in salaries and benefits; contract termination and other expenses of $1.9 million included in other expense).
All loans acquired from Bay Bank, with the exception of revolving credit agreements, were evaluated under a fair value process involving various degrees of deterioration in credit quality since origination, and also for those loans for which it was probable at acquisition that TNB would not be able to collect all contractually required payments. These loans are referred to as acquired impaired loans and are accounted for in accordance with FASB ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.”
The operations of Bay Bank are included in TNB’s operating results from March 16, 2012 and added revenue of $5.6 million and net income available to common shareholders of $1.8 million through June 30, 2012. Such operating results are not necessarily indicative of future operating results.
 | TRUSTMARK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALS |
Note 1 – Business Combinations (continued)
Heritage Banking Group
On April 15, 2011, the Mississippi Department of Banking and Consumer Finance closed the Heritage Banking Group (Heritage), a 90-year old financial institution headquartered in Carthage, Mississippi, and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. On the same date, Trustmark National Bank (TNB) entered into a purchase and assumption agreement with the FDIC in which TNB agreed to assume all of the deposits and purchased essentially all of the assets of Heritage. The FDIC and TNB entered into a loss-share transaction on approximately $151.9 million of Heritage assets, which covers substantially all loans and all other real estate. Under the loss-share agreement, the FDIC will cover 80% of covered loan and other real estate losses incurred. Because of the loss protection provided by the FDIC, the risk characteristics of the Heritage loans and other real estate covered by the loss-share agreement are significantly different from those assets not covered by this agreement. As a result, Trustmark will refer to loans and other real estate subject to the loss-share agreement as “covered” while loans and other real estate that are not subject to the loss-share agreement will be referred to as “noncovered” or “excluding covered.” The loss-share agreement applicable to single family residential mortgage loans and related foreclosed real estate provides for FDIC loss sharing and TNB’s reimbursement to the FDIC for recoveries of covered losses for ten years from the date on which the loss-share agreement was entered. The loss-share agreement applicable to commercial loans and related foreclosed real estate provides for FDIC loss sharing for five years from the date on which the loss-share agreement was entered and TNB’s reimbursement to the FDIC for recoveries of covered losses for an additional three years thereafter.
The assets purchased and liabilities assumed for the Heritage acquisition have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible and intangible, are recorded at their estimated fair values as of the acquisition date. The fair value amounts are subject to change for up to one year after the closing date as additional information relating to closing date fair values becomes available. The amounts are also subject to adjustments based upon final settlement with the FDIC.
The bargain purchase gain from the Heritage acquisition represents the net of the estimated fair value of the assets acquired and liabilities assumed and is influenced significantly by the FDIC-assisted transaction process. Under the FDIC-assisted transaction process, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer's bid, the FDIC may be required to make a cash payment to the acquirer. The pretax gain of $7.5 million ($4.6 million after tax) recognized by TNB is considered a bargain purchase transaction under FASB ASC Topic 805. The gain was recognized as other noninterest income in Trustmark’s consolidated statements of income for the three months ended June 30, 2011.
Note 2 - Securities Available for Sale and Held to Maturity
The following table is a summary of the estimated fair value of securities available for sale and the amortized cost of securities held to maturity ($ in thousands):
| | | 6/30/2012 | | | 3/31/2012 | | | 12/31/2011 | | | 9/30/2011 | | | 6/30/2011 | |
| SECURITIES AVAILABLE FOR SALE | | | | | | | | | | | | | | | |
| U.S. Government agency obligations | | | | | | | | | | | | | | | |
| Issued by U.S. Government agencies | | $ | 22 | | | $ | 31 | | | $ | 3 | | | $ | 5 | | | $ | 7 | |
| Issued by U.S. Government sponsored agencies | | | 72,923 | | | | 101,941 | | | | 64,802 | | | | 61,870 | | | | 102,940 | |
| Obligations of states and political subdivisions | | | 213,826 | | | | 208,234 | | | | 202,827 | | | | 207,781 | | | | 186,034 | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | | | | | | | | | |
| Guaranteed by GNMA | | | 22,367 | | | | 20,064 | | | | 12,445 | | | | 14,637 | | | | 14,990 | |
| Issued by FNMA and FHLMC | | | 264,018 | | | | 286,169 | | | | 347,932 | | | | 400,589 | | | | 413,493 | |
| Other residential mortgage-backed securities | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC, or GNMA | | | 1,570,226 | | | | 1,619,920 | | | | 1,614,965 | | | | 1,579,698 | | | | 1,556,676 | |
| Commercial mortgage-backed securities | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC, or GNMA | | | 354,453 | | | | 330,318 | | | | 226,019 | | | | 212,325 | | | | 124,902 | |
| Asset-backed securities / structured financial products | | | 91,293 | | | | 23,693 | | | | - | | | | - | | | | - | |
| Corporate debt securities | | | 3,679 | | | | 5,294 | | | | - | | | | - | | | | - | |
| Total securities available for sale | | $ | 2,592,807 | | | $ | 2,595,664 | | | $ | 2,468,993 | | | $ | 2,476,905 | | | $ | 2,399,042 | |
| | | | | | | | | | | | | | | | | | | | | |
| SECURITIES HELD TO MATURITY | | | | | | | | | | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 38,351 | | | $ | 40,393 | | | $ | 42,619 | | | $ | 43,246 | | | $ | 46,931 | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | | | | | | | | | |
| Guaranteed by GNMA | | | 3,745 | | | | 4,089 | | | | 4,538 | | | | 5,291 | | | | 5,547 | |
| Issued by FNMA and FHLMC | | | 583 | | | | 586 | | | | 588 | | | | 753 | | | | 753 | |
| Other residential mortgage-backed securities | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC, or GNMA | | | 3,000 | | | | 4,743 | | | | 7,749 | | | | 19,534 | | | | 32,456 | |
| Commercial mortgage-backed securities | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC, or GNMA | | | 2,188 | | | | 2,199 | | | | 2,211 | | | | 2,222 | | | | 2,236 | |
| Total securities held to maturity | | $ | 47,867 | | | $ | 52,010 | | | $ | 57,705 | | | $ | 71,046 | | | $ | 87,923 | |
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 90% of the portfolio in U.S. Government agency-backed obligations and other AAA rated securities. None of the securities owned by Trustmark are collateralized by assets which are considered sub-prime. Furthermore, outside of membership in the Federal Home Loan Bank of Dallas and the Federal Reserve Bank, Trustmark does not hold any equity investment in government sponsored entities.
| | TRUSTMARK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALS |
Note 3 – Loan Composition
| LHFI BY TYPE (excluding acquired loans) | | 6/30/2012 | | | 3/31/2012 | | | 12/31/2011 | | | 9/30/2011 | | | 6/30/2011 | |
| Loans secured by real estate: | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 464,349 | | | $ | 465,486 | | | $ | 474,082 | | | $ | 481,821 | | | $ | 510,867 | |
| Secured by 1-4 family residential properties | | | 1,621,865 | | | | 1,722,357 | | | | 1,760,930 | | | | 1,717,366 | | | | 1,737,744 | |
| Secured by nonfarm, nonresidential properties | | | 1,392,293 | | | | 1,419,902 | | | | 1,425,774 | | | | 1,437,573 | | | | 1,457,328 | |
| Other real estate secured | | | 192,376 | | | | 199,400 | | | | 204,849 | | | | 207,984 | | | | 208,797 | |
| Commercial and industrial loans | | | 1,142,282 | | | | 1,142,813 | | | | 1,139,365 | | | | 1,083,753 | | | | 1,082,127 | |
| Consumer loans | | | 196,718 | | | | 210,713 | | | | 243,756 | | | | 268,002 | | | | 332,032 | |
| Other loans | | | 640,665 | | | | 614,082 | | | | 608,728 | | | | 587,213 | | | | 577,421 | |
| LHFI | | | 5,650,548 | | | | 5,774,753 | | | | 5,857,484 | | | | 5,783,712 | | | | 5,906,316 | |
| Allowance for loan losses | | | (84,809 | ) | | | (90,879 | ) | | | (89,518 | ) | | | (89,463 | ) | | | (86,846 | ) |
| Net LHFI | | $ | 5,565,739 | | | $ | 5,683,874 | | | $ | 5,767,966 | | | $ | 5,694,249 | | | $ | 5,819,470 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| ACQUIRED NONCOVERED LOANS BY TYPE | | 6/30/2012 | | | 3/31/2012 | | | 12/31/2011 | | | 9/30/2011 | | | 6/30/2011 | |
| Loans secured by real estate: | | | | | | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 13,154 | | | $ | 14,346 | | | $ | - | | | $ | - | | | $ | - | |
| Secured by 1-4 family residential properties | | | 18,954 | | | | 20,409 | | | | - | | | | - | | | | - | |
| Secured by nonfarm, nonresidential properties | | | 53,272 | | | | 54,954 | | | | - | | | | - | | | | - | |
| Other real estate secured | | | 512 | | | | 695 | | | | - | | | | - | | | | - | |
| Commercial and industrial loans | | | 4,822 | | | | 5,732 | | | | - | | | | - | | | | - | |
| Consumer loans | | | 3,153 | | | | 4,188 | | | | - | | | | - | | | | - | |
| Other loans | | | 146 | | | | 345 | | | | - | | | | - | | | | - | |
| Noncovered loans | | | 94,013 | | | | 100,669 | | | | - | | | | - | | | | - | |
| Allowance for loan losses | | | (62 | ) | | | (37 | ) | | | - | | | | - | | | | - | |
| Net noncovered loans | | $ | 93,951 | | | $ | 100,632 | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
| ACQUIRED COVERED LOANS BY TYPE | | 6/30/2012 | | | 3/31/2012 | | | 12/31/2011 | | | 9/30/2011 | | | 6/30/2011 | |
| Loans secured by real estate: | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 3,683 | | | $ | 3,940 | | | $ | 4,209 | | | $ | 4,024 | | | $ | 8,477 | |
| Secured by 1-4 family residential properties | | | 27,218 | | | | 30,221 | | | | 31,874 | | | | 32,735 | | | | 32,124 | |
| Secured by nonfarm, nonresidential properties | | | 27,464 | | | | 30,737 | | | | 30,889 | | | | 33,601 | | | | 35,846 | |
| Other real estate secured | | | 4,580 | | | | 5,087 | | | | 5,126 | | | | 5,294 | | | | 5,363 | |
| Commercial and industrial loans | | | 1,382 | | | | 2,768 | | | | 2,971 | | | | 1,772 | | | | 5,570 | |
| Consumer loans | | | 205 | | | | 206 | | | | 290 | | | | 158 | | | | 163 | |
| Other loans | | | 1,483 | | | | 1,460 | | | | 1,445 | | | | 1,480 | | | | 1,015 | |
| Covered loans | | | 66,015 | | | | 74,419 | | | | 76,804 | | | | 79,064 | | | | 88,558 | |
| Allowance for loan losses | | | (1,464 | ) | | | (736 | ) | | | (502 | ) | | | - | | | | - | |
| Net covered loans | | $ | 64,551 | | | $ | 73,683 | | | $ | 76,302 | | | $ | 79,064 | | | $ | 88,558 | |
| | TRUSTMARK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALS |
| Note 3 – Loan Composition (continued) | | | | | | | | | | | | | | | |
| | | June 30, 2012 | |
LHFI - COMPOSITION BY REGION (1) | | Total | | | Florida | | | Mississippi (Central and Southern Regions) | | | Tennessee (Memphis, TN and Northern MS Regions) | | | Texas | |
| Loans secured by real estate: | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 464,349 | | | $ | 89,082 | | | $ | 224,822 | | | $ | 32,692 | | | $ | 117,753 | |
| Secured by 1-4 family residential properties | | | 1,621,865 | | | | 56,097 | | | | 1,395,357 | | | | 141,644 | | | | 28,767 | |
| Secured by nonfarm, nonresidential properties | | | 1,392,293 | | | | 152,491 | | | | 749,681 | | | | 164,270 | | | | 325,851 | |
| Other real estate secured | | | 192,376 | | | | 8,815 | | | | 136,719 | | | | 5,020 | | | | 41,822 | |
| Commercial and industrial loans | | | 1,142,282 | | | | 14,630 | | | | 775,678 | | | | 81,314 | | | | 270,660 | |
| Consumer loans | | | 196,718 | | | | 1,374 | | | | 170,972 | | | | 19,934 | | | | 4,438 | |
| Other loans | | | 640,665 | | | | 25,165 | | | | 543,222 | | | | 21,910 | | | | 50,368 | |
| Loans | | $ | 5,650,548 | | | $ | 347,654 | | | $ | 3,996,451 | | | $ | 466,784 | | | $ | 839,659 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
CONSTRUCTION, LAND DEVELOPMENT AND OTHER LAND LOANS BY REGION (1) | | | | | | | | | | | | | |
| Lots | | $ | 58,972 | | | $ | 35,499 | | | $ | 17,311 | | | $ | 1,617 | | | $ | 4,545 | |
| Development | | | 103,956 | | | | 9,036 | | | | 55,825 | | | | 5,974 | | | | 33,121 | |
| Unimproved land | | | 154,849 | | | | 42,335 | | | | 68,518 | | | | 16,763 | | | | 27,233 | |
| 1-4 family construction | | | 74,250 | | | | 1,933 | | | | 57,212 | | | | 2,369 | | | | 12,736 | |
| Other construction | | | 72,322 | | | | 279 | | | | 25,956 | | | | 5,969 | | | | 40,118 | |
| Construction, land development and other land loans | | $ | 464,349 | | | $ | 89,082 | | | $ | 224,822 | | | $ | 32,692 | | | $ | 117,753 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
LOANS SECURED BY NONFARM, NONRESIDENTIAL PROPERTIES BY REGION (1) | | | | | | | | | | | | | |
| Income producing: | | | | | | | | | | | | | | | | | | | | |
| Retail | | $ | 158,044 | | | $ | 41,004 | | | $ | 63,709 | | | $ | 23,310 | | | $ | 30,021 | |
| Office | | | 137,786 | | | | 37,259 | | | | 68,996 | | | | 9,772 | | | | 21,759 | |
| Nursing homes/assisted living | | | 92,772 | | | | - | | | | 83,302 | | | | 4,238 | | | | 5,232 | |
| Hotel/motel | | | 82,176 | | | | 8,593 | | | | 28,754 | | | | 17,442 | | | | 27,387 | |
| Industrial | | | 52,954 | | | | 8,677 | | | | 13,521 | | | | 269 | | | | 30,487 | |
| Health care | | | 16,620 | | | | - | | | | 10,735 | | | | 149 | | | | 5,736 | |
| Convenience stores | | | 9,393 | | | | 196 | | | | 4,461 | | | | 1,468 | | | | 3,268 | |
| Other | | | 137,788 | | | | 15,667 | | | | 70,850 | | | | 6,606 | | | | 44,665 | |
| Total income producing loans | | | 687,533 | | | | 111,396 | | | | 344,328 | | | | 63,254 | | | | 168,555 | |
| | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied: | | | | | | | | | | | | | | | | | | | | |
| Office | | | 116,381 | | | | 16,116 | | | | 68,697 | | | | 6,872 | | | | 24,696 | |
| Churches | | | 87,073 | | | | 2,066 | | | | 51,605 | | | | 28,325 | | | | 5,077 | |
| Industrial warehouses | | | 94,212 | | | | 2,375 | | | | 51,604 | | | | 325 | | | | 39,908 | |
| Health care | | | 95,299 | | | | 10,469 | | | | 50,794 | | | | 16,461 | | | | 17,575 | |
| Convenience stores | | | 60,977 | | | | 1,452 | | | | 37,375 | | | | 5,199 | | | | 16,951 | |
| Retail | | | 38,809 | | | | 4,259 | | | | 26,205 | | | | 1,736 | | | | 6,609 | |
| Restaurants | | | 34,682 | | | | 594 | | | | 26,038 | | | | 6,687 | | | | 1,363 | |
| Auto dealerships | | | 20,269 | | | | 499 | | | | 17,829 | | | | 1,874 | | | | 67 | |
| Other | | | 157,058 | | | | 3,265 | | | | 75,206 | | | | 33,537 | | | | 45,050 | |
| Total owner-occupied loans | | | 704,760 | | | | 41,095 | | | | 405,353 | | | | 101,016 | | | | 157,296 | |
| | | | | | | | | | | | | | | | | | | | | |
| Loans secured by nonfarm, nonresidential properties | | $ | 1,392,293 | | | $ | 152,491 | | | $ | 749,681 | | | $ | 164,270 | | | $ | 325,851 | |
| | | | | | | | | | | | | | | | | | | | | |
| (1) Excludes acquired loans. | | | | | | | | | | | | | | | | | | | | |
| | TRUSTMARK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALS |
Note 4 – 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:
| | | Quarter Ended | | | Six Months Ended | |
| | | 6/30/2012 | | | 3/31/2012 | | | 12/31/2011 | | | 9/30/2011 | | | 6/30/2011 | | | 6/30/2012 | | | 6/30/2011 | |
| Securities – Taxable | | | 2.94 | % | | | 3.13 | % | | | 3.02 | % | | | 3.26 | % | | | 3.69 | % | | | 3.04 | % | | | 3.73 | % |
| Securities – Nontaxable | | | 4.49 | % | | | 4.63 | % | | | 4.53 | % | | | 4.39 | % | | | 4.79 | % | | | 4.56 | % | | | 4.90 | % |
| Securities – Total | | | 3.06 | % | | | 3.24 | % | | | 3.13 | % | | | 3.35 | % | | | 3.77 | % | | | 3.15 | % | | | 3.82 | % |
| Loans | | | 5.14 | % | | | 5.18 | % | | | 5.37 | % | | | 5.18 | % | | | 5.25 | % | | | 5.16 | % | | | 5.25 | % |
| FF Sold & Rev Repo | | | 0.38 | % | | | 0.25 | % | | | 0.38 | % | | | 0.34 | % | | | 0.41 | % | | | 0.30 | % | | | 0.40 | % |
| Other Earning Assets | | | 4.56 | % | | | 3.89 | % | | | 3.72 | % | | | 4.04 | % | | | 4.17 | % | | | 4.20 | % | | | 3.36 | % |
| Total Earning Assets | | | 4.52 | % | | | 4.60 | % | | | 4.71 | % | | | 4.66 | % | | | 4.83 | % | | | 4.56 | % | | | 4.84 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing Deposits | | | 0.43 | % | | | 0.50 | % | | | 0.54 | % | | | 0.61 | % | | | 0.66 | % | | | 0.47 | % | | | 0.68 | % |
| FF Pch & Repo | | | 0.20 | % | | | 0.16 | % | | | 0.15 | % | | | 0.19 | % | | | 0.22 | % | | | 0.18 | % | | | 0.21 | % |
| Other Borrowings | | | 2.85 | % | | | 2.89 | % | | | 2.22 | % | | | 2.75 | % | | | 2.76 | % | | | 2.87 | % | | | 2.10 | % |
| Total Interest-bearing Liabilities | | | 0.50 | % | | | 0.55 | % | | | 0.58 | % | | | 0.65 | % | | | 0.70 | % | | | 0.52 | % | | | 0.71 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest margin | | | 4.15 | % | | | 4.19 | % | | | 4.28 | % | | | 4.17 | % | | | 4.29 | % | | | 4.17 | % | | | 4.29 | % |
The net interest margin for the second quarter of 2012 totaled 4.15% compared to a net interest margin in the prior quarter of 4.19% resulting in a decrease of four basis points. The decrease is mostly due to the downward repricing of loans and securities, partially offset by improvements in the accreted yield of acquired covered loans and modest declines in the cost of interest-bearing deposits.
Note 5 – 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 MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. Changes in the fair value of these exchange-traded derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of 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 changes 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 positive ineffectiveness of $172 thousand and $1.7 million for the quarters ended June 30, 2012 and 2011, respectively.
The following table illustrates the components of mortgage banking revenues included in noninterest income in the accompanying income statements:
| | | Quarter Ended | | | Six Months Ended | |
| | | 6/30/2012 | | | 3/31/2012 | | | 12/31/2011 | | | 9/30/2011 | | | 6/30/2011 | | | 6/30/2012 | | | 6/30/2011 | |
| Mortgage servicing income, net | | $ | 3,891 | | | $ | 3,886 | | | $ | 3,725 | | | $ | 3,738 | | | $ | 3,713 | | | $ | 7,777 | | | $ | 7,327 | |
| Change in fair value-MSR from runoff | | | (2,320 | ) | | | (2,106 | ) | | | (2,122 | ) | | | (2,039 | ) | | | (1,455 | ) | | | (4,426 | ) | | | (2,746 | ) |
| Gain on sales of loans, net | | | 6,302 | | | | 6,469 | | | | 4,633 | | | | 2,366 | | | | 1,852 | | | | 12,771 | | | | 4,953 | |
| Other, net | | | 3,139 | | | | 64 | | | | 133 | | | | 2,926 | | | | 448 | | | | 3,203 | | | | (517 | ) |
| Mortgage banking income before hedge ineffectiveness | | | 11,012 | | | | 8,313 | | | | 6,369 | | | | 6,991 | | | | 4,558 | | | | 19,325 | | | | 9,017 | |
| Change in fair value-MSR from market changes | | | (5,926 | ) | | | 248 | | | | (2,842 | ) | | | (7,614 | ) | | | (4,931 | ) | | | (5,678 | ) | | | (4,674 | ) |
| Change in fair value of derivatives | | | 6,098 | | | | (1,266 | ) | | | 2,511 | | | | 10,406 | | | | 6,642 | | | | 4,832 | | | | 6,648 | |
| Net positive (negative) hedge ineffectiveness | | | 172 | | | | (1,018 | ) | | | (331 | ) | | | 2,792 | | | | 1,711 | | | | (846 | ) | | | 1,974 | |
| Mortgage banking, net | | $ | 11,184 | | | $ | 7,295 | | | $ | 6,038 | | | $ | 9,783 | | | $ | 6,269 | | | $ | 18,479 | | | $ | 10,991 | |
| | TRUSTMARK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALS |
Note 6 – Other Noninterest Income and Expense
Other noninterest income consisted of the following for the periods presented ($ in thousands):
| | | Quarter Ended | | | Six Months Ended | |
| | | 6/30/2012 | | | 3/31/2012 | | | 12/31/2011 | | | 9/30/2011 | | | 6/30/2011 | | | 6/30/2012 | | | 6/30/2011 | |
| Partnership amortization for tax credit purposes | | $ | (1,491 | ) | | $ | (1,422 | ) | | $ | (2,690 | ) | | $ | (1,417 | ) | | $ | (1,137 | ) | | $ | (2,913 | ) | | $ | (2,259 | ) |
| Bargain purchase gain on acquisition | | | 881 | | | | 2,754 | | | | - | | | | - | | | | 7,456 | | | | 3,635 | | | | 7,456 | |
| Decrease in FDIC indemnification asset | | | (2,289 | ) | | | (81 | ) | | | (4,157 | ) | | | - | | | | - | | | | (2,370 | ) | | | - | |
| Other miscellaneous income | | | 1,749 | | | | 2,507 | | | | 1,919 | | | | 1,651 | | | | 1,466 | | | | 4,256 | | | | 3,350 | |
| Total other, net | | $ | (1,150 | ) | | $ | 3,758 | | | $ | (4,928 | ) | | $ | 234 | | | $ | 7,785 | | | $ | 2,608 | | | $ | 8,547 | |
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 or historical tax credits). These investments are recorded based on the equity method of accounting, which requires the equity in partnership losses to be recognized when incurred and are recorded as a reduction in other income. 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.
As previously mentioned in Note 1 – Business Combinations, during the second quarter of 2012, the bargain purchase gain for Bay Bank was increased $881 thousand from $2.8 million that was recorded during the first quarter of 2012, as the fair values associated with the Bay Bank acquisition were finalized. In addition, during the second quarter of 2012, other noninterest income included a write-down of the FDIC indemnification asset of $2.3 million on acquired covered loans obtained from Heritage as a result of loan payoffs and improved cash flow projections and lower loss expectations for loan pools.
Other noninterest expense consisted of the following for the periods presented ($ in thousands):
| | | Quarter Ended | | | Six Months Ended | |
| | | 6/30/2012 | | | 3/31/2012 | | | 12/31/2011 | | | 9/30/2011 | | | 6/30/2011 | | | 6/30/2012 | | | 6/30/2011 | |
| Loan expense | | $ | 8,299 | | | $ | 5,525 | | | $ | 5,788 | | | $ | 4,632 | | | $ | 4,139 | | | $ | 13,824 | | | $ | 7,812 | |
| Non-routine transaction expenses on acquisition | | | - | | | | 1,917 | | | | - | | | | - | | | | - | | | | 1,917 | | | | - | |
| Amortization of intangibles | | | 1,028 | | | | 710 | | | | 799 | | | | 792 | | | | 783 | | | | 1,738 | | | | 1,538 | |
| Other miscellaneous expense | | | 5,572 | | | | 4,916 | | | | 5,056 | | | | 6,312 | | | | 4,895 | | | | 10,488 | | | | 9,999 | |
| Total other expense | | $ | 14,899 | | | $ | 13,068 | | | $ | 11,643 | | | $ | 11,736 | | | $ | 9,817 | | | $ | 27,967 | | | $ | 19,349 | |
During the second quarter of 2012, Trustmark updated its quarterly analysis of mortgage loan repurchase exposure. This analysis, along with recent trends of increased mortgage loan repurchase activity in the mortgage industry, resulted in Trustmark providing an additional reserve of approximately $4.0 million in the second quarter. At June 30, 2012, the reserve for mortgage loan repurchases totaled $9.2 million. Notwithstanding significant changes in future behaviors and the demand patterns of investors, Trustmark believes that it is appropriately reserved for potential mortgage loan repurchase requests.
Note 7 – Non-GAAP Financial Measures
In addition to capital ratios defined by 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.
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.
