Trustmark Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 24, 2014. This is an annual report, not a standalone fourth-quarter filing. Trustmark is a regional financial services company operating in Alabama, Florida, Mississippi, Tennessee and Texas, primarily through Trustmark National Bank. It reported approximately 208 offices and 3,110 full-time-equivalent associates.
Financial performance and condition
| Metric | FY2013 / year-end | FY2012 / comparison |
|---|---|---|
| Revenue (net interest income plus noninterest income) | $562.3 million, up 8.9% | $516.2 million |
| Net interest income (GAAP) | $388.5 million, up 13.9% | $341.0 million |
| Net interest margin (fully taxable equivalent) | 4.01% | 4.09% |
| Net income | $117.1 million; diluted EPS $1.75 | $117.3 million; diluted EPS $1.81 |
| Return on average assets / common equity | 1.02% / 8.75% | 1.20% / 9.30% |
| Total assets / deposits | $11.79 billion / $9.86 billion | $9.83 billion / $7.90 billion |
| Loans held for investment | $5.80 billion, up 3.7% | $5.59 billion |
| Net interest income after loan-loss provisions | $395.9 million | $328.7 million |
| Cash and due from banks | $345.8 million | $231.5 million |
| Shareholders’ equity | $1.35 billion | $1.29 billion |
Profit, expenses and credit: Noninterest expense rose 20.7% to $415.7 million, while noninterest income declined 0.8% to $173.9 million. The provision for LHFI was a $13.4 million reversal, versus $6.8 million of expense in 2012; acquired-loan provision was $6.0 million. Net recoveries on LHFI were $1.1 million, compared with $17.5 million of net charge-offs in 2012. The allowance for LHFI was $66.4 million, or 1.15% of LHFI. Nonaccrual LHFI fell to $65.2 million from $82.4 million; nonperforming assets were $171.8 million, up from $160.6 million, largely because of BancTrust-acquired real estate. Excluding that acquired real estate, nonperforming assets declined 20.6%.
Cash flow and funding: Operating cash flow was $155.4 million, investing cash flow was negative $113.2 million, and financing cash flow was positive $72.1 million. Cash and cash equivalents increased $114.3 million. Deposits were the primary funding source; year-end borrowings included $251.6 million of federal funds purchased and repurchase agreements, $66.4 million of short-term borrowings, $8.5 million of long-term FHLB advances, $49.9 million of subordinated notes and $61.9 million of junior subordinated debt securities. Management reported excess funding capacity, including $1.77 billion of available FHLB of Dallas capacity and $931.6 million of Discount Window collateral capacity.
Capital and distributions: Trustmark’s Tier 1 and total risk-based capital ratios were 12.97% and 14.18%; TNB’s were 12.55% and 13.74%. TNB was classified as well-capitalized. The common dividend remained $0.23 per quarter, or $0.92 for the year; the payout ratio was 52.6%.
Material changes versus the prior period
- Trustmark completed its $53.5 million stock-funded acquisition of BancTrust on February 15, 2013, expanding into Alabama and strengthening its Florida Panhandle presence. BancTrust contributed $71.9 million of revenue and approximately $16.6 million of net income excluding non-routine merger expenses, from acquisition through year-end. The acquisition was a major driver of balance-sheet and revenue growth.
- Despite higher revenue and lower LHFI provisioning, net income was essentially flat and EPS declined, principally because noninterest expense increased. FY2013 included approximately $9.4 million of BancTrust transaction expenses, a $4.0 million overdraft-litigation settlement expense and a pension settlement expense.
- Net interest margin decreased 8 basis points as fixed-rate assets repriced downward and the asset mix shifted toward lower-yielding securities; lower deposit costs and acquired-loan income partly offset the pressure.
- Mortgage banking income fell 18.2% to $33.5 million as loan sales and margins weakened. Mortgage production declined 23.3% to $1.45 billion, and loan sales declined to $1.36 billion from $1.82 billion.
- Credit indicators generally improved, including lower nonaccrual loans, classified and criticized loans, and TDR balances. Other real estate nevertheless increased to $106.5 million, including $44.3 million attributable to BancTrust.
- In Q4, net income available to common shareholders was $28.0 million and diluted EPS was $0.42, versus $27.7 million and $0.43 in Q4 2012.
Outlook, risks and unusual items
- No specific earnings or growth guidance is provided. Management described the outlook as cautiously positive but emphasized uncertainty around economic growth, interest rates, credit conditions and regulation.
- Trustmark expected debit-card interchange regulation to apply beginning July 1, 2014, with an estimated annual noninterest-income reduction of $7–$10 million at then-current volumes. Management was evaluating product and service changes to offset the impact.
- New regulatory capital rules were expected to take effect for Trustmark in 2015 and could require more capital and common equity. Company-run stress testing was expected to begin using September 2014 data, with a formal filing due in March 2015.
- Interest-rate simulations estimated annual net interest income would increase 3.1% under a 200-basis-point rise and 1.3% under a 100-basis-point rise, but decrease 4.5% under a 100-basis-point decline. These are model estimates, not forecasts, and exclude potential management actions.
- In Q4, Trustmark reclassified approximately $1.099 billion of available-for-sale securities to held-to-maturity. The transfer involved an unrealized loss of approximately $46.6 million; no loss was recognized at transfer, and the remaining unrealized amount is amortized over the securities’ lives. Trustmark also sold $135.6 million of collateralized loan obligations, citing Volcker Rule uncertainty; the remaining CLOs were sold in January 2014.
- Trustmark paid FNMA approximately $3.6 million under an agreement resolving specified 2000–2008 mortgage repurchase obligations. The overdraft class-action settlement was $4.0 million and had preliminary court approval; final approval was scheduled for March 25, 2014. Stanford-related litigation remained pending with unquantified claims. Management said it did not consider a loss probable or expect the pending proceedings to have a material impact, but stated that possible losses could not be estimated.
- Other key risks include interest-rate and liquidity exposure, loan and real-estate credit losses, securities valuation, mortgage servicing rights assumptions, acquisition integration and regulatory compliance. The financial statements received an unqualified audit opinion; KPMG also reported effective internal control over financial reporting.
Investor verification priorities
- Separate BancTrust’s acquired balance sheet and earnings contribution from Trustmark’s organic growth, and assess whether acquisition benefits can be sustained after merger costs.
- Track margin trends, funding costs and the actual effect of debit interchange restrictions and other regulatory changes.
- Review credit quality alongside acquired assets: nonperforming assets, other real estate, acquired-loan cash-flow assumptions and allowance adequacy.
- Assess the securities reclassification, unrealized losses, interest-rate sensitivity and liquidity available under borrowing facilities.
- Confirm final court approval and implementation of the overdraft settlement, and monitor Stanford-related litigation and any updated loss estimates.
- Evaluate future capital requirements, stress-test results, dividend capacity and the maturity of the $50 million subordinated notes in 2016.