Trustmark Corporation — 2012 Form 10-K
Business context and reporting period. Trustmark is a regional financial services company operating banking, insurance and wealth management businesses, principally in Mississippi, Tennessee, Florida and Texas. This annual report covers the fiscal year ended December 31, 2012; fourth-quarter figures are also summarized below. The BancTrust merger closed February 15, 2013, after year-end, and is not included in 2012 operating results.
Financial performance and condition
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue (net interest income plus noninterest income) | $516.2 million | $508.8 million | +1.5% |
| Net income available to common shareholders | $117.3 million | $106.8 million | +9.8% |
| Diluted EPS | $1.81 | $1.66 | Up |
| Net interest income | $341.0 million | $348.9 million | -2.3% |
| Net interest margin, fully taxable equivalent | 4.09% | 4.26% | -17 bps |
| Noninterest income | $175.2 million | $159.9 million | +9.6% |
| Noninterest expense | $344.5 million | $329.9 million | +4.4% |
| Operating cash flow | $92.1 million | $173.6 million | Down |
- Fourth quarter: net income available to common shareholders was $27.7 million, or $0.43 diluted EPS, versus $24.3 million and $0.38 in fourth-quarter 2011. Net interest income was $82.3 million versus $89.1 million; the LHFI loan-loss provision was a $0.5 million reversal, while acquired-loan provision was $1.9 million.
- Balance sheet at year-end: total assets were $9.83 billion, up 1.0%; deposits were $7.90 billion, up 4.4%; shareholders’ equity was $1.29 billion, up 6.0%. Gross loans, including loans held for sale and acquired loans, were $5.98 billion. Loans held for investment declined 4.5% to $5.59 billion.
- Credit quality: nonperforming assets, excluding acquired loans and covered other real estate, fell 15.3% to $160.6 million. Net charge-offs declined to $17.5 million from $33.7 million; the LHFI provision fell to $6.8 million from $29.7 million. The LHFI allowance was $78.7 million, or 1.41% of LHFI.
- Liquidity and funding: cash and due from banks totaled $231.5 million. Deposit growth supported a reduction in federal funds purchased and repurchase-agreement balances to $288.8 million from $604.5 million. Trustmark reported $1.88 billion of additional FHLB borrowing capacity and approximately $798 million of Discount Window collateral capacity. Management said liquidity and capital were sufficient for known needs.
- Debt and capital: year-end obligations included $49.9 million of subordinated notes and $61.9 million of junior subordinated debt securities, in addition to short-term borrowings. Trustmark’s Tier 1 and total risk-based capital ratios were 15.53% and 17.22%; TNB’s were 15.17% and 16.85%. TNB was categorized as well-capitalized.
- Cash flows: investing activities provided $193.9 million and financing activities used $257.2 million. Cash and cash equivalents increased $28.9 million to $231.5 million. The filing does not provide a single operating cash-flow metric specifically for the fourth quarter.
Material changes and unusual items
- Profit growth reflected a $22.9 million reduction in the LHFI provision and stronger fee income, particularly mortgage banking. These benefits partly offset lower interest income and net interest margin amid low rates.
- Mortgage banking revenue increased to $41.0 million from $26.8 million, primarily as loan-sale gains rose to $33.9 million from $12.0 million. Mortgage loan sales increased to $1.82 billion from $969.4 million.
- Bay Bank, acquired in March 2012, contributed $13.8 million of revenue and $1.7 million of net income after acquisition. A $3.6 million bargain-purchase gain and approximately $2.6 million of pretax transaction expenses were recorded; management estimated their combined net benefit at about $2.0 million, or $0.03 per share.
- Trustmark sold and reorganized $929 million of Performance Funds assets managed by its investment adviser during the third quarter. The transaction yielded $1.2 million of other income.
- Net income adjusted by management for significant non-routine items was $116.6 million, or $1.80 diluted EPS, versus GAAP net income of $117.3 million, or $1.81 diluted EPS. This adjustment is non-GAAP.
Outlook, risks and contingencies
- The filing gives no specific 2013 earnings or revenue guidance. Management described economic improvement as moderate and uncertain, citing soft labor markets, the European crisis, slow growth and U.S. fiscal-policy uncertainty. Low rates were expected to continue pressuring margins.
- Following BancTrust, Trustmark expected to exceed $10 billion in assets and become subject to CFPB supervision beginning in the second quarter of 2013. Management estimated debit-interchange rules could reduce annual noninterest income by $6–$8 million from July 2014; overdraft processing changes could reduce 2013 service charges by about $3 million.
- BancTrust adds 49 offices in Alabama and the Florida Panhandle, with $1.2 billion in loans and $1.7 billion in deposits at December 31, 2012. Integration, retention of customers and employees, and realization of expected cost savings are key risks. The acquisition’s initial accounting was incomplete, and pro forma revenue and earnings disclosures were not provided because they were not practicable to prepare.
- Mortgage servicing putback expense was $8.0 million in 2012, up from $5.1 million; the related reserve increased to $7.8 million from $4.3 million. Future claims, mainly involving 2005–2008 vintages, remain uncertain.
- TNB faced Stanford-related litigation and two putative class actions concerning overdraft fees. Damages were unquantified. Management, based on counsel’s advice, said a material adverse outcome was not reasonably possible and expected no material effect on consolidated results or financial position.
- Other material exposures include real-estate credit and collateral values, interest-rate and liquidity risk, regulatory changes, and BancTrust integration. A 100-basis-point rate decrease was modeled to reduce annual net interest income by 4.9%; a 200-basis-point increase was modeled to raise it by 0.5%.
Most important facts for investors to verify
- Whether improving credit quality and lower provisions are sustainable, and whether the $78.7 million LHFI allowance remains adequate as economic and real-estate conditions change.
- Whether loan runoff, particularly residential mortgages, continues and how it affects earning-asset growth and net interest margin.
- The realized costs, synergies, integration progress and post-close financial contribution of BancTrust; 2012 results exclude the merger.
- Actual impact and timing of debit-interchange limits, overdraft changes and related regulatory costs versus management’s estimates.
- Developments in mortgage putback reserves and the Stanford and overdraft-fee litigation. The filing reports audited financial statements with an unqualified opinion and effective internal control over financial reporting.