Business context and reporting period
Trustmark Corporation is a bank holding company headquartered in Jackson, Mississippi. Its principal subsidiary, Trustmark National Bank, represented more than 99% of consolidated assets at December 31, 2011. The company provides banking, mortgage, insurance and wealth-management services across Mississippi, Tennessee, Florida and Texas. This Form 10-K covers the fiscal year ended December 31, 2011; fourth-quarter figures are also summarized below.
Financial performance and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue (net interest income plus noninterest income) | $508.8 million | $518.0 million | Down 1.8% |
| Net interest income | $348.9 million | $352.0 million | Down 0.9% |
| Net income available to common shareholders | $106.8 million | $100.6 million | Up 6.2% |
| Diluted EPS | $1.66 | $1.57 | Up |
| Net interest margin, fully taxable equivalent | 4.26% | 4.41% | Down 15 bps |
| Total assets at year-end | $9.727 billion | $9.554 billion | Up 1.8% |
| Deposits at year-end | $7.566 billion | $7.045 billion | Up 7.4% |
| Shareholders’ equity at year-end | $1.215 billion | $1.149 billion | Up 5.7% |
Net income improved mainly because the provision for loan losses excluding covered loans fell to $29.7 million from $49.5 million. Lower noninterest income and higher noninterest expense partly offset the benefit. Return on average assets was 1.11% versus 1.08%; return on average common equity was 8.95% versus 8.79%.
Cash from operating activities was $173.6 million, down from $206.8 million. Investing activities provided $95.3 million, compared with $245.2 million used in 2010; financing activities used $227.8 million, versus $13.5 million. Cash and cash equivalents increased $41.1 million to $202.6 million.
Loans held for investment excluding covered loans were $5.857 billion, down 3.3%. Total loans including loans held for sale and covered loans were $6.151 billion. Securities were $2.527 billion, up 9.0%. Short-term borrowings were $692.1 million, down from $1.125 billion; year-end debt also included $49.8 million of subordinated notes and $61.9 million of junior subordinated debt securities. Total risk-based capital ratios were 16.67% at Trustmark and 16.28% at TNB; leverage ratios were 10.43% and 10.18%, respectively. TNB was classified as well-capitalized.
Fourth quarter
Fourth-quarter 2011 net interest income was $89.1 million, provision for loan losses excluding covered loans was $6.1 million, noninterest income was $32.8 million, and noninterest expense was $83.0 million. Net income available to common shareholders was $24.3 million, or $0.38 diluted EPS, compared with $25.2 million, or $0.39, in fourth-quarter 2010.
Material changes versus the prior comparable period
- Credit quality improved: nonperforming assets excluding covered assets declined 17.5% to $189.5 million; net charge-offs fell to $33.7 million from $59.7 million; and nonaccrual loans declined to $110.5 million from $142.9 million.
- Deposits grew by $521.8 million, including strong noninterest-bearing deposit growth. The company reduced high-cost certificates of deposit and short-term wholesale funding.
- The net interest margin narrowed as asset yields fell and lower-yielding securities replaced some loan balances; lower deposit costs partly offset these pressures.
- Noninterest income fell 3.7% to $159.9 million. Deposit service charges and mortgage banking income declined; bank-card fees and wealth-management income increased.
- Noninterest expense rose 1.3% to $329.9 million, with higher salaries, loan-related costs, equipment expense and other expenses partly offset by lower foreclosure and FDIC assessment expenses.
Outlook, management commentary, risks and unusual items
Management described the economic recovery as gradual and fragile, with continued pressure from unemployment, weak housing and real-estate markets, tight credit conditions, uncertainty over U.S. fiscal policy and the European debt crisis. Trustmark reported no direct or indirect exposure to European sovereign or non-sovereign debt. Management said loan demand showed signs of strengthening in the fourth quarter and expected moderate U.S. growth in 2012, but did not provide numerical earnings or revenue guidance.
Trustmark acquired Heritage Banking Group in an FDIC-assisted transaction on April 15, 2011. The FDIC agreed to cover 80% of losses on specified assets. The acquisition contributed $6.5 million of net income through year-end, including a nonrecurring after-tax bargain-purchase gain of $4.6 million. A fourth-quarter re-estimation of Heritage loan cash flows increased covered-loan carrying value by $4.5 million and reduced the FDIC indemnification asset by $4.2 million. Trustmark also agreed to acquire Bay Bank for $22 million, partly in cash and partly in stock; completion was expected in the first quarter of 2012, subject to conditions and shareholder approval.
Key risks include commercial real-estate and construction credit exposure, uncertain property values, interest-rate sensitivity, liquidity and funding availability, mortgage-servicing valuation and repurchase claims, regulatory changes, competition, operational disruption and natural disasters. A 200-basis-point rate increase was modeled to reduce annual net interest income by 1.8%; a 100-basis-point decline was modeled to reduce it by 5.4%. These estimates depend on assumptions and exclude possible management actions.
Regulatory changes may further reduce fee income. Overdraft rules reduced 2011 noninterest income by an estimated $3.6 million; the five-item daily overdraft cap reduced it by about $0.4 million, with a further estimated $1.3 million impact in 2012. Pending OCC overdraft guidance could reduce annual income by an estimated $3.0 million. If Trustmark exceeds $10 billion in assets, debit-card interchange limits could reduce annual noninterest income by an estimated $6 million to $8 million. Management also cited potential future capital requirements under Basel III.
Legal matters include two Stanford Financial Group-related lawsuits and a putative class action challenging overdraft-fee practices. Damages were not quantified in the Stanford cases. Management said the pending proceedings were being contested and, based on counsel’s advice, a material adverse outcome was not reasonably possible. Trustmark incurred $5.1 million of mortgage-loan servicing putback expenses in 2011, versus $2.1 million in 2010; the year-end accrued balance was $4.3 million.
The common dividend remained $0.92 per share for the year. The Heritage bargain-purchase gain is nonrecurring; adjusted net income excluding the disclosed significant nonrecurring items was $102.2 million, a non-GAAP measure. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether credit-quality gains persist, especially in construction, land-development and commercial real-estate portfolios, and whether the $89.5 million loan-loss allowance remains adequate.
- How loan growth and the net interest margin develop after the fourth-quarter signs of stronger demand, given ongoing asset-yield pressure and rate sensitivity.
- Whether Heritage covered-asset estimates, FDIC reimbursements and the $601,000 true-up provision change materially as the portfolio runs off.
- The realized effects of overdraft regulation, interchange rules if the asset threshold is crossed, and other Dodd-Frank or Basel III requirements.
- The outcome and financial exposure, if any, from the Stanford and overdraft-fee litigation, as well as future mortgage repurchase claims.
- Completion and integration of the Bay Bank transaction, including its final terms and impact on capital, earnings and credit exposure.