Trustmark Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; the filing also reports fourth-quarter results. Trustmark is a regional financial services company operating through banking, insurance and wealth-management businesses in Alabama, Florida, Mississippi, Tennessee and Texas.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue (net interest income plus noninterest income) | $578.5 million | $562.3 million |
| Net interest income | $405.3 million | $388.5 million |
| Net income | $123.6 million | $117.1 million |
| Diluted earnings per share | $1.83 | $1.75 |
| Net interest margin, fully taxable equivalent | 4.03% | 4.01% |
| Noninterest income | $173.1 million | $173.9 million |
| Noninterest expense | $409.0 million | $415.7 million |
- Revenue increased 2.9% and net income increased 5.6%. Higher net interest income and lower noninterest expense supported earnings; the higher loan-loss provision partly offset those gains.
- Net interest income rose $16.8 million, chiefly from higher securities and loan income and lower deposit interest expense. The reported margin edged up, while margin excluding acquired loans fell 3 basis points to 3.52%.
- Mortgage banking income declined 26.0% to $24.8 million, mainly because of lower mortgage sale gains and reduced production. Insurance commissions and wealth-management income grew.
- At year-end, assets were $12.251 billion, loans held for investment were $6.449 billion, total loans including held-for-sale and acquired loans were $7.131 billion, deposits were $9.698 billion and shareholders’ equity was $1.420 billion.
- Deposits declined $161.5 million, or 1.6%; growth in noninterest-bearing deposits was more than offset by lower interest-bearing deposits. Short-term borrowings increased $550.6 million to $868.6 million, including $350 million of short-term FHLB advances.
- Operating cash flow was $211.3 million, versus $301.2 million in 2013; investing activities used $556.3 million and financing activities provided $315.2 million. Cash and cash equivalents ended at $316.0 million.
- Regulatory capital remained above applicable requirements: Trustmark’s total risk-based capital ratio was 14.56%, common equity Tier 1 ratio 12.75% and leverage ratio 9.63%. TNB was classified as well-capitalized.
- Common dividends were $0.92 per share for the year, unchanged from 2013. The 2014 dividend payout ratio was 50.3%.
Material changes versus the prior comparable period
- Loans held for investment grew 11.2%, while deposits contracted 1.6%. Noninterest-bearing deposits rose 3.2%; interest-bearing deposits fell 3.4%.
- The loan-loss provision for loans held for investment was $1.2 million, compared with a $13.4 million provision benefit in 2013. The 2014 provision included methodology changes that added approximately $2.2 million of provision.
- Net recoveries on loans held for investment were $2.0 million, compared with net recoveries of $1.1 million in 2013. Nonperforming assets excluding acquired loans and covered other real estate were essentially unchanged at $171.9 million; nonaccrual loans rose $14.1 million to $79.3 million.
- Net interest margin increased 2 basis points, but lower mortgage activity reduced mortgage banking revenue. Lower other expenses and foreclosure costs helped reduce total noninterest expense by 1.6%.
- Operating cash flow decreased, while investing outflows increased, principally reflecting loan growth and securities purchases. Short-term funding use rose materially.
- Trustmark consolidated Somerville into TNB at year-end 2013. The BancTrust merger closed in February 2013 and affects year-over-year comparisons; 2014 included a full year of BancTrust operations.
Outlook, risks and unusual items
- Management described the economy as moderately improving but remained cautious about growth, low interest rates, global conditions and the decline in crude oil prices. It cited continued pressure on margins as older assets mature or are replaced with lower-yielding assets. No quantified earnings or revenue guidance was provided.
- Management’s year-end rate-sensitivity model estimated net interest income would rise 2.4% under a 200-basis-point rate increase and fall 5.8% under a 100-basis-point decrease; these are modeled scenarios, not forecasts.
- Energy-related loans were approximately $208 million, or 3.0% of loans held for investment, and were reported as performing with no adversely rated credits at year-end. Management warned that sustained low oil prices could weaken demand or increase losses.
- Other key risks include credit and real-estate exposure, interest-rate and liquidity risk, competition, regulation and compliance costs, cyber and vendor risk, acquisition integration, mortgage servicing putbacks, and natural disasters. The company reported $92.5 million of other real estate and $14.6 million of gross unrealized losses on temporarily impaired securities; it reported no other-than-temporary impairment charge.
- Two Stanford Financial Group-related lawsuits against TNB remained pending. Management said a loss was not probable and no accrual was required; it did not quantify potential damages. The overdraft/insufficient-funds class actions were settled in 2013 for $4.0 million before tax.
- Notable items included a $1.2 million pretax gain from termination of the BancTrust pension plan and $0.9 million of lump-sum settlement expense in the Trustmark pension plan. The filing also disclosed immaterial cash-flow statement classification errors for 2012 and 2013; cash balances and other financial statements were unaffected, and no restatement was required.
- Trustmark elected fair-value accounting for certain mortgage loans held for sale beginning October 1, 2014. Management said the election had no impact on the financial statements on the election date.
- New regulatory capital rules applied beginning January 1, 2015, with certain requirements phased in through 2019. Trustmark was also required to submit its first company-run stress test to regulators in March 2015. Management did not expect the capital rules to have a significant impact but said it would continue evaluating them.
Important facts for investors to verify
- Whether loan growth and the increase in short-term borrowings can be sustained without weakening funding costs, liquidity or credit quality.
- Whether the rise in nonaccrual loans, including four Mississippi credit relationships totaling $21.6 million, leads to further provisioning or losses.
- How sustained low oil prices affect the energy portfolio and regional economic conditions.
- Whether lower mortgage production, interchange income and deposit fees are offset by growth in wealth management, insurance and other revenue sources.
- Developments in the Stanford-related litigation, mortgage repurchase exposure and the FDIC loss-share true-up obligation.
- Stress-test results, capital-rule phase-in effects and any resulting constraints on dividends, repurchases or growth.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2014.