Trustmark Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; comparisons are primarily with FY2009. Trustmark is a Mississippi-based financial services company operating in Mississippi, Tennessee, Florida and Texas, principally through Trustmark National Bank.
Financial performance and condition
| Metric | FY2010 / Dec. 31, 2010 | Prior comparable period |
|---|---|---|
| Revenue (net interest income plus noninterest income) | $517.95 million | $522.45 million in 2009; down 0.9% |
| Net interest income | $352.0 million | $354.2 million in 2009 |
| Net interest margin, fully taxable equivalent | 4.41% | 4.25% in 2009 |
| Net income | $100.6 million | $93.0 million in 2009 |
| Net income available to common shareholders; diluted EPS | $100.6 million; $1.57 | $73.0 million; $1.26 in 2009 |
| Net cash provided by operating activities | $206.8 million | $172.3 million in 2009 |
| Total assets; loans held for investment | $9.554 billion; $6.060 billion | $9.526 billion; $6.320 billion in 2009 |
| Deposits; shareholders’ equity | $7.045 billion; $1.149 billion | $7.188 billion; $1.110 billion in 2009 |
| Nonperforming assets; allowance for loan losses | $229.6 million; $93.5 million | $231.3 million; $103.7 million in 2009 |
Return on average assets was 1.08% (0.98% in 2009); return on average common equity was 8.79% (7.22%). Net charge-offs were $59.7 million, or 0.95% of average loans, versus $68.4 million, or 1.01%, in 2009. The nonperforming-assets ratio nevertheless increased to 3.64% from 3.48%.
Cash and cash equivalents ended the year at $161.5 million, down $52.0 million. Investing activities used $245.2 million and financing activities used $13.5 million. Deposits declined 2.0%; Trustmark increased wholesale funding, including short-term borrowings. At year-end, federal funds purchased and repurchase agreements were $700.1 million, short-term borrowings were $425.3 million, subordinated notes were $49.8 million and junior subordinated debt was $61.9 million. There were no long-term FHLB advances outstanding.
Trustmark and Trustmark National Bank exceeded regulatory capital requirements. Trustmark reported Tier 1 and total risk-based capital ratios of 13.77% and 15.77%; the bank reported 13.42% and 15.40%. The bank was categorized as well-capitalized.
Material changes and notable items
- Common-shareholder income rose 37.8% year over year, primarily due to a $27.6 million reduction in loan-loss provision and the absence of preferred-stock dividends and discount accretion in 2010. Higher noninterest expense partly offset the improvement.
- Provision for loan losses declined to $49.5 million from $77.1 million. Total charge-offs were $71.9 million, compared with $80.7 million in 2009.
- Loans declined 4.1%, reflecting reductions in construction and land-development lending and the discontinued indirect auto business. Construction and land-development loans fell $246.8 million; indirect auto loans fell $192.2 million.
- Noninterest expense increased 5.6% to $325.6 million, including a $11.6 million increase in real estate and foreclosure expense; property writedowns were $17.1 million.
- Trustmark recorded a $2.0 million Cadence merger termination fee, partly offset by $687,000 of direct expenses. Cadence accepted another proposal and terminated its agreement with Trustmark.
- The 2010 common dividend was $0.92 per share, unchanged from 2009. No common shares were repurchased.
Outlook, risks and contingencies
Management described the economic recovery as fragile and did not provide specific earnings guidance. It expected local economic and real-estate pressures, particularly in Florida, to remain a concern. Management continued to focus on reducing construction and land-development exposure, resolving problem assets and maintaining excess funding capacity.
Florida remained a significant credit concentration risk: it represented 7.3% of loans but 37.5% of nonperforming assets. Total Florida criticized loans were $139.5 million; $42.0 million were impaired and collateral-dependent. Management reported progress reducing Florida construction and land-development loans and foreclosed property, but acknowledged that further economic deterioration could increase defaults, charge-offs and provisions.
Management estimated potential 2011 noninterest-income reductions of $3–$4 million from overdraft rules, a further $3–$5 million if anticipated OCC overdraft guidance were implemented by midyear, and $4–$6 million from debit-card interchange-fee limits if implemented as expected. These are estimates, not earnings guidance. The Dodd-Frank Act and Basel III implementation could also affect costs, revenues and capital requirements; the ultimate impacts were uncertain.
Interest-rate modeling estimated net interest income declines of 3.2% under a 200-basis-point rate increase and 3.6% under a 100-basis-point decrease, based on year-end balances. Two Stanford Financial Group-related lawsuits naming the bank remained pending; management said a material adverse outcome was not reasonably possible and expected no material effect on consolidated results. The financial statements received an unqualified audit opinion, and the auditor and management reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether credit quality continues to improve, especially in Florida, and whether nonperforming-asset levels and foreclosure writedowns stabilize.
- Whether the $93.5 million loan-loss allowance remains adequate as impaired loans and real-estate values evolve.
- The actual revenue and expense effects of overdraft, interchange-fee and other Dodd-Frank rules as implementation proceeds.
- How deposit trends, wholesale funding usage and liquidity capacity develop after the 2010 deposit decline.
- Whether the Stanford litigation or mortgage-servicing repurchase claims produce losses beyond management’s current estimates.
- The sustainability of earnings growth: 2010 results benefited from lower provisions and the elimination of preferred-stock charges, while operating expenses rose.