Trustmark Corporation (TRMK) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Trustmark is a bank holding company operating banking, wealth management and insurance businesses across Alabama, Florida, Mississippi, Tennessee and Texas. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $188.7 | $152.4 | $508.1 | $491.2 |
| Net interest income | $136.1 | $98.3 | $348.1 | $320.0 |
| Net income | $42.5 | $21.2 | $106.0 | $121.1 |
| Diluted EPS | $0.69 | $0.34 | $1.72 | $1.92 |
| Net interest margin, FTE | 3.50% | 2.57% | 3.00% | 2.84% |
- Q3 net income roughly doubled year over year, as higher net interest income more than offset lower noninterest income and higher credit-loss provision. Nine-month net income declined about 12.5% year over year.
- Q3 provision for credit losses on loans was $12.9 million, versus a $2.5 million release in Q3 2021. Nine-month provision was $14.8 million, versus a $17.0 million release in 2021. Management attributed the 2022 provision principally to loan growth, specific reserves and a less positive macroeconomic outlook.
- Noninterest income fell 2.8% in Q3 and 6.5% for the nine months, primarily reflecting lower mortgage banking income. Mortgage banking income declined 50.9% in Q3 and 52.2% year to date. Noninterest expense decreased 2.2% in Q3 but increased 0.6% year to date; higher services and fees were partly offset by the absence of 2021 retirement-program and regulatory-settlement costs.
- Loans held for investment rose $1.34 billion, or 13.1%, from year-end 2021 to $11.59 billion, with growth concentrated in real estate and commercial and industrial lending. Deposits declined $662 million, or 4.4%, to $14.43 billion.
- At September 30, total assets were $17.19 billion and shareholders’ equity was $1.51 billion. Cash and due from banks were $479.6 million, down from $2.27 billion at year-end 2021. Nine-month operating cash flow was $228.5 million; investing cash flow was negative $1.74 billion and financing cash flow was negative $275.8 million.
- Funding included $544.1 million of federal funds purchased and repurchase agreements, $223.2 million of other borrowings, $123.2 million of subordinated notes and $61.9 million of junior subordinated debt. Trustmark and its bank subsidiary met regulatory “well-capitalized” standards; Trustmark’s CET1 ratio was 10.63%, total risk-based capital ratio 12.85% and Tier 1 leverage ratio 9.01%.
Material changes and notable items
- Rising rates and loan growth lifted Q3 net interest margin by 93 basis points year over year. Deposit competition and funding costs were increasing as monetary policy tightened.
- Unrealized losses on available-for-sale securities increased sharply amid higher market rates. At September 30, available-for-sale securities had $331.9 million of gross unrealized losses; accumulated other comprehensive loss was $306.4 million, contributing to a 13.3% decline in equity from December 2021. Trustmark transferred approximately $343 million of securities to held-to-maturity in Q2 to reduce the effect of further fair-value movements on reported equity.
- Nonperforming assets increased to $70.9 million from $67.3 million at year-end, including $67.9 million of nonaccrual loans. Management cited one large commercial credit placed on nonaccrual in each of Alabama and Texas, partly offset by payoffs and a credit returning to accrual.
- Mortgage loan sales and production were lower than in 2021. The mortgage servicing rights asset increased to $132.6 million, reflecting market-related valuation gains partly offset by runoff; its value is sensitive to prepayment and discount-rate assumptions.
- The company began a $675 million cash-flow-hedging program in Q3. Trustmark estimated $7.8 million would be reclassified as a reduction to interest income over the next 12 months.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described inflation, economic uncertainty, rising rates, deposit competition and a more pessimistic growth outlook as relevant conditions. Its interest-rate sensitivity analysis estimated that a 200-basis-point increase could raise one-year net interest income by 5.4%, while a 200-basis-point decline could reduce it by 5.8%; management cautioned actual results may differ and depend on balance-sheet changes and customer behavior.
Key disclosed risks include deterioration in borrower performance, unemployment or economic growth, real estate and energy-market conditions, interest-rate and deposit fluctuations, litigation, cybersecurity and operational risks, and the transition away from LIBOR. Trustmark reported several Stanford-related lawsuits and litigation involving Madison Timber. It said, based on counsel’s advice, a loss was not considered probable and reasonably estimable; a Stanford-related jury trial was scheduled to begin February 27, 2023. The company stated it did not expect pending legal proceedings to have a material adverse effect, while noting outcomes and timing cannot be predicted. An FDIC assessment-rate increase taking effect in 2023 was not expected to be material.
Important facts for investors to verify
- Whether loan growth and higher rates continue to support net interest income as deposit costs and wholesale funding needs rise.
- Changes in deposit balances, deposit mix, borrowing levels and available liquidity after the substantial reduction in cash during the first nine months.
- Credit trends, including nonaccrual loans, classified credits, charge-offs and future allowance needs.
- The effect of securities valuation losses, securities classification and interest-rate movements on tangible equity and capital measures.
- Mortgage banking volumes, MSR valuation assumptions and performance of the new cash-flow hedges.
- Developments in pending litigation, particularly the scheduled Stanford-related trial, and any resulting change in loss estimates or disclosures.