Trustmark Corporation — Q1 2022 Form 10-Q
Business context and reporting period. Trustmark is a bank holding company headquartered in Jackson, Mississippi, operating banking, wealth management and insurance businesses through 179 offices across five states. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise indicated. Balance-sheet comparisons are with December 31, 2021.
Key financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $153.5 million | $162.9 million; down 5.8% |
| Net interest income | $99.3 million | $102.3 million; down 2.9% |
| Net interest margin, fully taxable equivalent | 2.58% | 2.81%; down 23 basis points |
| Noninterest income | $54.1 million | $60.6 million; down 10.7% |
| Noninterest expense | $121.5 million | $121.5 million; essentially flat |
| Provision for credit losses | Benefit of $2.0 million combined | Benefit of $19.9 million combined |
| Net income / diluted EPS | $29.2 million / $0.47 | $52.0 million / $0.82 |
| Operating cash flow | $61.9 million | $83.3 million |
Net income declined 43.8%. Lower mortgage banking revenue and reduced PPP loan income were key headwinds; lower deposit interest expense and improved service-charge and insurance income partly offset them. Mortgage banking income fell 52.5% to $9.9 million, reflecting lower loan-sale gains and production. Insurance commissions rose 13.2% to $14.1 million, and deposit service charges rose 28.5% to $9.5 million. Management reported return on average assets of 0.68%, return on average equity of 6.91%, and return on average tangible equity of 9.05%.
Financial position, credit and liquidity
- Loans and deposits: Loans held for investment increased 1.5% from year-end to $10.397 billion. Total deposits rose 0.2% to $15.113 billion. Total assets were $17.442 billion.
- Funding and debt: Cash and due from banks was $1.918 billion. Federal funds purchased and repurchase agreements totaled $170.5 million; other borrowings were $84.6 million; subordinated notes were $123.1 million and junior subordinated debt securities were $61.9 million. The filing reports substantial additional borrowing capacity, including $3.492 billion of qualifying collateral capacity at the FHLB of Dallas and $1.172 billion at the Federal Reserve Discount Window.
- Credit: Nonperforming assets were $67.6 million, or 0.64% of loans, loans held for sale and other real estate; nonaccrual loans were $64.4 million. A large Texas commercial credit placed on nonaccrual was the main driver of the increase. The allowance for credit losses on loans was $98.7 million, 0.95% of loans held for investment, versus 0.97% at year-end. The allowance declined partly on improved credit quality and macroeconomic forecasts, partly offset by specific reserves and loan growth.
- Capital: Trustmark reported an 11.23% common equity Tier 1 ratio and 13.53% total risk-based capital ratio, and said Trustmark and its bank subsidiary remained well-capitalized. GAAP shareholders’ equity fell 6.3% from year-end to $1.631 billion, principally reflecting a $116.8 million after-tax-period loss in securities-related other comprehensive income, dividends and repurchases, partly offset by earnings.
- Cash flow: Net cash decreased $349.3 million during the quarter, to $1.918 billion, mainly reflecting securities purchases and other investing outflows. This cash-flow measure includes cash and cash equivalents; it should not be read as operating cash generation alone.
Material changes, outlook and risks
- Management described linked-quarter net interest income and noninterest income expansion and solid loan growth, while year-over-year revenue and earnings declined. It cited disciplined expense management and a solid capital position.
- The available-for-sale securities portfolio had $173.1 million of net unrealized losses at March 31, versus $17.4 million at year-end. Management attributed these losses to market-rate increases rather than credit deterioration, and said it did not intend, and was not more likely than not required, to sell before recovery of amortized cost. The resulting AOCI decline materially reduced reported GAAP equity; regulatory capital excludes AOCI.
- Management noted rising rates, inflation, supply-chain and labor constraints, and uncertainty related to Russia’s invasion of Ukraine and COVID-19 restrictions in China. It warned that higher deposit pricing competition may offset benefits from higher market rates. Its modeled one-year net interest income sensitivity was +17.3% for a parallel 200-basis-point increase and -8.6% for a 100-basis-point decrease; actual results may differ and models exclude possible balance-sheet actions.
- In Q1, Trustmark added a qualitative stagflation reserve overlay to address uncertainty around higher prices and low economic growth, and changed its other-construction loan allowance methodology from WARM to a discounted-cash-flow approach. A separate pandemic-related qualitative reserve framework remains part of its allowance methodology.
- Trustmark declared a $0.23-per-share quarterly dividend, payable June 15, 2022. Its $100 million repurchase authorization runs through December 31, 2022; it repurchased 279,231 shares for $9.1 million in Q1. No earnings guidance was provided in the supplied filing text.
- Legal proceedings include Stanford Financial Group-related litigation and a Madison Timber-related matter. The company said losses were not considered probable and reasonably estimable and did not expect pending proceedings to have a material adverse effect, while noting outcomes and timing cannot be predicted. Management also identified LIBOR transition as a source of potential cost and risk; new variable-rate instruments transitioned to SOFR beginning January 1, 2022.
Most important facts for investors to verify
- Whether loan growth and deposit mix persist, and how deposit costs respond to rising rates.
- Whether mortgage banking’s lower production and sale gains continue, and how diversified fee income performs.
- Developments in the Texas nonaccrual commercial credit, criticized loans and allowance assumptions, including stagflation and pandemic overlays.
- The effect of securities unrealized losses, interest-rate changes and securities portfolio duration on GAAP equity and future earnings.
- Updates on material litigation, contingent exposures, repurchases and dividend sustainability.