Trustmark Corporation (NASDAQ: TRMK) — FY 2023 Form 10-K
Business context and reporting period. Trustmark is a regional financial services holding company headquartered in Jackson, Mississippi. Through Trustmark National Bank and subsidiaries, it provides commercial and consumer banking, mortgage, insurance and wealth-management services across Alabama, Florida, Mississippi, Tennessee and Texas. This filing covers the fiscal year ended December 31, 2023; fourth-quarter results are compared with Q4 2022.
Financial results and condition
- FY earnings and revenue: Net income was $165.5 million, or diluted EPS of $2.70, versus $71.9 million and $1.17 in 2022. Revenue, defined as net interest income plus noninterest income, increased 8.6% to $759.8 million. Management’s non-GAAP net income excluding specified significant non-routine items was $171.4 million, or $2.80 diluted EPS, versus $147.5 million, or $2.40, in 2022.
- Interest income and margin: Net interest income rose 11.8% to $552.9 million. Fully taxable-equivalent net interest margin was 3.32%, up 15 basis points from 3.17%; excluding PPP loans and Federal Reserve balances, it was 3.25%, down 5 basis points. Higher asset yields and loan growth increased interest income, while sharply higher deposit and borrowing costs absorbed much of the benefit.
- Noninterest items and expenses: Noninterest income was $207.0 million, up 0.9%; higher insurance commissions were partly offset by lower mortgage-banking income and bank-card fees. Noninterest expense fell 10.8% to $537.9 million, mainly because 2022 included $100.8 million of Stanford-related settlement expense. Excluding litigation settlements, 2023 expense increased 5.8%.
- Fourth quarter: Net income was $36.1 million, or $0.59 per share, compared with a $34.1 million net loss, or a $0.56 loss per share, in Q4 2022. Revenue declined 2.7% to $186.5 million and net interest income fell 6.7% to $136.7 million. The year-over-year earnings improvement primarily reflected the Stanford settlement expense recorded in Q4 2022; excluding that expense, Q4 2023 net income declined $5.4 million, or 13.0%.
- Credit quality: Loans held for investment (LHFI) grew 6.1% to $12.95 billion. The allowance for credit losses on LHFI was $139.4 million, or 1.08% of LHFI, compared with 0.99% a year earlier. Net charge-offs were $8.2 million, or 0.06% of average loans, versus $0.9 million, or 0.01%, in 2022. Nonperforming assets rose 57.3% to $106.9 million; nonaccrual LHFI increased to $100.0 million, partly due to three large commercial credits and higher mortgage nonaccruals.
- Deposits, borrowings and liquidity: Deposits increased 7.8% to $15.57 billion, but noninterest-bearing deposits fell 21.9% to $3.20 billion as customers moved to higher-yielding accounts. Uninsured deposits were $5.60 billion, or 36.0% of deposits, down from 40.4%. Other borrowings declined 54.0% to $483.2 million, principally as short-term FHLB advances fell; federal funds purchased and repurchase agreements totaled $405.7 million. Trustmark reported $712.0 million in an interest-bearing Federal Reserve account, $4.003 billion of additional FHLB Dallas borrowing capacity and $1.374 billion of Discount Window collateral capacity. It had not accessed the Bank Term Funding Program.
- Cash flow: Net cash provided by operating activities was $196.9 million; investing activities used $411.2 million and financing activities provided $455.0 million. Cash and cash equivalents increased $240.8 million to $975.5 million.
- Capital and shareholder returns: Total shareholders’ equity was $1.66 billion, up 11.4%. Trustmark’s CET1, Tier 1, total risk-based capital and leverage ratios were 10.04%, 10.44%, 12.29% and 8.62%, respectively; TNB’s ratios were 10.58%, 10.58%, 11.61% and 8.75%. Trustmark paid $0.92 per share in dividends during 2023. No shares were repurchased in 2023; a new $50 million authorization applies through 2024, subject to market conditions and management discretion.
Material changes versus the prior comparable period
- Annual net income rebounded from 2022, when the Stanford litigation charge materially depressed results. On the company’s adjusted, non-GAAP basis, earnings also increased year over year.
- Rapid rate increases lifted loan and reserve income but drove a steep rise in funding costs: annual interest expense increased to $326.0 million from $47.1 million. The non-PPP/non-Federal Reserve margin measure declined.
- Deposit balances recovered after declining in 2022, but the mix shifted away from noninterest-bearing accounts toward interest-bearing deposits, including $578.8 million of brokered CDs at year-end.
- Credit indicators weakened: nonperforming assets and net charge-offs increased, and the loan-loss allowance rose relative to LHFI. Loan growth slowed to 6.1% from 19.1% in 2022.
- Shareholders’ equity improved in part as securities-related accumulated other comprehensive losses narrowed. AFS securities still carried $196.1 million of net unrealized losses at year-end; management attributed the losses to market rates rather than credit quality and reported no related credit-loss allowance.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no quantified earnings, revenue, margin or credit guidance. Management described continued investment for profitable growth, adapting delivery channels to customer preferences, and pursuing efficiency opportunities. It cautioned that economic and market uncertainty may persist and that future interest-rate effects are difficult to predict.
- Rate and funding risks: Deposit competition and repricing costs remain important. Static-balance simulations estimated that a 200-basis-point rate increase could lift one-year net interest income by 0.5%, while a 200-basis-point decrease could reduce it by 1.0%; these are model scenarios, not forecasts. The estimated net-portfolio-value impact was negative 2.3% under a 200-basis-point increase.
- Regulatory and fair-lending matter: TNB’s most recent CRA rating was “Needs to Improve,” following allegations of discriminatory credit practices in the Memphis area. The rating can restrict certain expansionary approvals until a subsequent examination results in at least “Satisfactory.” TNB had previously entered consent orders and undertaken corrective actions.
- Litigation settlements: Trustmark recognized $6.5 million of expense in Q3 2023 for the Adams/Madison Timber settlement; payment was made in January 2024. It recognized $100.0 million plus $750,000 of related legal fees for the Stanford settlement in Q4 2022; the $100.0 million payment was made in February 2024. The company said other pending legal losses were not then considered both probable and reasonably estimable, and did not expect pending matters to materially affect consolidated financial condition.
- Other exposures: Risks include commercial real estate and construction-credit performance, economic conditions in its markets, securities valuations, liquidity and uninsured-deposit movements, cyber threats and third-party providers, litigation, regulatory changes and weather events. The filing notes $196.1 million of AFS unrealized losses and potential sensitivity in mortgage-servicing-rights valuations.
- Audit and controls: The auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The allowance-for-credit-loss forecast was identified as a critical audit matter because it relies on subjective economic forecasts and assumptions.
Important facts for investors to verify
- Whether net interest margin stabilizes as deposit costs, deposit mix and funding competition evolve.
- Whether nonaccrual loans, criticized commercial credits, charge-offs and the allowance continue to rise, especially in commercial real estate and construction lending.
- How the bank manages uninsured deposits, brokered CDs and available wholesale borrowing capacity under stressed liquidity conditions.
- How securities-related losses, including the held-to-maturity portfolio and AOCI treatment, affect tangible capital and liquidity flexibility.
- Progress toward a satisfactory CRA rating and any implications for branches, acquisitions or other expansion plans.
- Whether expense growth, mortgage-banking activity and the benefits of management’s efficiency initiatives support earnings after excluding unusual litigation items.
- Actual execution of the 2024 share-repurchase authorization and the sustainability of dividends relative to earnings, capital and regulatory limits.