Trustmark Corporation (TRMK) — Q2 2022 Form 10-Q
Business context and period: Trustmark is a Mississippi-based bank holding company operating banking, wealth management and insurance businesses across Alabama, Florida, Mississippi, Tennessee and Texas. This unaudited report covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021.
Key financial results
Amounts are in millions except per-share data and ratios.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $165.9 | $175.8 | $319.4 | $338.8 |
| Net interest income | $112.7 | $119.4 | $212.0 | $221.8 |
| Net income | $34.3 | $48.0 | $63.5 | $99.9 |
| Diluted EPS | $0.56 | $0.76 | $1.03 | $1.57 |
| Net interest margin, FTE | 2.90% | 3.16% | 2.74% | 2.99% |
| Operating cash flow | — | $150.7 | $188.1 |
- Revenue fell 5.6% in Q2 and 5.7% for the first half. Lower PPP income and mortgage banking revenue were the main drags. Mortgage banking income declined 53.0% in Q2 and 52.7% in the first half, mainly on lower loan-sale gains and volume.
- Net income declined 28.5% in Q2 and 36.5% for the first half. Noninterest expense rose 4.3% in Q2 and 2.1% in the first half; higher services and fees contributed to the increases.
- Reported NIM contracted year over year, principally as PPP income faded. Excluding PPP loans and balances at the Federal Reserve, management reported NIM of 3.06% in Q2 and 2.97% for the first half, up 12 and 1 basis points, respectively, year over year.
- Loans held for investment increased $697.0 million, or 6.8%, from year-end to $10.945 billion. Deposits declined $317.0 million, or 2.1%, to $14.770 billion.
Financial position, liquidity and credit
- Total assets were $16.952 billion, down from $17.596 billion at year-end. Cash and due from banks fell to $742.5 million from $2.267 billion. Six-month cash flows were $150.7 million from operating activities, negative $1.143 billion from investing, and negative $532.2 million from financing.
- Total securities were $3.782 billion. Trustmark transferred $343.1 million of available-for-sale securities to held-to-maturity during Q2. Available-for-sale securities had $217.6 million of net unrealized losses at June 30; accumulated other comprehensive loss was $207.1 million, versus $32.6 million at year-end. Management cited rising market rates and said the transfer was intended to limit the effect on fair value and tangible equity.
- Shareholders’ equity was $1.587 billion, down 8.9% from year-end, largely reflecting after-tax securities valuation losses, dividends and repurchases, partly offset by earnings. Trustmark and its bank subsidiary remained well-capitalized; Trustmark’s CET1 ratio was 11.01% and total risk-based capital ratio 13.26%.
- Interest-bearing debt outside deposits included $70.2 million of federal funds/repo balances, $72.6 million of other borrowings, $123.2 million of subordinated notes and $61.9 million of junior subordinated debt securities. Management said liquidity was adequate and cited $3.610 billion of additional FHLB Dallas borrowing capacity, $1.220 billion of unencumbered Treasury and agency securities, and $1.192 billion of Discount Window collateral capacity.
- Nonperforming assets were $65.1 million, down 3.2% from year-end; nonaccrual loans were $62.1 million. The loan allowance was $103.1 million, 0.94% of loans, compared with $99.5 million and 0.97% at year-end. Net recoveries were $1.8 million for the first half.
Outlook, risks and notable items
- The filing provides no quantified earnings or revenue guidance. Management emphasized loan growth, customer relationships, profitable growth initiatives, delivery-channel realignment and expense discipline. It declared a $0.23-per-share dividend payable September 15, 2022.
- Management described inflation, supply-chain constraints, rising rates and geopolitical uncertainty, and noted that Federal Reserve District reports pointed to weaker demand and recession concerns. Its rate-sensitivity model estimated a 11.3% increase in one-year net interest income for a parallel 200-basis-point rise and an 11.6% decline for a 100-basis-point fall; these are model scenarios, not forecasts.
- Credit-loss estimates remain sensitive to economic assumptions. Trustmark activated a stagflation qualitative reserve factor in Q1 and a nature-and-volume factor in Q2; it also changed the other-construction loan allowance methodology. Management noted its models may not fully capture unusual pandemic-related effects.
- Material risks include regional real-estate and economic conditions, inflation and interest-rate changes, deposit competition and withdrawals, credit deterioration, cyber risks, and the LIBOR transition. Trustmark had $5.103 billion of unused credit commitments, which may not be fully drawn.
- Trustmark disclosed Stanford-related litigation and a Madison Timber-related lawsuit. Management, based on counsel’s advice, said loss was not probable and could not be reasonably estimated; it did not expect pending matters to materially adversely affect consolidated financial condition. The Stanford OSIC case was scheduled for jury trial beginning February 27, 2023.
Most important facts for investors to verify
- Whether loan growth and deposit trends continue, and how higher rates affect funding costs, NIM and liquidity.
- The sustainability of fee income as mortgage production and loan-sale gains weaken, and whether expense growth moderates.
- Credit performance in commercial real estate, construction and other growing loan categories, including allowance adequacy under weaker economic scenarios.
- The impact of securities valuation losses, the available-for-sale portfolio and the HTM transfer on tangible equity and future flexibility.
- Developments in the disclosed litigation and the potential effect of commitments, contingencies and regulatory changes.