Trustmark Corporation (NASDAQ: TRMK) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Trustmark is a Mississippi-based bank holding company operating banking, wealth management and insurance businesses across Alabama, Florida, Mississippi, Tennessee and Texas. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $193.5 | $165.9 | $382.4 | $319.4 |
| Net interest income | $139.9 | $112.7 | $277.5 | $212.0 |
| Provision for credit losses, total | $8.5 | $1.1 | $9.5 | Benefit of $0.8 |
| Noninterest income | $53.6 | $53.3 | $104.9 | $107.4 |
| Noninterest expense | $132.2 | $123.8 | $260.5 | $245.3 |
| Net income | $45.0 | $34.3 | $95.3 | $63.5 |
| Diluted EPS | $0.74 | $0.56 | $1.56 | $1.03 |
| Net interest margin, fully taxable equivalent | 3.33% | 2.90% | 3.36% | 2.74% |
Q2 revenue rose 16.6% and net income rose 31.4% year over year; first-half revenue and net income increased 19.7% and 50.1%, respectively. Higher loan yields and rates on Federal Reserve balances supported interest income, while sharply higher deposit and borrowing costs offset part of the benefit. Q2 net interest income increased 24.2%; interest expense rose to $78.6 million from $4.5 million. First-half noninterest income fell 2.3%, chiefly due to weaker mortgage banking and bank card fees. Expenses increased 6.8% in Q2 and 6.2% for the first half, including higher compensation, service costs and FDIC assessments.
Q2 return on average assets was 0.96%, return on average equity 11.43%, and return on average tangible equity 15.18%. The quarterly dividend was $0.23 per share. Management declared the same quarterly dividend for payment September 15, 2023.
Financial position, liquidity and capital
- At June 30, 2023, assets were $18.423 billion, up $407.1 million from December 31, 2022. LHFI was $12.614 billion, up $409.9 million, or 3.4%; total deposits were $14.914 billion, up $476.3 million, or 3.3%.
- Cash and due from banks was $832.1 million. First-half operating cash flow was $26.3 million, versus $150.7 million a year earlier; investing cash use was $262.2 million, compared with $1.143 billion, and financing provided $333.2 million, versus $532.2 million used. Cash increased $97.3 million during the period.
- Noninterest-bearing deposits declined $632.7 million, or 15.5%, from year-end; interest-bearing deposits increased $1.109 billion, or 10.7%. The increase included $598.3 million in brokered CDs. Uninsured deposits were $5.379 billion, 36.1% of deposits, versus $5.831 billion, 40.4%, at year-end.
- Federal funds purchased and repurchase agreements totaled $311.2 million; other borrowings were $1.057 billion, primarily short-term FHLB advances. Subordinated notes were $123.4 million and junior subordinated debt securities were $61.9 million. The filing reports no material change in contractual obligations since year-end.
- Management described liquidity and capital as adequate. Available capacity included $3.158 billion of additional FHLB of Dallas advances or letters of credit, approximately $1.405 billion of Federal Reserve Discount Window collateral capacity and $1.000 billion in unencumbered Treasury and agency securities. Trustmark had not used the Bank Term Funding Program as of June 30.
- Trustmark and its bank subsidiary met regulatory well-capitalized standards. Trustmark’s CET1 ratio was 9.87%, total risk-based capital ratio 12.08%, and Tier 1 leverage ratio 8.35%. The board’s $50 million 2023 repurchase authorization remained unused through June 30.
Credit, securities and other material developments
- Nonaccrual LHFI increased to $75.0 million from $66.0 million at year-end, primarily due to additions in Mississippi. Nonperforming assets were $76.2 million, or 0.60% of loans and other real estate, versus $68.0 million, or 0.55%, at year-end. Loans past due 90 days or more and still accruing were $3.9 million.
- The LHFI allowance for credit losses was $129.3 million, or 1.03% of LHFI, compared with $120.2 million, or 0.99%, at year-end. First-half net charge-offs were $2.4 million, versus net recoveries of $1.8 million in first-half 2022. Management attributed reserve increases mainly to loan growth, weaker macroeconomic forecasts, qualitative reserve factors and slower mortgage prepayments.
- Securities totaled $3.331 billion, down $188.0 million from year-end. Available-for-sale securities had $235.7 million of net unrealized losses; held-to-maturity securities had a $92.3 million gap between amortized cost and fair value. Management attributed losses primarily to higher market rates, stated it did not intend to sell and believed it was more likely than not that it would not be required to sell before recovery. No securities credit-loss allowance was recorded.
- In 2022, Trustmark transferred approximately $766 million of securities from available-for-sale to held-to-maturity. The related remaining unrealized loss in accumulated other comprehensive income was $63.4 million net of tax at June 30, 2023. Accumulated other comprehensive loss overall was $265.7 million.
- The 2023 cash-flow hedge portfolio had $975 million notional value. Trustmark estimated $17.7 million would be reclassified from accumulated other comprehensive income as a reduction to loan interest income over the next 12 months; the amount may change with rates or hedge activity.
- Mortgage production weakened: first-half production fell 35.4% year over year to $792.4 million, and mortgage banking income declined 21.0% to $14.2 million. Loans serviced for others were $8.260 billion.
Outlook, risks and contingencies
Management cited competitive deposit pricing, rising funding costs, recent bank failures and uncertainty about future interest rates and regulatory responses. It also noted subdued or softening lending activity in some markets and expected slow economic growth in the near term. Trustmark’s modeled one-year net interest income sensitivity was +3.1% under a 200-basis-point rate increase and -3.6% under a 200-basis-point decrease; management cautioned that actual results may differ and the estimates exclude potential strategic balance-sheet changes. No specific earnings or revenue guidance was provided.
The FDIC proposed a special assessment to replenish its Deposit Insurance Fund after recent bank failures; Trustmark said the proposed assessment was not expected to be material. The company was evaluating new small-business lending data and third-party risk requirements. The filing also identifies economic, credit, real-estate, interest-rate, deposit outflow, competition, cyber, litigation and regulatory risks.
Stanford litigation: Trustmark previously recognized a $100 million settlement expense in Q4 2022, plus $750,000 in related legal fees. Court approval and bar orders were entered in May 2023. The Fifth Circuit dismissed an appeal as frivolous on July 25; a further rehearing filing by Robert Allen Stanford was pending when the 10-Q was signed August 7. Payment is conditional on the settlement becoming final and non-appealable and related dismissals becoming final. Trustmark denies liability. Management said losses on other pending litigation were not probable and could not be reasonably estimated.
Investor verification priorities
- Track deposit mix, uninsured deposits, brokered CD reliance and deposit pricing as funding costs remain competitive.
- Review loan delinquencies, nonaccruals, charge-offs, criticized/classified credit trends and allowance adequacy, particularly in Mississippi and commercial real estate exposures.
- Assess securities valuation losses, tangible capital effects and potential liquidity needs under stressed deposit outflows.
- Monitor net interest margin sustainability as asset yields and deposit and wholesale funding costs reprice; compare actual results with the disclosed rate-sensitivity scenarios.
- Confirm the Stanford settlement’s final appeal status, effective date, payment timing and any implications for capital.