Trustmark Corporation (TRMK) — 2022 Form 10-K
Business context and reporting period. Trustmark is a Mississippi-based bank holding company with banking, mortgage, insurance and wealth-management operations across Alabama, Florida, Mississippi, Tennessee and Texas. Its fiscal year ended December 31, 2022; figures below are for the year unless identified as fourth-quarter results. The filing was dated February 16, 2023.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $699.9 million | $640.3 million |
| Net interest income | $494.7 million | $418.4 million |
| Net interest margin, fully taxable equivalent | 3.17% | 2.76% |
| Net income | $71.9 million | $147.4 million |
| Diluted earnings per share | $1.17 | $2.34 |
| Operating cash flow | $296.5 million | $348.8 million |
- Fourth-quarter 2022 revenue was $191.8 million, up 28.6% year over year. Net income was a loss of $34.1 million, or a loss of $0.56 per diluted share, compared with net income of $26.2 million in fourth-quarter 2021. The Stanford litigation charge drove the reported quarterly loss.
- Annual noninterest income declined 7.6% to $205.1 million, mainly as mortgage banking income fell 55.6% to $28.3 million. Noninterest expense rose 23.3% to $603.2 million, including $100.75 million of Stanford-related settlement and legal costs.
- Loans held for investment grew 19.1% to $12.204 billion. Total assets rose 2.4% to $18.015 billion, while deposits fell 4.3% to $14.438 billion, including a 14.2% decline in noninterest-bearing deposits.
- Funding shifted toward wholesale sources: federal funds purchased and repurchase agreements were $449.3 million at year-end, and other borrowings were $1.051 billion, principally short-term FHLB advances. Subordinated notes were $123.3 million and junior subordinated debt was $61.9 million.
- Year-end cash and due from banks was $734.8 million, down from $2.267 billion. Net cash used in investing activities was $2.280 billion, principally reflecting loan growth and securities activity; financing activities provided $451.8 million.
- Credit indicators remained relatively low but the allowance increased: nonperforming assets were $68.0 million, or 0.55% of loans and other real estate, versus 0.64% a year earlier. The allowance for loan losses was $120.2 million, 0.99% of loans, compared with $99.5 million, or 0.97%. Net charge-offs were 0.01% of average loans.
- Shareholders’ equity fell 14.3% to $1.492 billion. Accumulated other comprehensive loss was $275.4 million, largely reflecting securities valuation losses. Common equity Tier 1 capital was 9.74% at Trustmark and 10.34% at its bank subsidiary; the bank was reported well-capitalized.
- Trustmark paid $0.92 per share in annual dividends. It repurchased $24.6 million of stock in 2022 and authorized a new $50 million repurchase program for 2023.
Material changes versus the prior period
- Net interest income increased 18.3% as loan balances and yields rose; the FTE net interest margin expanded 41 basis points. Higher rates also increased funding costs and competitive pressure for deposits.
- Mortgage banking revenue continued to normalize: loan production declined 24.2% to $2.125 billion and loan sales fell 45.6% to $1.243 billion.
- Annual reported net income fell 51.2%, primarily because of the $100.75 million Stanford charge. Trustmark’s non-GAAP adjusted net income, which excludes specified unusual items, was $147.5 million, or $2.40 diluted EPS; this is not a GAAP measure.
- Loan growth was funded alongside declining deposits by increased FHLB advances and upstream federal funds purchases. Capital ratios also declined, while securities-related accumulated other comprehensive loss increased.
Outlook, commentary, risks and unusual items
- Management cited strong historical loan growth, a wider margin, fee-business performance and solid credit quality. It emphasized long-term profitable growth, investment, changing delivery channels and efficiency; the filing provides no specific earnings or revenue guidance.
- Management’s static-balance sensitivity analysis estimated that a 200-basis-point rate increase could raise one-year net interest income by 3.3%, while a 100-basis-point decrease could reduce it by 1.8%. These are model estimates, not forecasts, and exclude possible balance-sheet and management responses.
- The $100 million Stanford settlement, plus $750,000 in legal fees, was recorded in fourth-quarter 2022 even though the settlement agreement was entered into in January 2023. Payment and broad releases were subject to final court approval; a final approval hearing was scheduled for May 3, 2023. Trustmark denied liability or wrongdoing.
- Other disclosed risks include deposit outflows and funding costs, interest-rate and securities valuation exposure, recession and inflation, commercial real estate and construction credit, litigation, cybersecurity and third-party providers, regulation, and severe weather in Gulf Coast markets. The filing reported $335.0 million in gross unrealized securities losses without a recorded credit-loss allowance; management attributed the losses to higher market rates rather than credit quality and said it did not intend or expect to need to sell the securities before recovery.
- The company said it had sufficient liquidity and capital for presently known needs. Available borrowing capacity included $3.034 billion from the FHLB of Dallas and approximately $1.345 billion at the Federal Reserve discount window, subject to collateral and access conditions.
- The independent auditor issued unmodified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses and its economic forecasts were identified as a critical audit matter.
Investor verification priorities
- Confirm final court approval, payment and scope of releases for the Stanford settlement, and check for developments in the other disclosed litigation.
- Track deposit trends, deposit pricing, wholesale borrowing levels and available collateral as loan growth and interest rates evolve.
- Review securities portfolio duration, unrealized losses, the effects of transfers from available-for-sale to held-to-maturity, and any resulting effects on equity and capital.
- Monitor credit quality and allowance adequacy, particularly in construction, commercial real estate and other rapidly growing loan categories.
- Compare realized net interest margin, funding costs, mortgage banking results and capital ratios with management’s stated strategy and modeled rate sensitivity.