Trustmark Corporation (NASDAQ: TRMK) — Q1 2023 Form 10-Q
Business context and reporting 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 three months ended March 31, 2023; income and cash flow comparisons are against Q1 2022, and balance-sheet comparisons are generally against December 31, 2022.
Key financial results
| Metric | Q1 2023 / March 31, 2023 | Comparable period / change |
|---|---|---|
| Net income; diluted EPS | $50.3 million; $0.82 | $29.2 million; $0.47 in Q1 2022 |
| Total revenue (net interest income plus noninterest income) | $189.0 million | Up 23.1% from $153.5 million |
| Net interest income | $137.6 million | Up 38.5% from $99.3 million |
| Net interest margin, fully taxable equivalent | 3.39% | 2.58% in Q1 2022 |
| Noninterest income / expense | $51.4 million / $128.3 million | Income down 5.1%; expense up 5.6% year over year |
| Provision for credit losses | $3.2 million on LHFI; negative $2.2 million on off-balance-sheet exposures | LHFI provision was negative $0.9 million in Q1 2022 |
| Operating cash flow | $2.6 million | $61.9 million in Q1 2022 |
Interest income rose sharply with loan growth and higher rates, while interest expense also increased substantially as deposit pricing and wholesale funding costs rose. Mortgage banking income declined 22.6% to $7.6 million, mainly due to lower loan-sale gains and hedge results. Salary and employee-benefit expense rose 6.4%.
Financial condition, liquidity and credit
- Total assets were $18.88 billion. Loans held for investment (LHFI) were $12.50 billion, up $293.2 million, or 2.4%, from year-end; total loans including held-for-sale were $12.67 billion.
- Deposits were $14.78 billion, up $346.0 million. Noninterest-bearing deposits fell $296.7 million, while interest-bearing deposits rose $642.7 million, including $150.0 million in brokered CDs. Uninsured deposits were $5.67 billion, or 38.4% of deposits, versus 40.4% at year-end.
- Federal funds purchased and repurchase agreements totaled $478.0 million; other borrowings were $1.49 billion, up $434.2 million, principally due to short-term FHLB advances. The company reported $1.30 billion in cash and due from banks, including $1.025 billion held at the Federal Reserve Bank of Atlanta.
- Management reported $2.80 billion of additional FHLB Dallas borrowing capacity against qualifying collateral, $877 million in available unencumbered Treasury and agency securities, and $1.43 billion in Federal Reserve Discount Window collateral capacity. Trustmark had not accessed the Bank Term Funding Program as of March 31.
- Nonperforming assets were $74.1 million, up 9.0% from year-end; nonaccrual LHFI was $72.4 million, with the increase mainly in Mississippi. The LHFI allowance for credit losses was $122.2 million, or 0.98% of LHFI; net charge-offs were $1.2 million.
- Available-for-sale securities had $216.1 million of gross unrealized losses at quarter-end; held-to-maturity securities had a fair value $67.9 million below amortized cost. Management attributed unrealized losses to market rates, reported no securities credit-loss allowance, and stated it did not intend, and was not more likely than not required, to sell the impaired securities before recovery.
- Shareholders’ equity was $1.56 billion. Trustmark’s regulatory ratios included a 9.76% common equity Tier 1 ratio, 10.17% Tier 1 risk-based ratio, 11.95% total risk-based ratio and 8.29% Tier 1 leverage ratio. Trustmark and its bank subsidiary met applicable well-capitalized standards.
- Cash and cash equivalents increased $562.4 million to $1.297 billion. Financing cash flow was $809.1 million, reflecting deposit growth and $450.0 million in net short-term borrowings; investing cash use was $249.3 million.
Material changes, outlook and risks
Management described loan and deposit growth as solid and credit quality as strong, while noting a challenging banking environment and increasingly competitive deposit costs. Customers shifted toward higher-yielding accounts: noninterest-bearing deposits declined while interest-bearing balances grew. Management cited recent bank failures and industry volatility as reasons for heightened attention to liquidity, uninsured deposits, securities losses and capital.
No specific earnings or growth guidance is provided in the supplied filing text. Management said it maintains excess funding capacity and believes available liquidity and capital are adequate for known requirements. Its interest-rate simulation estimated that a one-year parallel increase of 200 basis points would raise net interest income by 3.5%, while a 200-basis-point decrease would lower it by 4.8%; the filing cautions these are model estimates, not assurances.
Risks include deposit competition and withdrawals, rising funding costs, interest-rate and securities valuation changes, economic and real-estate weakness, credit deterioration, regulatory changes following bank failures, and litigation. The FDIC had indicated it planned a special deposit-insurance assessment; the amount and timing were not known. A new small-business lending data collection rule was finalized, and Trustmark was evaluating its impact.
Unusual legal item: Trustmark recognized a $100 million Stanford-related litigation settlement expense in Q4 2022, not Q1 2023. The court approved the settlement from the bench on May 3, 2023 and issued written orders May 4, after quarter-end. The $100 million payment remains subject to the settlement becoming effective and the absence of relevant appeals. Trustmark denied liability or wrongdoing.
Important facts for investors to verify
- Whether deposit mix, uninsured balances and funding costs continue to develop as expected, and the extent of reliance on brokered CDs, upstream federal funds and short-term FHLB advances.
- How the substantial unrealized securities losses affect tangible equity and liquidity under stress, notwithstanding regulatory AOCI treatment and management’s stated ability to hold securities.
- Whether nonaccrual loans and nonperforming assets continue rising, particularly in Mississippi, and whether the allowance remains sufficient as economic conditions and loan growth evolve.
- The final effectiveness, payment timing and any appeal-related developments concerning the $100 million Stanford settlement approved after quarter-end.
- The impact and timing of any FDIC special assessment or other regulatory changes prompted by recent bank failures.