Trustmark Corporation (NASDAQ: TRMK) — Q3 2023 Form 10-Q
Business context and reporting period
Trustmark is a Mississippi-based bank holding company operating through General Banking, Wealth Management and Insurance segments, primarily across Alabama, Florida, Mississippi, Tennessee and Texas. This filing covers the quarter and nine months ended September 30, 2023; financial statement amounts are unaudited. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $190.9 million | $188.7 million | $573.3 million | $508.1 million |
| Net interest income | $138.6 million | $136.1 million | $416.1 million | $348.1 million |
| Net income | $34.0 million | $42.5 million | $129.4 million | $106.0 million |
| Diluted EPS | $0.56 | $0.69 | $2.11 | $1.72 |
| Net interest margin, fully taxable equivalent | 3.29% | 3.50% | 3.34% | 3.00% |
| Noninterest expense | $140.9 million | $126.7 million | $401.5 million | $372.0 million |
- Q3 return on average assets was 0.72% (0.98% prior year); nine-month return was 0.93% (0.81%). Nine-month return on average tangible equity was 14.77%, versus 11.39%.
- Cash from operating activities for the first nine months was $132.7 million, compared with $228.5 million in 2022. Cash and cash equivalents at September 30 were $750.5 million, versus $734.8 million at December 31, 2022.
- At September 30, total assets were $18.391 billion; LHFI was $12.810 billion, up 5.0% from year-end; deposits were $15.102 billion, up 4.6%. Shareholders’ equity was $1.570 billion.
- Noninterest-bearing deposits declined $773.6 million (18.9%) from year-end, while interest-bearing deposits rose $1.438 billion (13.9%). Brokered CDs reached $727.3 million. Uninsured deposits were $5.390 billion, or 35.7% of deposits, compared with 40.4% at year-end.
- Federal funds purchased and repurchase-agreement balances were $321.8 million; other borrowings were $793.2 million. Subordinated notes were $123.4 million and junior subordinated debt securities were $61.9 million.
- Trustmark and its bank subsidiary met applicable well-capitalized standards. Trustmark’s CET1 ratio was 9.89%, total risk-based capital ratio 12.11%, and Tier 1 leverage ratio 8.49%. The quarterly dividend was $0.23 per share.
Material changes versus comparable periods
- Q3 total revenue increased 1.1% year over year, but net income fell 19.8%. The 21-basis-point reduction in Q3 net interest margin reflected rising deposit and other funding costs, partly offset by higher loan yields.
- For the first nine months, revenue rose 12.8% and net income rose 22.1%. Higher loan yields and loan growth lifted interest income, while total interest expense increased sharply as deposit and borrowing costs reset higher.
- Q3 noninterest expense rose 11.2%; excluding a $6.5 million litigation settlement charge, it rose 6.1%. Noninterest income was down 0.7% in Q3 and 1.8% year to date, including lower mortgage banking and bank-card/other fees, partly offset by higher insurance commissions.
- Nonperforming assets increased to $96.4 million from $68.0 million at year-end; nonaccrual loans rose to $90.9 million from $66.0 million. Management attributed the increase chiefly to two large commercial credits placed on nonaccrual.
- The allowance for credit losses on LHFI increased to $134.0 million from $120.2 million; its ratio to loans rose to 1.05% from 0.99%. Management cited loan growth, weaker macroeconomic forecasts, credit downgrades and portfolio mix.
- Available-for-sale securities had $262.7 million of net unrealized losses at September 30, versus $246.6 million at year-end. Held-to-maturity securities had a carrying amount of $1.438 billion and disclosed fair value of $1.313 billion. Accumulated other comprehensive loss was $287.9 million.
Outlook, management commentary, risks and unusual items
- Management described loan and deposit growth, stable net interest income and continued credit-quality strength amid a challenging banking environment and competitive deposit pricing. It provided no specific quantitative earnings or margin guidance.
- Management highlighted uncertainty around interest rates, deposit competition and withdrawals, recent bank failures and banking-system volatility, economic conditions, real estate markets, credit performance and regulatory changes. Its rate-sensitivity model estimated that a 200-basis-point increase would raise one-year net interest income 2.0%, while a 200-basis-point decrease would reduce it 2.8%; management cautioned actual outcomes may differ.
- Trustmark recorded a $6.5 million Q3 litigation settlement expense for the Adams/Madison Timber matter. A settlement requiring court approval would entail a one-time $6.5 million payment; final, non-appealable approval and related conditions remained pending. Management expects the settlement to be tax deductible.
- The Stanford litigation settlement provides for a one-time $100 million payment, previously expensed in Q4 2022, subject to final effectiveness and payment conditions. The filing describes unresolved motions and remaining procedural steps; the related matters were stayed pending resolution.
- The company said liquidity and capital were sufficient for presently known needs. It reported $3.595 billion of additional FHLB Dallas collateral capacity and $1.384 billion of Federal Reserve Discount Window collateral capacity; it had not accessed the Bank Term Funding Program.
- The $50 million share-repurchase authorization through December 31, 2023 remained unused at September 30. Management noted the revised Community Reinvestment Act rule and small-business lending data requirements were under evaluation; implementation of the latter was enjoined for banks nationwide as of October 26, 2023.
Important facts for investors to verify
- Whether deposit repricing, brokered funding use and competition continue to pressure net interest margin and earnings.
- Developments in the two large nonaccrual commercial credits, delinquency trends, charge-offs and adequacy of the loan-loss allowance.
- The scale and duration of unrealized securities losses and their potential effects on liquidity, capital and funding choices.
- Final court approval, appeal status, payment timing and tax treatment of the Adams/Madison Timber and Stanford settlements.
- Progress toward regulatory compliance deadlines and any resulting costs, and whether the unused repurchase authorization is exercised.