TRUSTMARK CORP quarterly report, Q1 FY2024

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Trustmark Corporation (TRMK) — Q1 2024 Form 10-Q

Business context and period: Trustmark is a bank holding company headquartered in Jackson, Mississippi, with banking and financial services operations across Alabama, Florida, Mississippi, Tennessee and Texas. This filing covers the three months ended March 31, 2024; balance-sheet comparisons are primarily with December 31, 2023. Unless stated otherwise, dollar amounts below are in millions.

Financial performance and position

  • Earnings and revenue: Net income was $41.5 million, or $0.68 per diluted share, versus $50.3 million, or $0.82, in Q1 2023. Total revenue (net interest income plus noninterest income) was $188.2 million, down 0.4% year over year.
  • Net interest income and margin: Net interest income declined 3.5% to $132.8 million. Fully taxable-equivalent net interest margin was 3.21%, down 18 basis points year over year. Higher loan yields and interest income were more than offset by higher deposit costs.
  • Noninterest income and expense: Noninterest income rose 7.7% to $55.3 million, led by mortgage banking, insurance commissions and other income. Noninterest expense increased 2.2% to $131.1 million, including higher salaries and FDIC assessment expense.
  • Returns and credit costs: Return on average assets was 0.89%, versus 1.10% a year earlier; return on average tangible equity was 12.98%, versus 18.03%. Loan credit-loss provision was $7.7 million, compared with $3.2 million; net charge-offs were $4.1 million, compared with $1.2 million.
  • Loans and credit quality: Loans held for investment totaled $13.06 billion, up 0.8% from year-end. Nonperforming assets were $106.0 million, or 0.80% of loans, loans held for sale and other real estate, slightly below year-end’s $106.9 million and 0.81%. Nonaccrual loans were $98.4 million. The allowance for loan losses was $143.0 million, or 1.10% of loans, versus $139.4 million, or 1.08%, at year-end.
  • Deposits, debt and liquidity: Deposits declined 1.5% from year-end to $15.34 billion, including a 4.9% decrease in noninterest-bearing deposits; uninsured deposits were $5.53 billion, or 36.1% of total deposits. Federal funds purchased and repurchase agreements were $393.2 million; other borrowings were $482.0 million; subordinated notes were $123.5 million. Cash and due from banks fell to $606.3 million from $975.5 million. The company reported $58.5 million of negative operating cash flow for the quarter, versus $2.6 million positive in Q1 2023.
  • Capital: Shareholders’ equity was $1.68 billion. Trustmark’s regulatory CET1 ratio was 10.12%, total risk-based capital ratio 12.42%, and Tier 1 leverage ratio 8.76%; the company and bank were described as well-capitalized. The quarterly dividend was $0.23 per share.

Changes versus comparable periods

  • Interest income grew 15.6% year over year, but interest expense rose 58.2%, principally due to higher deposit rates and balances. Average loan balances increased, while average securities declined.
  • Net income, EPS, net interest income, net interest margin and returns were lower than in Q1 2023. Noninterest income increased, but did not offset lower net interest income and higher credit provision and expenses.
  • Loans grew modestly from December 2023, while deposits declined. Loan-loss allowance and net charge-offs increased from year-earlier levels.
  • Accumulated other comprehensive loss widened to $227.2 million from $219.7 million at year-end. Available-for-sale securities had $198.7 million of gross unrealized losses; management attributed securities impairments primarily to market-rate changes, not credit quality, and reported no credit-loss allowance on those securities.

Outlook, commentary, risks and unusual items

  • Management commentary: Management cited continued loan growth, solid credit quality and capital, and higher noninterest income. It said it maintains excess funding capacity and believes liquidity and capital resources are sufficient for known cash-flow needs. The filing provides no specific earnings or net-interest-margin guidance.
  • Interest-rate exposure: In the company’s one-year simulation, a 200-basis-point rate increase was estimated to raise net interest income 1.4%; a 200-basis-point decrease was estimated to reduce it 2.3%. These are model estimates, not forecasts. Management noted that actual results depend on rates, deposit competition, customer behavior and balance-sheet changes.
  • Sale of insurance subsidiary: On April 23, 2024, the bank agreed to sell Fisher Brown Bottrell Insurance to Marsh & McLennan Agency for $345 million cash. Estimated after-tax proceeds are $228 million, which management expects to use to reposition the balance sheet, improve earnings and profitability, and enhance capital. Closing, expected by the end of Q2 2024, remained subject to customary conditions and regulatory approval. The sale would end the Insurance Segment.
  • Other subsequent item: Trustmark tendered 38,700 Visa Class B-1 shares in an exchange offer; acceptance was pending. If accepted, the Visa Class C shares received are expected to generate a realized gain that may be recorded in Q2 2024.
  • Key risks and contingencies: The filing highlights uncertainty around interest rates, deposit pricing and retention, economic conditions and real estate markets, borrower performance, bank-industry and regulatory developments, and cybersecurity. Trustmark reported pending ordinary-course litigation but said a loss was not considered probable and reasonably estimable; it did not expect current proceedings to have a material adverse effect. No material change to previously disclosed risk factors was reported.
  • Other items: The $50 million 2024 share-repurchase authorization remained unused through March 31. Management updated certain credit-loss model drivers in Q1 and implemented a performance-trends factor for unfunded commitments. Trustmark expects $15.5 million of cash-flow hedge losses to be reclassified as a reduction to loan interest income over the next 12 months.

Important facts for investors to verify

  1. Whether the FBBI sale closes as expected, the final after-tax proceeds, and how proceeds are deployed and affect post-sale earnings and capital.
  2. Whether deposit outflows and migration to higher-yielding products continue, and the resulting deposit costs and net interest margin.
  3. Whether loan delinquencies, nonaccruals, charge-offs and commercial real estate exposures worsen, and how reserve assumptions and the allowance evolve.
  4. Actual liquidity and funding capacity under stress, given the quarter’s cash decline and negative operating cash flow.
  5. Whether Visa accepts the tender and the amount and timing of any resulting gain.
  6. How market-rate changes affect securities values, accumulated other comprehensive loss, mortgage servicing rights and the company’s modeled interest-rate sensitivity.