The following provides a narrative discussion and analysis of Trustmark
Corporation's (Trustmark) financial condition and results of operations. This
discussion should be read in conjunction with the unaudited consolidated
financial statements and the supplemental financial data included in Part I.
Item 1. - Financial Statements of this report.
Description of Business
Trustmark, a Mississippi business corporation incorporated in 1968, is a bank
holding company headquartered in Jackson, Mississippi. Trustmark's principal
subsidiary is Trustmark National Bank (TNB), initially chartered by the State of
Mississippi in 1889. At March 31, 2023, TNB had total assets of $18.875 billion,
which represented approximately 99.99% of the consolidated assets of Trustmark.
Through TNB and its other subsidiaries, Trustmark operates as a financial
services organization providing banking and other financial solutions through
offices and 2,758 full-time equivalent associates (measured at March 31, 2023)
located in the states of Alabama (includes the Georgia Loan Production Office
(LPO), which are collectively referred to herein as Trustmark's Alabama market
region), Florida (primarily in the northwest or "Panhandle" region of that
state, which is referred to herein as Trustmark's Florida market), Mississippi,
Tennessee (in the Memphis and Northern Mississippi regions, which are
collectively referred to herein as Trustmark's Tennessee market), and Texas
(primarily in Houston, which is referred to herein as Trustmark's Texas market).
Trustmark's operations are managed along three operating segments: General
Banking Segment, Wealth Management Segment and Insurance Segment. For a complete
overview of Trustmark's business, see the section captioned "The Corporation"
included in Part I. Item 1. - Business of Trustmark's Annual Report on Form 10-K
for its fiscal year ended December 31, 2022 (2022 Annual Report).
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Executive Overview
Trustmark's financial results for the three months ended March 31, 2023
reflected solid growth in loans held for investment (LHFI) and deposits of
$293.2 million, or 2.4%, and $346.0 million, or 2.4%, respectively, and credit
quality remained strong. Trustmark's strong financial performance during the
first quarter of 2023 was impacted by the challenging financial services
environment and increasingly competitive deposit costs; however, Trustmark
remains well-positioned and committed to meeting the banking and financial needs
of its customers and the communities it serves, and remains focused on providing
support, advice and solutions to meet its customers' unique needs.
Trustmark is committed to managing the franchise for the long term, supporting
investments to promote profitable revenue growth, realigning delivery channels
to support changing customer preferences as well as reengineering and efficiency
opportunities to enhance long-term shareholder value. Trustmark's capital
position remained solid, reflecting the consistent profitability of its
diversified financial services businesses. Trustmark's Board of Directors
declared a quarterly cash dividend of $0.23 per share. The dividend is payable
June 15, 2023, to shareholders of record on June 1, 2023.
Recent Economic and Industry Developments
Economic activity improved slightly during the first three months of 2023;
however, economic concerns remain as a result of the cumulative weight of
uncertainty regarding the potential economic impact of geopolitical
developments, such as Russia's invasion of Ukraine, inflation, uncertainty
regarding the federal government's debt limit or a prolonged shutdown of the
federal government, the consequences of recent bank failures and other economic
and industry volatility, supply chain issues, higher energy prices and broader
price pressures. Doubts surrounding the near-term direction of global markets
and the potential impact on the United States economy are expected to persist
for the near term. While Trustmark's customer base is wholly domestic,
international economic conditions affect domestic economic conditions, and thus
may have an impact upon Trustmark's financial condition or results of
operations.
Market interest rates began to rise during 2022 after an extended period at
historical lows and have continued to rise in early 2023. Starting in March
2022, the FRB began raising the target federal funds rate for the first time in
three years and continued with multiple increases throughout 2022 and the first
three months of 2023, up to a range of 4.75% to 5.00% as of March 2023. The FRB
also signaled the possibility of additional rate increases throughout 2023. In
addition, the FRB increased the interest that it pays on reserves multiple times
during 2022 and the first three months of 2023 from 0.10% to 4.90% as of March
2023. As interest rates have increased, so have competitive pressures on the
deposit cost of funds. This has been exacerbated by recent bank failures and the
resulting heightened competition for deposits, which has also affected the
interest that Trustmark pays on deposits. It is not possible to predict the pace
and magnitude of changes in interest rates, or the impact rate changes will have
on Trustmark's results of operations.
In the April 2023 "Summary of Commentary on Current Economic Conditions by
Federal Reserve District," the twelve Federal Reserve Districts' reports
suggested that economic activity during the reporting period (covering the
period from February 28, 2023 through April 10, 2023) increased slightly;
however, conditions varied across industries and Federal Reserve Districts
(Districts). Reports by the twelve Districts noted the following during the
reporting period:
•
Consumer spending was generally seen as flat to down slightly amid continued
reports of moderate price growth. Auto sales remained steady overall, with a
couple Districts reporting improved sales and inventory levels. Travel and
tourism increased across much of the country. Manufacturing activity was widely
reported as flat or down even as supply chains continued to improve.
Transportation and freight volumes were also flat to down.
•
On balance, residential real estate sales and new construction activity softened
modestly. Nonresidential construction was little changed while sales and leasing
activity was generally flat to down.
•
Lending volumes and loan demand generally declined across consumer and business
loan types. Several Districts noted that banks tightened lending standards amid
increased uncertainty and concerns about liquidity.
•
The majority of Districts reported steady to increasing demand and sales for
nonfinancial services. Agriculture conditions were mostly unchanged, while some
softening was reported in energy markets.
•
Employment growth moderated somewhat during the reporting period as several
Districts reported a slower pace of growth. A small number of firms (centered at
a subset of the largest companies) reported mass layoffs, while other firms
opted to allow for natural attrition to occur and to hire only for critically
important roles. Contacts reported the labor market becoming less tight as
several Districts noted increases to the labor supply. Firms benefited from
better employee retention, which allowed them to hire for open roles while not
constantly trying to back-fill positions. Wages showed some moderation but
remained elevated. Several Districts reported declining needs for off-cycle wage
increases compared to the prior year.
•
Overall price levels rose moderately, though the rate of price increase appeared
to be slowing. Contacts noted modest-to-sharp declines in the prices of nonlabor
inputs and significantly lower freight costs. Producer prices for finished goods
rose modestly,
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albeit at a slightly slower pace. Selling price pressures eased broadly in
manufacturing and services sectors. Consumer prices generally increased due to
still-elevated demand as well as higher inventory and labor costs. Prices for
homes and rents leveled out in most Districts but remained at near record highs.
Contacts expected further relief from input cost pressures but anticipated
changing their prices more frequently compared to previous years.
Reports by the Federal Reserve's Sixth District, Atlanta (which includes
Trustmark's Alabama, Florida and Mississippi market regions), Eighth District,
St. Louis (which includes Trustmark's Tennessee market region), and Eleventh
District, Dallas (which includes Trustmark's Texas market region), noted similar
findings for the reporting period as those discussed above. The Federal
Reserve's Sixth District also noted that liquidity pressures persisted for some
financial institutions, but despite concerns about liquidity, banks indicated
loan growth remained solid over the reporting period. Banking contacts in the
Sixth District reported that a limited number of customers expressed concerns
about recent bank failures and their level of uninsured deposits held at a
single institution; however, banks have not experienced a large outflow of
deposits. The Federal Reserve's Sixth District also noted that unrealized losses
remained elevated, limiting the ability to sell securities for liquidity without
negatively impacting capital. The Federal Reserve's Eighth District also
reported that banking conditions remain stable, loan growth declined slightly in
the commercial, industrial and consumer lending sectors but increased in the
real estate sector, and total deposits fell. The Federal Reserve's Eighth
District also noted that contacts expect net interest margins to begin
contracting if they have not already, as deposit costs are still increasing.
Memphis banking contacts in the Eighth District reported a renewed focus in the
industry on liquidity in light of recent bank failures, while expressing
confidence in their diverse and strong deposit base. The Federal Reserve's
Eleventh District also reported loan demand continued to decline as bankers
reported worsening business activity, loan volumes fell, driven largely by a
sharp contraction in consumer loans, loan performance worsened slightly overall,
credit standards and terms tightened sharply and increases in loan pricing was
noted. Banking outlooks continued to deteriorate in the Federal Reserve's
Eleventh District, with contacts expecting a contraction in loan demand and
business activity and an increase in nonperforming loans over the next six
months. The Federal Reserve's Eleventh District also noted that increased
uncertainty and lack of confidence resulting from the recent banking issues were
cited as concerns.
The rapid rise in interest rates during 2022 and the first three months of 2023,
the resulting industry-wide reduction in the fair value of securities portfolios
and the recent bank runs that led to the failures of some financial institutions
in March 2023, among other events, have resulted in a current state of
volatility and uncertainty with respect to the health of the United States
banking system. There is heightened awareness around liquidity, uninsured
deposits, deposit composition, unrecognized investment losses and capital. See
further discussion around these items in the remaining sections of the
Management's Discussion and Analysis of this document.
Financial Highlights
Trustmark reported net income of $50.3 million, or basic and diluted earnings
per share (EPS) of $0.82, in the first quarter of 2023, compared to $29.2
million, or basic and diluted EPS of $0.47, in the first quarter of 2022.
Trustmark's reported performance during the quarter ended March 31, 2023
produced a return on average tangible equity of 18.03%, a return on average
assets of 1.10%, an average equity to average assets ratio of 8.24% and a
dividend payout ratio of 28.05%, compared to a return on average tangible equity
of 9.05%, a return on average assets of 0.68%, an average equity to average
assets ratio of 9.79% and a dividend payout ratio of 48.94% during the quarter
ended March 31, 2022.
Total revenue, which is defined as net interest income plus noninterest income,
for the three months ended March 31, 2023 was $189.0 million, an increase of
$35.5 million, or 23.1%, when compared to the same time period in 2022. The
increase in total revenue for the three months ended March 31, 2023, when
compared to the same time period in 2022, primarily resulted from an increase in
net interest income, principally due to increases in interest and fees on loans
held for sale (LHFS) and LHFI, other interest income and interest on securities,
partially offset by an increase in total interest expense.
Net interest income for the three months ended March 31, 2023 totaled $137.6
million, an increase of $38.3 million, or 38.5%, when compared to the same time
period in 2022. Interest income totaled $198.9 million for the three months
ended March 31, 2023, an increase of $95.2 million, or 91.8%, when compared to
the same time period in 2022, principally due to increases in interest and fees
on LHFS and LHFI primarily due to loan growth and rising interest rates, other
interest income primarily due to an increase in the rate paid by the Federal
Reserve Bank of Atlanta (FRBA) on reserves and interest on securities primarily
due to higher-yielding securities purchased throughout 2022. Interest expense
totaled $61.3 million for the three months ended March 31, 2023, an increase of
$56.9 million when compared to the same time period in 2022. The increase in
interest expense when the first quarter of 2023 is compared to the same time
period in 2022 was due to increases in interest on deposits primarily due to
rising interest rates, increased competition for deposits and higher average
balances, other interest expense primarily due to the increase in short-term
Federal Home Loan Bank (FHLB) advances, and interest on federal funds purchased
and securities sold under repurchase agreements primarily due to increases to
the target rate for federal funds purchased by the FRB as well as an increase in
upstream federal funds purchased.
Noninterest income for the three months ended March 31, 2023 totaled $51.4
million, a decrease of $2.7 million, or 5.1%, when compared to the same time
period in 2022, primarily due to a decline in mortgage banking, net. Mortgage
banking, net totaled $7.6
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million for the three months ended March 31, 2023, a decrease of $2.2 million,
or 22.6%, when compared to the same time period in 2022, principally due to
declines in the gain on sales of loans, net and the net hedge ineffectiveness,
partially offset by a decline in the run-off of the mortgage servicing rights
(MSR).
Noninterest expense for the three months ended March 31, 2023 totaled $128.3
million, an increase of $6.8 million, or 5.6%, when compared to the same time
period in 2022. The increase in noninterest expense for the first quarter of
2023 was principally due to increases in salaries and employee benefits and
other expense. Salaries and employee benefits totaled $74.1 million for the
three months ended March 31, 2023, an increase of $4.5 million, or 6.4%, when
compared to the same time period in 2022, principally due to increases in
salaries expense, primarily due to general merit increases as well as employees
added related to the new Georgia LPO and accrued management performance
incentives, partially offset by a decline in commission expense due to the
decline in mortgage originations. Other expense totaled $14.8 million for the
three months ended March 31, 2023, an increase of $1.3 million, or 9.9%, when
compared to the same time period in 2022, principally due to increases in FDIC
assessment expense, stationery and supplies expense, and other miscellaneous
expenses, partially offset by a decline in loan expense.
Trustmark's provision for credit losses (PCL) on LHFI for the three months ended
March 31, 2023 totaled $3.2 million, an increase of $4.1 million when compared
to the same time period in 2022. The PCL on LHFI for the first three months of
2023 primarily reflected an increase in required reserves as a result of loan
growth and the Nature and Volume of Portfolio qualitative factor. The PCL on
off-balance sheet credit exposures totaled a negative $2.2 million for the three
months ended March 31, 2023, a decrease of $1.1 million when compared to the
same time period in 2022. The negative PCL on off-balance sheet credit exposures
for the first three months of 2023 primarily reflected a decline in required
reserves as a result of changes in the total reserve rate used in the
calculation of the ACL on off-balance sheet credit exposures and a decline in
the unfunded commitments balance. Please see the section captioned "Provision
for Credit Losses" for additional information regarding the PCL on LHFI and
off-balance sheet credit exposures.
At March 31, 2023, nonperforming assets totaled $74.1 million, an increase of
$6.1 million, or 9.0%, compared to December 31, 2022, primarily as a result of
an increase in nonaccrual loans. Nonaccrual LHFI totaled $72.4 million at March
31, 2023, an increase of $6.4 million, or 9.7%, relative to December 31, 2022,
primarily due to loans placed on nonaccrual status in the Mississippi market
region.
LHFI totaled $12.497 billion at March 31, 2023, an increase of $293.2 million,
or 2.4%, compared to December 31, 2022. The increase in LHFI during the first
three months of 2023 was primarily due to net growth in LHFI secured by real
estate and commercial and industrial LHFI, partially offset by a decline in
state and other political subdivision LHFI. For additional information regarding
changes in LHFI and comparative balances by loan category, see the section
captioned "LHFI."
Management has continued its practice of maintaining excess funding capacity to
provide Trustmark with adequate liquidity for its ongoing operations. In this
regard, Trustmark benefits from its strong deposit base, its highly liquid
investment portfolio and its access to funding from a variety of external
funding sources such as upstream federal funds lines, FHLB advances and brokered
deposits. See the section captioned "Capital Resources and Liquidity" for
further discussion of the components of Trustmark's excess funding capacity.
Total deposits were $14.784 billion at March 31, 2023, an increase of $346.0
million, or 2.4%, compared to December 31, 2022. During the first three months
of 2023, noninterest-bearing deposits decreased $296.7 million, or 7.2%,
reflecting declines in all categories of noninterest-bearing deposits reflecting
customers' desire for higher-yielding deposit accounts. Interest-bearing
deposits increased $642.7 million, or 6.2%, during the first three months of
2023, primarily due to growth in consumer and business certificates of deposits
(CDs), which was principally attributable to deposit campaigns offered during
the first quarter of 2023, the addition of $150.0 million of brokered CDs and
growth in consumer and business money market deposit accounts (MMDAs), partially
offset by declines in consumer interest checking accounts and all categories of
savings accounts.
Federal funds purchased and securities sold under repurchase agreements totaled
$478.0 million at March 31, 2023, an increase of $28.6 million, or 6.4%,
compared to December 31, 2022, principally due to an increase in upstream
federal funds purchased. Other borrowings totaled $1.485 billion at March 31,
2023, an increase of $434.2 million, or 41.3%, compared to December 31, 2022,
principally due to an increase in short-term FHLB advances obtained from the
FHLB of Dallas. The increases in the upstream federal funds purchased and
short-term FHLB advances as funding sources were principally due to Trustmark's
continued strong loan growth and increased competition for deposits.
Recent Legislative and Regulatory Developments
Potential Regulatory Reforms in Response to Recent Bank Failures
The recent failures of Silicon Valley Bank, Santa Clara, California, Signature
Bank, New York, New York, and First Republic Bank, San Francisco, California, in
March and April of this year, may lead to regulatory changes and initiatives
that could impact Trustmark.
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For example, the FDIC has stated that it plans to impose a special deposit
insurance assessment on banks in order to recover losses that the FDIC's Deposit
Insurance Fund (DIF) incurred in the receiverships of these institutions.
Trustmark cannot predict the amount or timing of any special assessment or
changes to the assessment calculation the FDIC may choose to impose in order to
recover losses incurred by the FDIC's DIF. However, any special assessments or
changes in the assessment calculation imposed by the FDIC could have a material
adverse effect on Trustmark's financial condition and results of operations. In
addition, President Biden has encouraged the federal banking agencies to adopt
various reforms, including the completion of an incentive compensation rule for
bank executives pursuant to Section 956 of the Dodd-Frank Act, in response to
these bank failures. On April 28, 2023, the FRB and the FDIC issued reports on
the potential causes of failures of Silicon Valley Bank and Signature Bank,
respectively. Among the changes discussed, the FRB and the FDIC highlighted
potential changes needed to supervisory approaches for banks of all sizes as
well as to regulatory requirements. Currently, it is unclear what actions
federal regulatory agencies will take as a result of these failures.
Small Business Lending Data Collection Rule
On March 30, 2023, the CFPB finalized a rule under section 1071 of the
Dodd-Frank Act requiring lenders to collect and report data regarding small
business lending activity. Trustmark is evaluating the impact of the new rule.
For additional information regarding legislation and regulation applicable to
Trustmark, see the section captioned "Supervision and Regulation" included in
Part I. Item 1. - Business of Trustmark's 2022 Annual Report.
Selected Financial Data
The following tables present financial data derived from Trustmark's
consolidated financial statements as of and for the periods presented ($ in
thousands, except per share data):
Three Months Ended March 31,
2023 2022
Consolidated Statements of Income
Total interest income $ 198,900 $ 103,713
Total interest expense 61,305 4,369
Net interest income 137,595 99,344
Provision for credit losses (PCL), LHFI 3,244 (860 )
PCL, off-balance sheet credit exposures (2,242 ) (1,106 )
Noninterest income 51,377 54,115
Noninterest expense 128,327 121,519
Income before income taxes 59,643 33,906
Income taxes 9,343 4,695
Net Income $ 50,300 $ 29,211
Total Revenue (1) $ 188,972 $ 153,459
Per Share Data
Basic EPS $ 0.82 $ 0.47
Diluted EPS 0.82 0.47
Cash dividends per share 0.23 0.23
Performance Ratios
Return on average equity 13.39 % 6.91 %
Return on average tangible equity 18.03 % 9.05 %
Return on average assets 1.10 % 0.68 %
Average equity / average assets 8.24 % 9.79 %
Net interest margin (fully taxable equivalent) 3.39 % 2.58 %
Dividend payout ratio 28.05 % 48.94 %
Credit Quality Ratios (2)
Net charge-offs (recoveries) / average loans 0.04 % -0.01 %
PCL, LHFI / average loans 0.10 % -0.03 %
Nonaccrual LHFI / (LHFI + LHFS) 0.57 % 0.61 %
Nonperforming assets / (LHFI + LHFS)
plus other real estate 0.58 % 0.64 %
ACL, LHFI / LHFI 0.98 % 0.95 %
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(1)
Consistent with Trustmark's audited annual financial statements, total revenue
is defined as net interest income plus noninterest income.
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