Trustmark Corporation (NASDAQGS:TRMK) reported a loss of $34.1 million, or $0.56 per diluted share, in the fourth quarter of 2022. As previously disclosed, Trustmark agreed to a settlement that, pending court approval, will resolve all current and potential future claims relating to litigation involving the Stanford Financial Group that began in 2009. In the fourth quarter, Trustmark recognized litigation settlement expense of $100.0 million as well as an additional $750 thousand in legal fees, which are included in noninterest expense. The litigation settlement expense reduced fourth quarter net income by $75.6 million, or $1.24 per diluted share. Excluding this expense, Trustmark’s fourth quarter net income totaled $41.5 million, or $0.68 per diluted share. For the full year, Trustmark’s net income totaled $71.9 million, representing diluted earnings per share of $1.17. Excluding the litigation settlement expense, Trustmark’s net income in 2022 totaled $147.5 million, representing diluted earnings per share of $2.40. Please refer to the Consolidated Financial Information, Note 1 – Litigation Settlement and Note 7 – Non-GAAP Financial Measures. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share payable March 15, 2023, to shareholders of record on March 1, 2023.

2022 Highlights

• Loans held for investment (HFI) increased $2.0 billion, or 19.1%, in 2022
• Nonperforming assets declined to 0.55% of loans HFI and held for sale (HFS)
• Net charge-offs represented 0.01% of average loans in 2022
• Net interest income FTE totaled $507.1 million, up 17.9% in 2022 to produce a net interest margin of 3.17%, up 41 basis points from 2021
• Insurance revenue increased 10.7% in 2022 while wealth management remained stable
• Noninterest income totaled $205.1 million and represented 29.3% of total revenue
• Noninterest expense, excluding litigation settlement expense, totaled $502.5 million, up 2.7% from the prior year
• Expanded market optimization efforts with a net reduction of 11 branch offices during the year
• Continued technology investments to enhance efficiency and productivity

Duane A. Dewey, President and CEO, commented, “We made significant progress across the organization during the year. Loan growth in 2022 was the highest in Trustmark’s history. Credit quality remained strong. Net interest income and the net interest margin were up significantly. Our insurance business posted another record year. We made significant investments in technology, including conversion to a state-of-the-art loan system designed to enhance efficiency and productivity. With all of these positive advancements, our financial results were overshadowed by the litigation settlement. While we expressly deny any liability or wrongdoing with respect to this matter, we believe the settlement is in the best interest of Trustmark and our shareholders as it eliminates risk, ongoing expense and uncertainty. With this matter now behind us, we will focus more intently on the future and the opportunities that are ahead. Trustmark is very well-positioned to serve and expand its customer base and create long-term value for shareholders.”

Balance Sheet Management

Loans HFI increased $618.0 million, or 5.3%, during the quarter

Investment securities decreased $82.9 million, or 2.3%, linked quarter as liquidity from maturing security balances was deployed to fund loan growth

Total deposits increased $12.5 million, or 0.1%, linked quarter

Maintained strong capital position with CET1 ratio of 9.74% and total risk-based capital ratio of 11.91%

Loans HFI totaled $12.2 billion at December 31, 2022, reflecting an increase of $618.0 million, or 5.3%, linked-quarter and $2.0 billion, or 19.1%, year-over-year. The linked-quarter growth was broad-based and reflected increases in virtually every category. Trustmark’s loan portfolio remains well-diversified by loan type and geography.

As previously disclosed in the third quarter of 2022, Trustmark initiated a cash flow hedging program under which interest rate swaps convert floating rate loans to fixed rate. The intent of the program is to manage the natural asset sensitivity of Trustmark’s balance sheet. As of December 31, 2022, notional balances totaled $825.0 million with a weighted average receiving fixed rate of 3.10%.

Deposits totaled $14.4 billion at December 31, 2022, up $12.5 million, or 0.1%, from the prior quarter and down $649.5 million, or 4.3%, year-over-year. Trustmark continues to maintain a strong liquidity position as loans HFI represented 84.5% of total deposits at year end 2022. Noninterest-bearing deposits represented 28.4% of total deposits at December 31, 2022. Interest-bearing deposit costs totaled 0.71% for the fourth quarter, an increase of 51 basis points linked quarter. The total cost of interest-bearing liabilities was 1.03% for the fourth quarter of 2022, an increase of 72 basis points from the prior quarter.

During the fourth quarter, Trustmark did not repurchase any of its common shares. During the twelve months ended December 31, 2022, Trustmark repurchased $24.6 million, or approximately 789 thousand of its common shares. As previously announced, Trustmark’s Board of Directors authorized a stock repurchase program effective January 1, 2023, under which $50.0 million of Trustmark’s outstanding shares may be acquired through December 31, 2023. The repurchase program, which is subject to market conditions and management discretion, will continue to be implemented through open market repurchases or privately negotiated transactions. At December 31, 2022, Trustmark’s tangible equity to tangible assets ratio was 6.27%, while the total risk-based capital ratio was 11.91%. Tangible book value per share was $18.11 at December 31, 2022, down 1.5% from the prior quarter.

Credit Quality

Allowance for credit losses (ACL) represented 0.99% of loans HFI and 399.19% of nonperforming loans, excluding individually analyzed loans at year-end

Net charge-offs totaled 0.06% of average loans in the fourth quarter

Nonaccrual loans totaled $66.0 million at December 31, 2022, a decrease of $2.0 million from the prior quarter and an increase of $3.3 million year-over-year. Other real estate totaled $2.0 million, reflecting a $985 thousand decrease from the prior quarter and a $2.6 million decline from the prior year. Collectively, nonperforming assets totaled $68.0 million, reflecting a linked-quarter decrease of 4.1% and year-over-year increase of 1.0%.

The provision for credit losses for loans HFI was $6.9 million in the fourth quarter primarily attributable to loan growth and the weakening in the macroeconomic forecast. The provision for credit losses for off-balance sheet credit exposures was $5.2 million in the fourth quarter, primarily driven by increases in unfunded commitments and the macroeconomic forecast. Collectively, the provision for credit losses totaled $12.1 million in the fourth quarter compared to $11.6 million in the prior quarter and a negative $1.6 million in the fourth quarter of 2021.

Allocation of Trustmark’s $120.2 million ACL on loans HFI represented 0.85% of commercial loans and 1.41% of consumer and home mortgage loans, resulting in an ACL to total loans HFI of 0.99% at December 31, 2022. Management believes the level of the ACL is commensurate with the credit losses currently expected in the loan portfolio.

Revenue Generation

Net interest income (FTE) totaled $150.0 million in the fourth quarter, up 7.9% linked-quarter

Net interest margin expanded 16 basis points to 3.66% in the fourth quarter

Revenue in the fourth quarter totaled $191.8 million, an increase of 1.6% from the prior quarter and 28.6% from the same quarter in the prior year. The linked-quarter increase primarily reflects higher net interest income offset by lower noninterest income while the year-over-year growth is attributed to higher net interest income offset in part by reduced mortgage banking revenue. In 2022, revenue totaled $699.9 million, an increase of 9.3% from the prior year.

Net interest income (FTE) in the fourth quarter totaled $150.0 million, resulting in a net interest margin of 3.66%, up 16 basis points from the prior quarter. The expansion of the net interest margin was due to increases in the yields on the loans HFI and HFS portfolio and the securities portfolio and was partially offset by costs of interest-bearing liabilities, which resulted from the higher interest rate environment.

Noninterest income in the fourth quarter totaled $45.2 million, a decrease of $7.4 million from the prior quarter and $5.6 million from the prior year. The linked-quarter change reflects a decline in mortgage banking revenue, a seasonal decline in insurance revenue, as well as lower bank card and other fees and wealth management revenue. The decrease in noninterest income year-over-year is principally due to lower mortgage banking revenue.

Mortgage loan production in the fourth quarter totaled $390.8 million, a decline of 23.1% linked-quarter and 33.9% year-over-year. Mortgage banking revenue totaled $3.4 million in the fourth quarter, a decrease of $3.5 million from the prior quarter and $8.2 million year-over-year. The linked-quarter decline is attributable to an increase in net negative hedge ineffectiveness as well as volume-related lower gains on sales of mortgage loans in the secondary market. In 2022, mortgage loan production totaled $2.1 billion, down 24.2% from the prior year. Mortgage banking revenue totaled $28.3 million in 2022, compared to $63.8 million in the prior year.

Insurance revenue in the fourth quarter totaled $12.0 million, a seasonal decline of $1.9 million from the prior quarter and an increase of $303 thousand from the prior year. Insurance revenue in 2022 totaled $53.7 million, up $5.2 million, or 10.7%, from the prior year. The solid performance during the year reflects an expanded producer workforce, a hardening of the insurance market, and the realization of operational efficiencies from investments in technology and improved processes.

Wealth management revenue totaled $8.1 million in the fourth quarter, down 8.0% from the prior quarter and 7.7% from the prior year. The linked-quarter decline is principally due to reduced investment services and trust management revenue while the year-over-year change is attributable to reduced brokerage and trust management revenue. In 2022, wealth management revenue totaled $35.0 million, in line with the prior year. During 2022, Trustmark selectively expanded its salesforce in Birmingham, Jackson and the Florida Panhandle as well as expanded business development efforts in new markets.

Noninterest Expense

Total noninterest expense in the fourth quarter was $231.2 million; excluding litigation settlement expense of $100.8 million, noninterest expense was $130.5 million, up $3.8 million, or 3.0%, from the prior quarter. Please refer to the Consolidated Financial Information, Note 7 – Non-GAAP Financial Measures.

Salaries and employee benefits expense in the fourth quarter totaled $73.5 million, up $762 thousand, or 1.0%, from the prior quarter principally due to one-time severance expense related to the FIT2GROW initiative. Total services and fees increased $964 thousand during the fourth quarter principally due to continued investments in technology and higher professional fees. Net occupancy – premises expense increased $503 thousand during the fourth quarter principally due to early lease termination expenses related to closed branch offices. Other expense increased $1.4 million during the fourth quarter reflecting in part write-downs associated with branch offices that were closed during the quarter.

FIT2GROW

“In 2022 we announced FIT2GROW, a comprehensive program of Focus, Innovation and Transformation designed to enhance Trustmark’s ability to grow and serve customers. Earlier this month, we refocused our community bank efforts on commercial, small business, and consumer lines of business to provide additional expertise for our customers and enhance profitable revenue growth. Additionally, our Atlanta loan production office is now fully functioning and is focused on Commercial Real Estate, Residential Real Estate, Corporate Banking, and Equipment Finance,” said Dewey.

“We continued efforts to optimize our branch network, reflecting changing customer preferences and the continued migration to mobile and digital channels. In 2022, we consolidated 12 branch offices, opened a full-service banking center as well as loan production offices in Birmingham, AL, and Memphis, TN. We also expanded deployment of myTeller interactive teller machine technology. These efforts are designed to efficiently serve and expand customer relationships,” said Dewey.

“Innovation is also a key component of FIT2GROW. In 2022, we successfully completed our core loan system conversion and selected the replacement for our core deposit system. Collectively, these investments are designed to provide best-in-class service to customers as well as enhance our productivity and efficiency. Looking forward, we will continue to pursue opportunities to redesign workflows and restructure the organization to further leverage investments in technology that will broaden our reach, enhance the customer experience, and improve efficiency. We remain focused on providing the financial services and advice our customers have come to expect while building long-term value for our shareholders,” said Dewey.

Additional Information

As previously announced, Trustmark will conduct a conference call with analysts on Wednesday, January 25, 2023, at 8:30 a.m. Central Time to discuss the Corporation’s financial results. Interested parties may listen to the conference call by dialing (877) 317-3051 or by clicking on the link provided under the Investor Relations section of our website at www.trustmark.com. A replay of the conference call will also be available through Wednesday, February 8, 2023, in archived format at the same web address or by calling (877) 344-7529, passcode 3725903.

Trustmark is a financial services company providing banking and financial solutions through offices in Alabama, Florida, Georgia, Mississippi, Tennessee and Texas. Visit trustmark.com for more information.