DBRS Comments on Trustmark Corporation’s 2Q12 Earnings – Senior at BBB (high)

DBRS, Inc. (DBRS) has today commented that the ratings for Trustmark Corporation (Trustmark or the Company), including its Issuer & Senior Debt rating of BBB (high), are unchanged following the release of the Company’s 2Q12 results. The trend on all ratings is Stable. For the quarter, Trustmark reported net income available to common shareholders of $29.3 million, down from $30.3 million in 1Q12.

DBRS sees the Company’s 2Q12 results as reflective of the low rate environment and tepid loan demand in most areas that has made generating appreciable revenue and earnings growth a challenge for the industry. That said, despite the difficult operating environment, Trustmark continues to generate solid returns, including a return on average tangible equity of 12.74% in the second quarter. In DBRS’s view, this reflects the Company’s strong funding profile, which contributes to its above-peer net interest margin (NIM), and its diversified revenue streams. Trustmark’s NIM was down 4 bps from 1Q12, but still strong at 4.15% in 2Q12. Noninterest income, excluding securities gains, increased 2.4% QoQ, driven by strong mortgage banking results, though DBRS notes that all key fee lines reported linked quarter growth. In addition, 2Q12 results benefited from a lower provision for loan losses as credit continues to improve.

Net interest income (FTE) was $89.9 million in the quarter, down from $90.6 million in 1Q12, primarily due to margin pressure, as average earning assets were essentially flat QoQ. Loans held for investment declined $139.5 million from March 31, 2012 to $5.8 billion. The decline was largely attributable to lower single family mortgage balances as customers refinanced and Trustmark opted to sell the vast majority of its mortgage production in the quarter. In addition, indirect auto loan balances continued to run off. While C&I and construction & development balances also declined over the quarter, Trustmark noted that its Houston, Texas market continues to show good growth in these categories, offsetting declines in Mississippi and the Florida panhandle.

Noninterest expense, excluding merger-related expenses, increased around $4.8 million from 1Q12 to $88.0 million in the second quarter. The increase was largely due to a $4 million addition to the Company’s mortgage repurchase reserve in the quarter. Moreover, DBRS notes that 2Q12 expenses reflected a full quarter of Bay Bank, which closed on March 16th. Given the challenging revenue environment, DBRS anticipates that effective cost control will be important in coming quarters for all banks. Positively, core expenses (which excludes merger-related costs and OREO/Foreclosure expenses) are likely to decline in coming quarters as the addition to mortgage repurchase reserves and some software-related expenses are not expected to be recurring. DBRS comments that OREO/Foreclosure expense declined 38.8% from 1Q12 to $2.4 million, and was the lowest in twelve quarters.

Trustmark’s credit quality displayed solid improvement in the second quarter, supporting a provision for loan losses (excluding acquired loans) of $650,000 that was down $2.6 million from 1Q12 and less than 2Q12 net charge-offs (NCOs). Though NCOs increased from the first quarter, most leading credit indicators, including criticized and classified balances, improved while nonperforming assets (NPAs) (excluding acquired loans) were the lowest since the end of 2008. Specifically, at June 30, 2012 NPAs, excluding acquired loans and covered OREO, totaled $173.4 million, or 2.88% of loans plus OREO down from $181.5 million, or 2.99% of loan plus OREO at the end of 1Q12. With a provision that was below NCOs, Trustmark’s allowance declined $6.1 million, but currently at $84.8 million remains adequate in DBRS’s view. At quarter-end, the allowance represented 1.50% of total loans held for investment and 85.08% of total non-performing loans.

Trustmark’s liquidity and funding profile remains sound and capital remains strong, underpinning the Company’s rating. On the deposit front, Trustmark is focused on building and maintaining noninterest bearing balances, while letting higher cost time deposits run off. At June 30, 2012 noninterest bearing deposits were $2.1 billion, up 2% QoQ, and equal to 26% of total deposits. DBRS notes that core deposits easily fund the Company’s lending. With respect to capital, Trustmark’s tangible common equity to tangible assets ratio was a very high 9.90% and its Tier 1 common ratio was 14.36% at June 30, 2012. The Company expects the BancTrust acquisition to close in 4Q12, subject to shareholder and regulatory approvals.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Schaller
Approver: Roger Lister
Initial Rating Date: 17 November 2011
Most Recent Rating Update: 30 May 2012

For additional information on this rating, please refer to the linking document under Related Research.