DBRS Comments on Trustmark Corporation’s 3Q12 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 3Q12 results. The trend on all ratings is Stable. For the quarter, Trustmark reported net income available to common shareholders of $29.9 million, up modestly from $29.3 million in 2Q12.

DBRS sees Trustmark’s results as solid in light of the current operating environment. The Company was able to grow revenues modestly quarter-over-quarter (QoQ) despite margin pressure in the persistent low rate environment, as well as ongoing deleveraging and increasing economic uncertainty that has made generating loan growth a challenge. Nonetheless, Trustmark continues to generate good returns, including a return on average tangible equity of 12.61% for 3Q12. 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. Highlights of the quarter included sustained strong mortgage banking revenues, as well as higher insurance revenues and service charges that drove a 2.5% QoQ increase in fee revenues. In addition, credit continues to improve and expenses were well-managed, in DBRS’s view.

Net interest income (FTE) was $88.9 million in the quarter, down 1% from 2Q12, primarily due to margin pressure, which reflected the environment as well as changes in the composition of earning assets. Specifically, Trustmark reported NIM at 4.06% in 3Q12, down 9 bps QoQ. Overall, average earnings assets increased slightly QoQ to $8.7 billion. Loans held for investment (excluding acquired loans) declined for a third consecutive quarter, falling $122.6 million from 2Q12 to $5.5 billion at September 30, 2012. Meanwhile, AFS securities increased $131.6 million, or 5%, from the end of 2Q12. As in 2Q12, the third quarter decline in loans was largely attributable to lower single family mortgage balances, as customers refinanced and Trustmark continues to sell the vast majority of its mortgage production. In addition, indirect auto loan balances continued to run off as planned. Positively, C&I balances increased in the quarter, driven by strength in Texas, Mississippi and Tennessee. Commercial real estate loans also increased slightly QoQ.

Given the challenging revenue environment and ongoing NIM pressure, DBRS anticipates that effective cost control will be important in coming quarters for all banks. Core expenses (excluding merger-related costs and OREO/Foreclosure expenses) declined $3.8 million in the third quarter to $81.8 million, largely due to the absence of mortgage repurchase reserve additions (which added $4 million to 2Q12 expenses). DBRS notes that third quarter expenses included around $400,000 of non-recurring charges related to a write-down of leasehold improvements associated with a pending branch consolidation. DBRS comments that OREO/Foreclosure expense declined materially again in 3Q12, down 28.7% from 2Q12 to $1.7 million, and was the lowest in thirteen quarters.

Once again, Trustmark’s credit quality improved during the third quarter. Indeed, key leading credit indicators, including criticized and classified balances, improved considerably in the quarter, while nonperforming assets (NPAs), excluding acquired loans, were the lowest since the end of 2008. Specifically, at September 30, 2012 NPAs (excluding acquired loans and covered OREO) totaled $163.1 million, or 2.75% of loans plus OREO down from $173.4 million, or 2.88% at the end of 2Q12. Total net charge-offs (NCOs) declined by 30.9% from 2Q12 to $4.6 million and represented 0.31% (annualized) of average total loans. The provision for loan losses (excluding acquired loans) was $3.4 million, up from $650,000 in the previous quarter, but below NCOs. As a result, Trustmark’s allowance declined $1.3 million, but at $83.5 million, reserves remain adequate in DBRS’s view. At quarter-end, the allowance represented 1.51% of total loans held for investment and 103.6% of total NPLs, including acquired 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 September 30, 2012 noninterest bearing deposits amounted to $2.1 billion, up 2.7% QoQ and equal to 27% of period-end 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 10.13% and its Tier 1 common ratio was 14.50% at September 30, 2012. The Company expects the BancTrust acquisition to close in 1Q13, subject to regulatory approval.

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.

Lead Analyst: Michael Schaller
Approver: Alan G. Reid
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.