DBRS Comments on Trustmark Corporation’s 4Q12 Earnings – Senior at BBB (high)

DBRS, Inc. (DBRS) has today commented on the 4Q12 earnings of Trustmark Corporation (Trustmark or the Company). DBRS rates the Company’s Issuer & Senior Debt at BBB (high) with a Stable trend. The Company reported net income available to common shareholders of $27.7 million in the fourth quarter, down from $29.9 million in 3Q12, but up from $24.3 million a year ago.

Highlights of the quarter include record mortgage banking revenues, modest loan growth, and continued asset quality improvements. Nonetheless, revenues declined and expenses increased contributing to lower income before provisions and taxes.

Positively, loan balances increased $50.7 million during the quarter to $5.7 billion primarily reflecting loans to public entities and school districts, and to a lesser extent, growth in construction and land development and commercial and industrial loans (balances grew despite the unexpected payoffs from the sale of four businesses totaling $55 million), which more than offset expected declines in 1-4 family residential mortgages and indirect auto loans. Overall, net interest income (FTE) declined by $2.9 million to $86.0 million driven by a 12 basis point decline in the net interest margin to a still strong 3.94%, as asset yields continued to decline more rapidly than funding costs. Management signaled that margin compression is expected to be in the 8 basis point to 10 basis point range in 1Q13.

Noninterest income declined by $2.1 million to $42.8 million reflecting the one-time 3Q12 $1.2 million gain on disposition of the Company’s proprietary mutual fund family, higher partnership amortization related to tax credit investments, and seasonally lower insurance revenues. Positively, mortgage banking, wealth management and bankcard and other fee income had solid quarters. Specifically, mortgage banking revenue of $11.3 million was a record and wealth management revenue increased 10.1% to $6.2 million reflecting increased investment services sales and improved profitability with the trust management business. Lastly, bankcard and other fee income increased 15.2% to $8.0 million with the growth primarily coming from commercial credit related fee income and interchange income from debit cards.

Noninterest expense increased $3.8 million to $87.3 million primarily from higher salaries and benefits and higher ORE/foreclosure expenses. While up in the quarter, ORE/foreclosure expenses declined by 31.5% in 2012. Management has targeted a quarterly core expense rate of approximately $81 million, as the Company remains focused on finding additional savings.

Excluding acquired loans and other real estate covered by FDIC loss-share agreements, asset quality metrics saw significant improvements during the quarter. Indeed, classified loans contracted $20.6 million, or 7.5%, while criticized loans declined by $20.9 million, or 6.0%. Meanwhile, nonperforming assets (NPAs) declined a more modest 1.6% during the quarter to $160.6 million, or 2.71% of total loans (including LHFS) + ORE. DBRS notes that NPAs are at the lowest level seen since 4Q08 (16 quarters ago). Net charge-offs were a manageable $4.3 million, or 0.29% of average loans. Positively, Florida, once a primary driver of loan losses, reported its second consecutive quarter of recoveries. As a result of the significant asset quality improvements, the Company was able to release reserves with a negative $535 thousand provision for loans held for investment. Overall, Trustmark’s allowance for loan losses remains solid at 1.41% of total loans.

Capital remains strong and helps underpin the rating. Specifically, the Company’s tangible common equity to tangible assets ratio increased 15 basis points to 10.28% during the quarter affording Trustmark the ability to pursue organic growth, as well as acquisitions to bolster the franchise. The Company still expects to close the BancTrust Financial Group acquisition in 1Q13.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]