DBRS Comments on Trustmark Corporation’s 1Q13 Earnings – Senior at BBB (high)

DBRS, Inc. (DBRS) has today commented on the 1Q13 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 $24.9 million in the first quarter, down from $27.7 million and $30.3 million for 4Q12 and 1Q12, respectively.

During the quarter, Trustmark completed its acquisition of Mobile, Alabama-based BancTrust Financial Group (BancTrust). The acquisition, Trustmark’s largest to date, added (at fair value) approximately $1.9 billion in assets, including $1.0 billion in loans, and $1.7 billion in deposits. DBRS confirmed the Company’s ratings and Stable trend when the deal was announced in May 2012.

In addition to the balance sheet impact, the BancTrust acquisition added some noise to the quarterly results, which included $5.8 million (after-tax) in non-routine merger related costs. Additionally, BancTrust added $9.4 million in revenue and net income of $2.0 million (excluding non-routine merger charges). Besides the acquisition, highlights of the quarter include a 6.6% increase in revenues and improvements in loan quality.

Excluding BancTrust, loan balances decreased $118.4 million due to the run-off of $124.6 million of residential mortgage loans, as Trustmark has elected to sell the majority of new mortgage originations. Overall, net interest income (Fully Taxable Equivalent) increased by $6.6 million to $92.6 million driven by a four basis point (bp) increase in the net interest margin (NIM) to a strong 3.98%. The addition of higher yielding assets from BancTrust was the main driver of the increase in the NIM.

For the quarter, noninterest income increased by $1.6 million to $44.3 million reflecting the BancTrust acquisition, which added approximately $2.0 million. Higher wealth management, insurance commissions, and mortgage banking fees offset a seasonal decrease in service charges on deposit accounts. Going forward, Trustmark expects to generate revenue synergies, as it rolls out its deeper banking products across the BancTrust franchise.

Noninterest expense increased to $102.1 from $87.3 million in the linked quarter primarily from the addition of $6.7 million of BancTrust operating expenses, as well as the non-routine merger related pre-tax expenses of $9.4 million. Excluding these items, noninterest expense would have been down for the quarter. As Trustmark continues to integrate the acquisition, including the consolidation of overlapping branches in the Florida Panhandle, additional cost saving will be realized. At the time of the acquisition announcement, Trustmark expected to reduce BancTrust’s noninterest expenses by 25%.

Excluding acquired loans and other real estate covered by Federal Deposit Insurance Corporation loss-share agreements, asset quality metrics as measured by classified and criticized loans improved sequentially. This is highlighted by a $19.7 million (7.8%) and $15.0 million (4.6%) decline in classified and criticized loans, respectively. Reflecting the acquisition, nonperforming assets increased $41.2 million in the quarter to $201.7 million, or 3.48% of total loans (including loans held for sale) + other real estate compared to 2.71% in 4Q12. The bulk of the increase was other real estate added from BancTrust, which was marked to fair value at the acquisition date. Positively, the Company reported a net recovery of $1.1 million, or 8 bps of average loans. Loans originated in Florida, once a primary driver of losses, reported its third consecutive quarter of recoveries. Loans originated in Texas and Mississippi also had net recoveries for the quarter. As a result of the recoveries and drop in classified and criticized loans, the Company was able to release reserves with a negative $3.0 million provision for loans held for investment. Overall, Trustmark’s allowance for loan losses remains sufficient at 1.40% of total loans.

Capital remains solid and helps underpin the rating. As expected, the Company’s tangible common equity to tangible assets ratio decreased a significant 208 bps to 8.20% during the quarter following the closing of the BancTrust acquisition. While the acquisition was for common stock, it created a larger balance sheet, as well as $107.3 million of goodwill and other intangible assets, which drove the tangible capital ratios down. DBRS notes that Trustmark’s historically strong earnings generation allows the Company to build significant capital organically. DBRS expects the Company to fully integrate BancTrust before embarking on any additional material acquisitions.

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

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