DBRS Comments on Trustmark Corporation’s 3Q13 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 3Q13 results. The trend on all ratings is Stable. The Company reported net income available to common shareholders of $33.0 million in the second quarter, up from $31.1 million and $29.9 million for 2Q13 and 3Q12, respectively. For 3Q13, earnings equated to a 1.11% return on average assets and 9.83% return on common equity, improving from 1.06% and 9.29%, respectively earned in the linked quarter. DBRS notes that approximately 15% of 3Q13’s net income was attributable to the BancTrust Financial Group (BancTrust) acquisition, which is the Company’s largest acquisition yet and completed in 1Q13.

Overall, net interest income (FTE) decreased by $0.8 million to $102.1 million driven by an 8 bps contraction in the net interest margin (NIM) to a still strong 3.94%. The decrease in the NIM was largely attributable to lower recoveries on acquired loans. Excluding acquired loans, the NIM was down 3 bps to 3.52% with management expecting a similar decline in 4Q13.

For the quarter, noninterest income, which represents almost one-third of revenue, increased by $3.4 million to $47.1million reflecting increases in a number of categories from business activity, as well as seasonality. Unlike most banks, Trustmark was able to grow mortgage banking revenue, despite a decline in production. The increase was driven by higher mortgage servicing income and effective mortgage servicing hedging strategies, which offset lower secondary market gains.

Noninterest expense decreased by $5.7 million QoQ to $101.5 million. The absence of the prior quarter’s non-routine litigation expense of $4.0 million and a $2.1 million reduction in ORE/Foreclosure expense drove the decline. Trustmark continue to efficiently realign its branch network and announced plans to consolidate six branches in 4Q13. Also during the quarter, the Company completed its previously announced purchase of two branches in Oxford, Mississippi.

Nonperforming assets (NPAs) decreased $2.3 million in the quarter to $189.7 million, or a high 3.20% of total loans (including LHFS) + ORE, slightly down from 3.26% in 2Q13. DBRS notes that previously marked-down other real estate accounts for 61% of NPAs which should benefit from the firming-up of real estate values. Positively, net charge-offs remain low for 3Q13, totaling just $0.6 million, or 4 bps of average loans. Loans originated in Florida, once a primary driver of losses, witnessed a fifth consecutive quarter of recoveries. As a result of improved credit performance, the Company was able to release reserves with a negative $3.6 million provision for loans held for investment. Overall, Trustmark’s allowance for loan losses remains sufficient at 1.20% of total loans.

Capital remains solid and helps underpin the rating. Indeed, all capital ratios increased during the quarter. Specifically, the Company’s tangible common equity to tangible assets was 8.01% at period-end, while its Tier 1 common risk based capital ratio was 11.92%. DBRS notes that Trustmark’s historically strong earning generation allows the Company to build significant capital organically.

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

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