DBRS: Trustmark’s 1Q14 Earnings Remain Sound; Increased QoQ on Lower Expenses

Summary:
• Trustmark reported 1Q14 net income of $29.0 million, a 3.4% increase compared to $28.0 million for 4Q13, driven by lower expenses and higher noninterest income.
• DBRS views Trustmark’s 1Q14 results as indicative that the Company is successfully building upon prior acquisitions and achieving organic loan growth.
• DBRS rates the Company’s Issuer & Senior Debt (unsolicited) rating at BBB (high) with a Stable
trend.

DBRS, Inc. (DBRS) views Trustmark Corporation’s (Trustmark or the Company) 1Q14 earnings as sound with the Company reporting continued loan and deposit growth, improving credit quality and lower expenses. Positively, loan growth was broad-based across product types and most markets. Additionally, the Company reported a healthy loan pipeline going into 2Q14.

Overall, net interest income (fully tax equivalent) decreased quarter-on-quarter (QoQ), reflecting a decline in the net interest margin (NIM) associated with lower recoveries on acquired loans, which create some volatility in the NIM. Excluding acquired loans, the core NIM was up 4 bps to 3.52% with management expecting a relatively stable core NIM in 2014. Noninterest income, which represents almost one-third of revenue, increased QoQ reflecting increases in insurance commissions and mortgage banking, as well as the absence of various items that had negatively impacted 4Q13 noninterest income. Trustmark was able to grow mortgage banking revenue, despite a decline in production, due to increased positive mortgage servicing hedge ineffectiveness. Noninterest expense decreased 3.1% QoQ, reflecting lower legal and professional fees and other expenses. Positively, the Company’s largest expense, salaries and benefits, was flat even with seasonally higher payroll-related expenses. Trustmark will continue realigning its branch network based on changing customer patterns.

Nonperforming loans decreased QoQ. Additionally, the Company had a net recovery this quarter, which combined with improving credit quality (including lower classified and criticized loans), allowed for a negative loan loss provision. Overall, Trustmark’s allowance for loan losses remains sufficient at 1.14% of total loans. Capital remains solid and helps underpin the rating. Indeed, with earnings retention and modest balance sheet growth all capital ratios increased during the quarter. DBRS notes that Trustmark’s historically strong earning generation allows the Company to build significant capital organically.

Trustmark’s ratings reflect its historically-strong performing community banking franchise, including ample low-cost core deposit funding (including a large percentage of noninterest bearing deposits), resilient and diversified earnings, and a strong capital base. Tempering the ratings are the Company’s large commercial real estate (including construction) exposures that have pressured asset quality metrics over the past several years and Trustmark’s more modest market shares in some of its newer markets, including Houston, Memphis, and the Florida panhandle.

DBRS rates the Company’s Issuer & Senior Debt (unsolicited) rating at BBB (high) with a Stable trend.

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