DBRS: Trustmark’s 2Q14 Earnings Up on Loan Growth; Recoveries on Acquired Loans

Summary:
• Trustmark reported 2Q14 net income of $32.9 million, a 13.4% increase compared to $29.0 million for 1Q14, driven by higher net interest income partially offset by a higher provision for loan losses.
• DBRS views Trustmark’s 2Q14 results as indicative that the Company is successfully building upon prior acquisitions, as well as through accelerating 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) 2Q14 earnings as sound, with the Company reporting continued loan and deposit growth, improving credit quality and good control over expenses. Positively, loan growth was broad-based across product types and most markets. Additionally, the Company reported a healthy loan pipeline going into 3Q14.

Overall, net interest income (fully tax equivalent) increased quarter-on-quarter (QoQ), reflecting loan growth as well as a higher net interest margin (NIM) associated with an increase in recoveries on acquired loans, which creates some volatility in the NIM. Excluding acquired loans, the core NIM was up three bps to 3.55% with management expecting a relatively stable core NIM for the remainder of 2014. Noninterest income, which represents about 30% of revenue, was relatively stable QoQ. Meanwhile, noninterest expense increased modestly QoQ, reflecting higher legal and professional fees, and the efficiency ratio improved to the mid 60% range. During the quarter, Trustmark continued realigning its branch network based on changing customer patterns by opening two new banking centers, while consolidating others. The Durbin amendment becomes effective for Trustmark starting with 3Q14, which will create some revenue headwinds for the Company. Trustmark estimates that 2H14 pre-tax revenues will decline by $4.5 million, or approximately 3% of 2Q14 revenues.

Primarily due to the addition of one credit, nonperforming loans increased QoQ. However, the Company’s net charge-offs remained modest, and classified and criticized loans continued to trend down. Overall, Trustmark’s allowance for loan losses remains sufficient at 1.08% 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.

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

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.