DBRS Initiates Coverage of Trustmark Corporation – Issuer & Senior Debt at BBB (high); Trend Stable

DBRS Inc. (DBRS) has today initiated coverage on Trustmark Corporation (Trustmark or the Company) and its primary banking subsidiary, Trustmark National Bank (the Bank). DBRS has assigned an Issuer & Senior Debt rating of BBB (high) to Trustmark and a Deposits & Senior Debt rating of A (low) to the Bank. At the same time, Trustmark was assigned a Short-Term Instruments rating of R-2 (high) and the Bank was assigned a Short-Term Instruments rating of R-1 (low). The trend on all ratings is Stable.

Trustmark’s ratings reflect its deeply rooted community banking franchise in Mississippi that is underpinned by ample low-cost core deposit funding, resilient earnings power and a strong capital base. The ratings also consider the Company’s large commercial real estate (including construction) exposures that have pressured asset quality metrics over the past several years, and Trustmark’s smaller market shares in its newer markets of Houston, Memphis and the panhandle of Florida. Moreover, DBRS notes that parts of Trustmark’s operating footprint have been harder hit than other regions of the country with unemployment rates higher than the national average as well as significant real estate value declines, particularly in Florida.

The Stable trend reflects DBRS’s expectations that Trustmark’s resilient and diversified earnings stream and strong capital position will allow the Company to work through its manageable asset quality problems while growing the franchise through acquisitions and organic growth opportunities. If Trustmark is able to further reduce its commercial real estate concentration or expand effectively outside of its legacy Mississippi markets while maintaining its sound balance sheet, there would likely be upward ratings migration. Conversely, if asset quality unexpectedly deteriorates leading to losses or if Trustmark does not maintain strong capital metrics, there could be negative ratings pressure.

With a history dating back to 1889, Trustmark has developed a strong and defensible banking franchise in Mississippi. Indeed, the Company has the number two deposit market share in the state with top market shares in several MSAs including Jackson, where it has a dominant 34.2% deposit market share. Moreover, Trustmark has a greater than 20% deposit market share in 74% of the cities it operates in, which is considerably above the DBRS rated bank median of 46%. Core deposits fully fund the loan portfolio and noninterest bearing deposits comprise a healthy 25% of total deposits. This excellent deposit funding base contributes to strong liquidity and a very low cost of funds of 0.51% at September 30, 2011.

While Trustmark has developed strong long-standing customer relationships within its legacy markets, the Company’s newer markets of Houston, Memphis and Florida are highly competitive where the Company has yet to build strong brand recognition or a large presence. As a result, pricing for both loans and deposits to capture growth would likely be less profitable and more difficult to obtain. Nonetheless, management has demonstrated solid discipline on growing the franchise to date and these markets should eventually exhibit higher growth than its legacy MS markets.

A sufficiently diversified revenue stream, low funding costs, a strong net interest margin and conservative culture have contributed to resilient and solid earnings generation at Trustmark. Indeed, the Company has remained profitable each quarter since incorporation in 1968, including the most recent severe economic downturn. Moreover, Trustmark was one of the few banks to maintain its dividend during the downturn.

For 1H11, Trustmark reported net income of $55.6 million, up from $49.6 million in 1H10 primarily reflecting lower credit costs. Indeed, both the provision for loan losses and ORE/Foreclosure expenses were down considerably. Also contributing to better earnings was the $4.6 million after-tax bargain purchase gain related to a FDIC assisted deal, and stronger wealth management revenues. DBRS notes that both service charges on deposit accounts and mortgage banking revenues were down compared to 1H10. Most recently, Trustmark reported net income available to common shareholders of $27.0 million for 3Q11, down from $31.6 million in 2Q11. Excluding 2Q11’s bargain purchase gain, net income would have been stable with higher mortgage banking, wealth management and insurance revenues offset by lower net interest income and higher expenses that included some non-core items.

Like most banks, asset quality remains challenging with elevated levels of nonperforming assets (NPAs). Specifically, NPAs as a percentage of loans held for investment (excludes covered assets) was 3.16% at September 30, 2011, but showed material improvement during the quarter from 3.50% in 2Q11. Positively, DBRS notes that nonperforming loans have declined for six consecutive quarters. Similarly, year-to-date net charge-offs (NCOs) were $27.7 million, or 0.61% of average loans. In 3Q11, NCOs represented a very manageable 0.36% of average loans, the lowest rate since 3Q07. Importantly, all asset quality indicators have been trending in a positive direction, which has contributed to lower loan loss provisioning needs. Going forward, DBRS expects continued gradual improvements in asset quality.

At $481.8 million, or 8.3% of total loans held for investment, the construction, land development and other land loans portfolio remains Trustmark’s most problematic asset class, especially in Florida. Positively, these exposures have become considerably more manageable and are far below peak 1Q08 levels when the portfolio totaled $1.2 billion, or 17.3% of the loan portfolio. The Company has reduced this exposure by 21.7% over the last year alone. DBRS notes that Trustmark’s total commercial real estate exposure, including construction, comprised approximately 33% of total loans held for investment and represented 210% of tangible common equity, which DBRS considers to be a concentration.

Trustmark has maintained very strong capital metrics following a December 2009 common equity issuance that raised net proceeds of $109.3 million that led to the repayment of its $215 million in preferred shares issued under the U.S. Treasury’s Capital Purchase Program. Indeed, the Company’s tangible common equity ratio was a robust 9.74% at September 30, 2011, and all regulatory ratios are significantly above the well-capitalized threshold. The Company’s strong capital position provides ample bondholder protection against unexpected losses and allows Trustmark to pursue organic growth as well as acquisitions to bolster its franchise strength. DBRS notes that the Company has already completed one FDIC assisted deal earlier this year and has been actively looking at regular M&A as well.

Trustmark Corporation, a diversified financial services provider headquartered in Jackson, MS, reported $9.7 billion in assets at September 30, 2011.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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.

Lead Analyst: Michael Driscoll
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 17 November 2011

For additional information on this rating, please refer to the linking document under Related Research.