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

DBRS, Inc. (DBRS) has today confirmed all ratings of Trustmark Corporation (Trustmark or the Company) and its primary banking subsidiary, Trustmark National Bank (the Bank) including the Company’s Issuer & Senior Debt rating of BBB (high). The trend on all ratings remains Stable.

Trustmark’s ratings reflect its historically-strong performing community banking franchise in its home market of Mississippi. Highlights of the franchise include 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. While the recent acquisition and integration of Mobile, Alabama-based BancTrust Financial Group (BancTrust) appears to be progressing smoothly including a successful systems conversion, the acquisition is the Company’s largest, and Trustmark must still deliver on financial targets including its ability to sell its deeper product set to BancTrust customers.

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 remaining 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 could 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. Moreover, DBRS would view another large acquisition unfavorably until the BancTrust acquisition is fully digested.

With a history dating back to 1889, Trustmark has developed a strong and defensible banking franchise in Mississippi. The Company maintains a close number two deposit market share in its home state of 14.2% (trailing Regions Financial Corporation at 14.8%) and it has been making steady gains. Additionally, the Company has top market shares in several MSAs including Jackson, Mississippi where it has a dominant 33.8% deposit market share. Core deposits comfortably fund the loan portfolio and noninterest bearing deposits comprise a healthy 26% of total deposits. This excellent deposit funding base contributes to strong liquidity and a low cost of funds that supports earnings.

For 2012, Trustmark reported net income of $117.3 million, up from $106.8 million in 2011 primarily reflecting lower credit costs, as both the provision for loan losses and ORE/Foreclosure expenses continued to trend downwards. An over 50% increase in net mortgage banking revenues also bolstered results. Other sources of noninterest income, which comprised a healthy one-third of total revenues in 2012, include insurance commissions, bank card and other fees, and wealth management.

Most recently, Trustmark reported net income of $24.9 million for 1Q13, down from $27.7 million and $30.3 million for 4Q12 and 1Q12, respectively. During 1Q13, Trustmark completed its acquisition of BancTrust. In addition to the balance sheet impact, the BancTrust acquisition added some noise to the quarterly results. Specifically, the acquisition resulted in $5.8 million (after-tax) of non-routine merger related costs, added $9.4 million in revenue, and contributed net income of $2.0 million (excluding non-routine merger charges).

While improved, asset quality remains weaker than historical levels. Specifically, nonperforming assets (NPAs) as a percentage of loans held for investment (excludes covered assets) were 3.48% at March 31, 2013 up from 2.71% at December 31, 2012, but down from the year-end peak of 3.64% in 2010. The increase in 1Q13 was mainly due to other real estate (ORE) added with the BancTrust acquisition. Similarly, net charge-offs (NCOs) were in a net recovery of $1.1 million for 1Q13 (or -0.08%) and a NCO of $17.5 million, or a manageable 0.30% of average loans in 2012. This is down from the peak of $68.4 million or 1.01% of average loans during 2009. The improving asset quality indicators, including a decline in classified and criticized assets, has contributed to lower loan loss provisioning needs. Going forward, DBRS expects continued gradual improvements in asset quality.

Trustmark has historically maintained strong capital metrics since raising equity to repay TARP funds in December 2009. Specifically, at YE12, the Company’s tangible common equity ratio was a robust 10.28% and all regulatory ratios are significantly above the well-capitalized threshold. As expected, the Company’s tangible common equity to tangible assets ratio decreased a significant 208 bps to a still strong 8.20% during 1Q13 following the closing of the BancTrust acquisition. While the acquisition was for common stock, it created a larger balance sheet and added $108.8 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.

Trustmark Corporation, a diversified financial services provider headquartered in Jackson, Mississippi, reported $11.9 billion in assets as of March 31, 2013.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments, and DBRS Criteria: Bank and Bank Holding Company Trust Preferred Securities. These can be found at: http://www.dbrs.com/about/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.

[Amended on August 27, 2014, to reflect actual methodologies used.]

Lead Analyst: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: 17 November 2011
Most recent rating update: 30 May 2012

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