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, including the Company’s Issuer & Senior Debt rating of BBB (high). The trend on all ratings remains Stable. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

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 pressured asset quality metrics during the financial crisis, and Trustmark’s more modest market shares in some of its newer markets including Houston, Memphis, and the Florida panhandle.

The Stable trend reflects DBRS’s expectations that Trustmark’s resilient and diversified earnings stream and strong capital position will allow the Company to continue to grow the franchise through both 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.

With a history dating back to 1889, Trustmark has developed a strong and defensible banking franchise in Mississippi. Based on most recent FDIC data, the Company maintains a number one deposit market share in its home state. Additionally, the Company has top market shares in several MSAs including Jackson, Mississippi where it has a dominant 33.2% deposit market share. Core deposits comfortably fund the loan portfolio and noninterest bearing deposits comprise a healthy 28% of total deposits. This excellent deposit funding base contributes to strong liquidity and a low cost of funds that supports earnings.

For 1H14, Trustmark reported net income of $61.9 million, up from $56.0 million in in 1H13, primarily reflecting increased revenues and lower taxes, partially offset by an increase in provision expense and higher expenses. Noninterest income, which comprised a sound 30% of total revenues in 1H14 and is diversified by product, includes insurance commissions, bank card and other fees, wealth management and mortgage banking. Increasing loan growth has led to higher provisioning needs in recent periods.

While improved, some asset quality measures remain moderately weaker than historical levels. Specifically, nonperforming assets (NPAs) as a percentage of loans held for investment (excludes restructured loans) were 2.53% at June 30, 2014, unchanged from YE13, but down from the year-end peak of 3.64% in 2010. DBRS notes that about 60% of NPAs are real estate owned and repossessed assets, which have gone through the foreclosure process and should already be marked to net realizable value. Nevertheless, these assets are still subject to carrying costs and further valuation adjustments. Positively, net charge-offs were in a net recovery of $0.7 million for 1H14 (or -0.02% of average loans) following a net recovery of $1.1 million for 2013. This is down from the peak of $68.4 million or 1.01% of average loans during 2009. Going forward, DBRS expects continued gradual improvements in asset quality.

Trustmark has historically maintained strong capital metrics, which may dip down when the Company completes an acquisition. Specifically, at June 30, 2014, the Company’s tangible common equity ratio was a solid 8.51% and all regulatory ratios are significantly above the well-capitalized threshold. DBRS notes that Trustmark’s historically strong earnings generation allows the Company to build significant capital organically to fuel organic growth as well as potential acquisitions.

Trustmark Corporation, a diversified financial services provider headquartered in Jackson, Mississippi, reported $12.1 billion in assets as of June 30, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents 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: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: 17 November 2011
Most recent rating update: 21 May 2013

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