Fitch Affirms Trustmark Corp. at 'BBB+/F2'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Trustmark Corp.'s (TRMK) ratings at 'BBB+/F2'. The Rating Outlook remains Stable. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS and VR

TRMK's ratings are affirmed at 'BBB+' and continue to be supported by its good asset quality and the leading market share in TRMK's home state of Mississippi and growing market share in other parts of the southeastern U.S. Meanwhile, Fitch continues to positively view TMRK's risk appetite measured by relatively lower credit losses through the economic cycle reflecting more conservative underwriting standards. Moreover, TRMK has shown the willingness and ability to build capital after its most recent acquisition, a trend that Fitch views favourably.

Offsetting these strengths is the company's depressed earnings profile over recent quarters in light of increased regulatory burden and operating costs due to crossing over $10 billion in assets. Fitch believes this will be a persistent rating constraint over the near-to-medium term and believes TRMK is toward the higher end of its potential rating range.

TRMK continues to hold the highest deposit market share in the state of Mississippi. Fitch views this positively as it provides TRMK with relatively strong deposit and loan pricing power. TRMK maintains a solid core funding base owing to its strong deposit franchise, with core deposits representing 92% of total deposits as of second quarter 2015 (2Q15) based on regulatory definitions. While Fitch expects some deposit run-off as rates rise across the industry, TRMK's strong franchise, especially in rural markets, should position it well to retain a sound level of funding at reasonable costs. This view is incorporated in today's rating affirmation and the Stable Outlook.

Fitch believes TRMK has relatively sound underwriting standards evidenced by the company generating consistent profitability and relatively low charge-off levels in aggregate during the financial crisis. Fitch observes that over the last 40 quarters, which includes the financial downturn, TRMK has realized 30% fewer net credit losses as a percentage of total loans when compared to other similarly sized banks within its operating footprint according to Fed data.

In Fitch's view, TRMK has shown that it has not made any significant changes to its underwriting standards over recent periods. Therefore, Fitch would expect charge-off levels and credit costs in general to remain lower than those of its peers over the long run. However, credit costs could be pressured over the near term as oil prices remain depressed. TRMK has just over $400 million in exposure to the energy sector (none tied directly to oil reserves). While not expected to materially impact TRMK's credit profile, a prolonged period of depressed energy prices could result in modest upturn in non-performing assets (NPAs) or credit costs.

Core earnings, as measured through pre-provision net revenue (PPNR), continue to remain modestly pressured relative to similarly rated peers primarily due to elevated costs and lost revenue associated with crossing over the $10 billion asset threshold. Fitch notes that TRMK's PPNR in 2014 was at 1.41% of average assets, flat year-over-year and down considerably from prior periods. PPNR was 1.34% during the first three months of 2015.

Fitch anticipates that core earnings will stabilize slightly above current levels due to efficiencies gained through addition acquisitions and organic growth. Operating efficiency should improve over the mid-term providing some uplift to earnings although higher provisioning costs associated with loan growth will likely offset any expense gains. This expectation is reflected in today's rating affirmation and outlook.

Capital is considered ample and adequate for TRMK's risk profile and rating. Core capital ratios such as TCE/TA have been brought up to nearly 9% after dropping under 8% in the middle of 2013. Fitch anticipates TRMK to continue to build capital going forward but might be a little slow given earnings pressure and a relatively high dividend payout ratio. Basel III Common Equity Tier 1 is considered strong and was in excess of 13% at 1Q15.

SUPPORT RATING AND SUPPORT RATING FLOOR

TRMK has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, TRMK is not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Trustmark National Bank's subordinated debt rating is one notch below its Viability Rating (VR) of 'bbb+' in accordance with Fitch's assessment of the instruments non-performance and loss severity risk profiles. It has thus been affirmed due to the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

TRMK's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's Issuer Default Rating (IDR) and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

HOLDING COMPANY

The IDR and VR of TRMK is equalized with its operating company, Trustmark National Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.

RATING SENSITIVITIES

IDRS, VR

Fitch views Trustmark Corp.'s current rating solidly positioned at 'BBB+'. Given what Fitch perceives to be a more challenging operating environment for Trustmark Corp. with higher costs of doing business, Fitch does not expect upward rating movement for Trustmark Corp. in the near term.

Today's ratings action incorporates Fitch's expectation that Trustmark Corp. will continue to be active in the merger and acquisition (M&A) space as it has been in the past. Fitch expects Trustmark Corp.'s M&A activity to be reasonable in size, in geography and within the bank's core competencies. To the extent that Trustmark Corp. partakes in M&A activity that does not fit these attributes and/or results in earnings and capital metrics that are not commensurate with its rating level, Fitch could take negative rating action.

Fitch also notes that a visible negative trend in earnings (measured by ROA or PPNR) from current levels resulting in nominal capital build could lead to negative rating action over the long term. Finally, and although not expected, a reversal in current AQ trends leading to noticeable earnings and capital deterioration could also lead to negative rating action.

SUPPORT RATING AND SUPPORT RATING FLOOR

Trustmark Corp. Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid securities are sensitive to any change in the company's VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by Trustmark Corp. and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a long-term IDR be downgraded, deposit ratings could be similarly impacted.

HOLDING COMPANY

If Trustmark Corp. became undercapitalized or increased double leverage significantly there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

Fitch has affirmed the following ratings with a Stable Outlook:

Trustmark Corporation

--Long-term IDR at 'BBB+';

--Short-term IDR at 'F2';

--Viability Rating at 'bbb+';

--Support at '5';

--Support Rating at 'NF'.

Trustmark National Bank

--Long-term IDR at 'BBB+';

--Short-term IDR at 'F2';

--Viability Rating at 'bbb+';

--Subordinated debt at 'BBB';

--Long-term deposits at 'A-';

--Short-term deposits at 'F2';

--Support at '5';

--Support Rating at 'NF'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989841

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989841

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Bain K. Rumohr, CFA
Director
+1-312-368-3153
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Doriana Gamboa
Senior Director
+1-212-908-0865
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bain K. Rumohr, CFA
Director
+1-312-368-3153
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Doriana Gamboa
Senior Director
+1-212-908-0865
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com