December 15, 2017 / 9:21 PM / a year ago

Fitch Affirms Trustmark Corporation's Ratings at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 15 (Fitch) Fitch Ratings has affirmed Trustmark Corp's (TRMK) ratings at 'BBB+/F2'. The Rating Outlook remains Stable. The affirmation reflects the company's strong franchise within its operating markets and conservative risk appetite. A full list of rating actions is at the end of this press release. The rating action follows a periodic review of the midtier regional banking group, which includes BankUnited, Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corporation (FHN), First National of Nebraska, Inc. (FNNI), Fulton Financial Corporation (FULT), Hilltop Holdings Inc. (HTH), Synovus Financial Corp. (SNV), Trustmark Corporation (TMRK), UMB Financial Corp. (UMBF), Umpqua Holdings Corporation (UMPQ) and Wintrust Financial Corporation (WTFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Midtier Regional Bank Periodic Review,' to be published shortly. KEY RATING DRIVERS IDRs AND VRs TRMK's ratings continue to be highly supported by its strong franchise within its operating markets and a conservative risk appetite exhibited by relatively fewer credit losses through various economic cycles. Moreover, TRMK's ratings are supported by solid capital and liquidity levels. Offsetting these ratings strengths is TRMK's earnings performance relative to historical results. While the company had historically outperformed peers on a consistent basis, Fitch observes that TRMK's earnings have converged downward with peer medians. Fitch believes earnings are still being adversely impacted by the loss of revenue and higher operating costs related to crossing over $10 billion in assets. Fitch continues to believe this will be a persistent rating constraint over the near to medium term as the company attempts to build scale, which places TRMK toward the higher end of its potential rating range. TRMK holds the highest deposit market share in the state of Mississippi, which Fitch believes provides the bank with strong deposit and loan pricing power. TRMK maintains a solid core funding base, with core deposits representing over 95% of total deposits as of 3Q17. Fitch believes TRMK's strong franchise, especially in more rural, isolated markets, should position it well to retain a sound level of funding at reasonable costs as rates rise. Fitch considers TRMK's franchise as a higher influence factor on its rating. TRMK has sound underwriting standards evidenced by consistent profitability and relatively low charge-off levels in aggregate over various economic cycles. Moreover, TRMK has realized a relatively lower level of NCOs compared to peer banks in recent periods as remaining nonperforming assets are resolved. Fitch expects charge-off levels and credit costs in general to remain lower than peers over the long run which is incorporated into today's rating affirmation and Stable Rating Outlook. More recently, loan growth has been outsized relative to peers and Fitch's expectations, which could lead to rating pressure over time. TRMK's loans held for investment grew over 12% between 3Q16 and 3Q17. Much of the growth has been in TRMK's Alabama region and is related to commercial real estate (CRE), construction and commercial and industrial (C&I). Fitch views TRMK's growth cautiously given the competitive loan classes that the growth stems from. Regulators have pointed out weaknesses in underwriting and overvaluation related to CRE lending within the industry. C&I lending has been an extremely competitive asset class coming out of the crisis as smaller banks have sought to diversify. However, this caution is counterbalanced by TRMK's demonstrated ability to maintain prudent underwriting standards during periods of growth. Fitch continues to anticipate that core earnings will stabilize slightly above current levels due to efficiencies gained through acquisitions and organic growth. TRMK has taken steps in the last few years to cut expenses such as implementing an early retirement program and terminating the company's defined benefit pension plan. Operating efficiency should improve over the mid-term providing modest uplift to overall earnings although higher provisioning costs associated with loan growth could offset expense savings. TMRK's capital levels are considered adequate for the company's risk profile and rating, although capital levels have been on a slightly downward trend in recent quarters. TRMK's common equity tier 1 (CET1) ratio was 11.80% at 3Q17, which was slightly above the peer median for the midtier regional peer group. Fitch anticipates TRMK will maintain capital ratios at or modestly below currently levels due to earnings pressure, a relatively high dividend payout ratio and loan growth. Fitch views TRMK's approach to share buybacks as prudent. The company initiated a share buyback program in 1Q16 to repurchase up to $100 million in stock over three years. TRMK's stock price has risen considerably, and it has repurchased just $750 thousand worth of stock since the buyback program was authorized indicating management's cautious approach to share repurchases. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of Trustmark National Bank (TNB) are rated one notch higher than the bank's 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 TRMK's VR is equalized with those of 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. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR TRMK has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRs AND VRs Given what Fitch perceives to be a sustained, challenging operating environment for TRMK with higher operating costs relative to its size, Fitch does not expect upward rating movement for TRMK in the forseeable future. A visible negative trend in earnings measured by return on assets (ROA) or pre-provision net revenue to average assets (PPNR to AA) from current levels resulting in materially lower capital ratios than peer medians could lead to negative rating action over the long-term. Should TRMK's earnings fall below the peer median on a consistent basis due to an inability to find sufficient operating scale or due to a truly much less asset sensitive position relative to peers, Fitch could take negative rating action. Moreover, negative rating action could develop should TRMK experience asset quality deterioration such that credit costs exceed peer averages over a sustained period, although Fitch views this as unlikely. TRMK has historically been an acquisitive bank and Fitch expects the company to continue build out its franchise through merger and acquisitions (M&A). Although M&A activity has been relatively muted in recent years, TRMK remains an opportunistic acquirer, evidenced by the relatively minor acquisition of RB Bancorporation completed in 2Q17. Fitch expects TRMK's M&A activity to be reasonable in size, in geography and within the bank's core competencies. To the extent that TRMK 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. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to TNB's long- and short-term IDR. HOLDING COMPANY Should TRMK's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is potential that Fitch could notch the holding company VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since TMRK's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. The rating actions are as follows: Fitch has affirmed the following ratings Trustmark Corporation --Long-term IDR at 'BBB+'; Outlook Stable; --Short-term IDR at 'F2'; --Viability Rating at 'bbb+'; --Support at '5'; --Support Rating at 'NF'. Trustmark National Bank --Long-term IDR at 'BBB+'; Outlook Stable; --Short-term IDR at 'F2'; --Viability Rating at 'bbb+'; --Long-term deposits at 'A-'; --Short-term deposits at 'F2'; --Support at '5'; --Support Rating at 'NF'. 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