TRUSTMARK CORPORATION
Fitch Ratings has affirmed
The Rating Outlook on the Long-Term IDRs is Stable. Fitch has also affirmed the Short-Term IDRs of TRMK and TNB at 'F2'. A full list of rating actions is below.
Key Rating Drivers
The affirmation reflects TRMK's strong franchise within its operating markets, conservative risk appetite, exhibited by relatively fewer credit losses through various economic cycles and solid funding profile, partially offset by the company's weaker earnings performance over the past several years. The Outlook remains Stable, despite our expectation for increased asset quality deterioration given the bank's high commercial real estate (CRE) exposure. Due to TRMK's conservative underwriting standards, Fitch expects the bank's losses would be manageable and in line with its current rating.
Strong Deposit Franchise: Fitch views TRMK's deposit market share in the state of
Sale of Insurance, Credit Neutral: Fitch views TRMK's announced agreement to sell its wholly owned subsidiary
Risk Profile Supports Rating: Trustmark's credit culture is sound, with low charge-offs and sustained asset quality metrics that have remained strong through various economic cycles. TRMK has a long history as a CRE focused lender and Fitch considers risks to be effectively monitored, in line with similarly sized banks and supportive of the rating. TRMK's yoy loan growth slowed in 1Q24, which Fitch views positively.
Asset Quality a Ratings Strength: TRMK's asset quality has been consistently strong driven by stable underwriting discipline, a focus on long-term relationships and deep knowledge of the markets in which the bank operates. TRMK's NCOs were low compared to peer banks in 2023 despite the bank's higher level of impaired loans to gross loans for the same period.
While some credit deterioration could occur given TRMK's relatively higher CRE exposure, Fitch does not expect outsized losses in the portfolio due to the bank's conservative underwriting standards. 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 Outlook.
Weak Earnings Constrain Ratings: Fitch considers Trustmark's generally weaker earnings profile relative to peers as a ratings constraint. Profitability metrics improved in 2023 compared to the prior year due to higher NII, which continued to benefit from NIM expansion, partially offset by higher funding costs. The bank's operating profit/risk-weighted assets increased to 1.3% in 2023, but remained below the peer median of 1.8%. Although earnings quality is anticipated to decline after the sale of the insurance subsidiary, the reinvestment of the proceeds at an assumed yield of approximately 5% is expected to counterbalance the loss of fee income.
Capital Improved but Below Peers: TRMK's capital ratios increased in 2023, with the common equity Tier 1 (CET1) ratio increasing by 30bps from the previous year to 10%. Despite this improvement, this ratio remains below the mid-tier peer median of 10.9% during the same timeframe. At the close of the announced transaction, TRMK's CET1 ratio is expected to increase over 60bps to around 10.8%. Over the long term, Fitch anticipates that the bank will continue to sustain capital levels that are slightly below those of its peers.
Strong Funding Base: Fitch views TRMK's funding profile as solid, underscored by a stable deposit base and a cost of deposits that is lower than its peers. In 2023, deposits increased by 7.8%, outpacing loan growth of 6% during the same period. Consequently, the loan-to-deposit ratio stood at 84% at YE 2023, a slight decrease from 85.5% at YE 2022. Furthermore, Trustmark's strong market presence enables it to sustain a competitive cost of funds, which is consistently lower than peers.
Additionally, Fitch continues to view TRMK's liquidity profile, including unused borrowing capacity, as adequate and supportive of the rating. Looking ahead to 2024, Fitch anticipates a slight increase in the loan-to-deposit ratio as loan growth is expected to outstrip deposit growth.
Holding Company: TRMK's Viability Rating (VR) is equalized with that of TNB, reflecting its role as a bank holding company, which is mandated in the
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Negative pressure could be placed on TRMK's ratings if the company's CET1 were to decline below 8% for several quarters without a credible plan to rebuild back above 8%, particularly in conjunction with rapid loan growth and/or signs of asset quality deterioration.
Fitch would also be sensitive to a weakening liquidity profile or dramatic shift in its funding mix that constrains the company's ability to meet its obligations under a stressed scenario. Although outside of Fitch's expectations, negative rating action could occur if Trustmark's credit costs exceed peer averages over several quarters and potentially result in weaker ability to generate earnings in line with ratings.
Fitch expects Trustmark to continue to build out its franchise through M&A. A negative action could occur to the extent that Trustmark partakes in M&A that is not reasonable in size or geography, or is not complementary in core competencies to Trustmark's business model. Further, a negative action could occur if M&A results in earnings or capital deterioration not commensurate with the current rating level.
While not currently expected, if management increases the level of double leverage above 120%, Fitch could potentially notch the holding company IDR and VR from TNB. Fitch could also notch the holding company VR from TNB if holding company liquidity covered less than 1.0x expected annual outflows.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Positive rating momentum for TRMK is limited at present due to the company's higher operating costs relative to its size, lower capital levels compared to peers, as well as a relatively concentrated loan mix.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Long- and Short-Term Deposit Ratings: The Long-term uninsured deposit rating of TNB is rated one notch higher than the bank's IDR and senior unsecured debt because
Subordinated Debt: Trustmark's subordinated debt is one notch below Trustmark's VR for loss severity. In accordance with Fitch's 'Bank Rating Criteria,' this reflects alternate notching to the base case of two notches due to the agency's view of
Government Support: TRMK's and TNB's Government Support Ratings (GSRs) are rated 'No Support' (ns). In Fitch's view the probability of support is unlikely.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Long- and Short-Term Deposit Ratings: TNB's long-term deposit rating is sensitive to any change in the company's Long-Term IDR. The short-term deposit rating is sensitive to any change in the long-term deposit rating and Fitch's assessment of Trustmark's funding and liquidity profile.
Subordinated Debt: The rating of TRMK's subordinated debt is sensitive to any change to the VR.
Government Support Ratings: The GSR would be sensitive to any change in
VR ADJUSTMENTS
The Asset Quality score of 'bbb+' has been assigned below the 'aa' category implied score due to a negative adjustment for Concentrations and Collateral and Reserves.
The Funding and Liquidity score of 'bbb+' has been assigned below the 'a' category implied score due to a negative adjustment for Contingent Access.
The Capitalization and Leverage score of 'bbb' has been assigned below the 'a' category implied score due to the following adjustment reason: Capital Flexibility (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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