Fitch Ratings has affirmed Trustmark Corporation's (TRMK) and Trustmark National Bank's (TNB) Long-Term Issuer Default Ratings (IDRs) at 'BBB+'.

Fitch has also revised TRMK's and TNB's Rating Outlooks to Negative from Stable.

The Outlook revisions reflect Fitch's expectations that TRMK's capital ratios will decline and may remain below Fitch's mid-tier regional bank peer median over the rating horizon, which could result in a downgrade of the company's rating.

On Dec. 31, 2022, TRMK entered into a settlement agreement relating to outstanding litigation involving a Ponzi scheme operated by the Stanford Financial Group (Stanford), to whom TRMK provided banking services. TRMK was one of several banks involved in litigation related to the Stanford Ponzi scheme. While TRMK made no admission of and expressly denies liability or wrongdoing, it agreed to pay $100 million as part of the settlement agreement. Fitch estimates the after-tax impact of the settlement to be over 50 bps of CET1 capital.

Key Rating Drivers

The Negative Outlook reflects Fitch's view that TRMK's common equity tier 1 (CET1) ratio, Fitch's core metric for assessing capitalization and leverage, may fall and remain materially below Fitch's mid-tier regional bank peer median levels. Prior to today's action, TRMK's ratings and Stable Outlook incorporated Fitch's expectation that the company would manage capital at or above the peer median over time and that a sustained CET1 ratio below the peer median could result in ratings pressure.

TRMK's capital ratios have been on a downward trajectory over the last several years, driven by deteriorating earnings trends relative to peers, a relatively high dividend payout ratio, and strong loan growth. TRMK's CET1 ratio fell to 10.6% at 3Q22, approximately 60 bps below the peer median of 11.2%. Its 3Q22 CET1 ratio was down over 100 bps compared with 3Q21. TRMK's capital ratios had historically been managed at or above the peer median, which Fitch considered appropriate considering the company's weaker earnings and higher dividend payout ratio compared with peers.

Fitch considers the earnings impact of the settlement a credit negative that adds to TRMK's already challenged earnings performance relative to peers, which has deteriorated over time. TRMK's return on average assets (ROA) was 0.82% for 3Q22 YTD compared with the mid-tier regional bank peer median of 1.12%. Fitch considers TRMK's earnings a ratings constraint and believes the company's earnings performance trends relative to peers may indicate a weakening business profile.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch will monitor TRMK's capitalization levels, particularly its CET1 ratio, over the Outlook horizon and will continue to monitor the company's capitalization relative to peers. A downgrade is possible should TRMK's CET1 ratio sustain materially below Fitch's mid-tier regional bank peer median absent an expectation that it will rebuild the ratio and sustain its CET1 ratio at or above the peer median.

Negative rating action could also occur if TRMK's earnings continue to be pressured and further diverge from peers. Should the company's elevated operating expenses result in structurally weaker earnings compared to peers over the long term, negative rating action could occur.

Although outside of Fitch's expectations, negative rating action could occur if TRMK's credit costs exceed peer averages over several quarters and could result in weaker ability to generate earnings in line with the ratings.

Negative action could occur if TRMK partakes in M&A that is not reasonable in size or geography or that is not complementary in core competencies to its business model.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch considers the likelihood of an upgrade to be low over the Outlook horizon, given the Negative Outlook. Fitch could revise the Outlook back to Stable from Negative should TRMK's CET1 ratio revert towards peer median levels over the Outlook horizon. The Outlook could also be revised back to Stable should TRMK announce a credible plan to rebuild its CET1 ratio back to or above peer median levels.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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