TEXT-Fitch affirms Trustmark's ratings & revises outlook to negative following BancTrust announcement

May 31 - Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) for Trustmark Corporation (TRMK) and its banking subsidiary, Trustmark National Bank at 'A-'. The Rating Outlook has been revised to Negative from Stable. This action follows the announcement that the company has entered into an agreement to acquire BancTrust Financial Group, Inc. (BTFG). A full list of ratings follows this release.

The Outlook revision reflects Fitch's negative view of the acquisition's impact on the company's capital, earnings contribution, and pricing.

The acquisition is expected to close in 4Q12. Upon consummation of the deal, Tier 1 risk-based capital is projected to decline over 250bps from actual March 31, 2012 levels. Although the company is forecasting capital levels in excess of well-capitalized levels at close and re-building over time, this acquisition still represents a meaningful impact to the company's capital base. Fitch has viewed TRMK's solid capital position and manageable credit costs to date as offsetting rating strengths, in the context of lower earnings. As of March 31, 2012, TRMK had solid capital ratios with Tier 1 common equity at 14.87%, while NCOs have averaged around 70bps over the past five years.

At close, TRMK's total assets will exceed $10bn, subjecting the company to increased regulatory scrutiny and regulations, including compliance with interchange rules. Over the past five years, TRMK's ROA has averaged 1.08%, which is at the low end of the A- range. Fitch will assess the combined company's financial performance as one key rating factor in the company's maintenance of its credit ratings at their current levels. The time horizon for reviewing the ratings will likely be shorter than the typical rating outlook time frame which is between 12-24 months.

Fitch also views the pricing as aggressive, in terms of acquired book value. The announced transaction is valued at $105 million or 1.7x BTFG's tangible book value as of March 31, 2012. TRMK will issue approximately $55.4 million of stock to BTFG's shareholders and intends to repay BTFG's $50 million preferred stock issued to the U.S. Treasury. Fitch views the deal as expensive given BTFG's weakened financial condition.

From a strategic standpoint, the transaction will modestly augment TRMK's existing franchise in Florida, as well as provides an entry into Alabama. Although BTFG's deposit franchise is predominantly time deposits (46% of deposits at March 31, 2012), the company does possess good market shares in several of its central and south Alabama markets. Given TRMK's low-cost funding base and track record in managing funding costs, Fitch factored in TRMK's ability to rationalize the newly acquired deposit base over the medium term. TRMK's leading market share in its home state provides strength to the company's ratings at their current levels.

The conservative mark on the loan portfolio (15% of total loans, 48% of OREO) should also mitigate some of the risk inherent in BTFG's troubled loan book. BTFG had been struggling since late 2007, and most recently, had to revise its 4Q11 results to reflect a $50 million loss after a review of its loan portfolio forced the company to set aside more reserves for loan losses and a decrease in the carrying value of certain foreclosed real estate. BTFG had announced in March 2012 that it was seeking a merger partner after it failed to recapitalize the company as an independent entity.

Fitch expects that capital ratios will re-build over a two-year period to levels in line with its rating category. Failure to rebuild capital in line with projections could lead to pressure on TRMK's ratings. Further, TRMK's ratings could also be negatively influenced should credit quality of the acquired loan portfolio or its own legacy portfolio deteriorate beyond current expectations or, if earnings performance were not to rebuild to levels in line with peer averages over time.

Fitch affirms the following, with a Negative Rating Outlook:

Trustmark Corporation

--Long-term IDR at 'A-';

--Short-term IDR at 'F1';

--Viability at 'a-';

--Support at '5';

--Support Floor at 'NF'.

Trustmark National Bank

--Long-term IDR at 'A-';

--Short-term IDR at 'F1';

--Long-term deposits at 'A';

--Short-term deposits at 'F1';

--Subordinated debt at 'BBB+';

--Viability at 'a-';

--Support at '5';

--Support Floor at 'NF'.