Trustmark Corp. (Nasdaq:TRMK) saw its asset quality decline over the last year as it has suffered the effects of the recession and real estate bubble, but its high tangible equity ratio will protect the bank from any permanent damage.
Trustmark is a Southeastern United States regional bank headquartered in Jackson, Miss., with $9.8 billion in assets. The bank's roots are in central Mississippi, but over time it branched out into Memphis, Tenn., Houston and the Florida Panhandle.

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Assets
Trustmark had a loan portfolio of $6.64 billion at the end of the first quarter, with approximately one-third in consumer loans and the remainder in commercial loans. The bank does have a high concentration toward several different types of real estate lending, including a construction and land development portfolio of $1 billion.

These real estate concentrations have hurt the bank in the last year. Total non-performing assets as a percent of total loans and other real estate owned (OREO) was at 2.53% as of March 31. Trustmark also charged off $11.4 million in loans during the quarter.

Florida is where most of the bank's problem loans are. Total loans here were $606 million in the recent Q1, with $181 million of those loans in various stages of distress on a watch list that the bank refers to as "criticized loans". Some of these loans are still accruing interest.

Liabilities
Trustmark's deposit base is concentrated with 80% located in the Jackson Metropolitan Statistical Area (MSA) and the rest of the state. Twenty-one percent of these deposits are non-interest bearing, which helps keep funding costs lower.

Capital
The capital strength of a bank is the most important thing for investors in the current market climate, and Trustmark does well in that regard. Its tangible common equity ratio (TCE) stands at 7.2%, and its Tier 1 risk-based capital ratio was 13.34% as of March 31. That Tier 1 ratio includes $215 million in senior preferred stock issued to the U.S. government as part of the Capital Purchase Program (CPP). Even excluding this, the ratio was 10.2%.

This tangible equity ratio stands favorably versus some of the larger banks that were assessed as part of the Supervisory Capital Assessment Program (SCAP) conducted by the U.S government recently to ascertain capital needs. Citigroup (NYSE:C) had the lowest TCE of the major banks at 1.9%, while KeyCorp (NYSE:KEY) was the highest at 6.0%. Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM) had a TCE of 2.9% and 4.0%, respectively.

Valuation
Since it is difficult to predict earnings during this turbulent time, a multiple of book value may be the best way to value banks and other financials. Trustmark's tangible book value per share was $11.87 at the end of the Q1. At close to $20 a share, this gives us a multiple of two times book value. This is not exactly cheap for a bank in the market today.

Bottom Line: A Strong TCE
Trustmark is a pricey play in the banking sector considering its declining asset quality over the last 12 months. However, its strong tangible equity base may give some investors comfort that the bank will make it through the balance of the financial crisis.

Read Buy When There's Blood In The Streets to learn how contrarian investors find value in the worst market conditions, and see Analyzing A Bank's Financial Statements for more on bank ratio analysis.

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