<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER 0-3683
TRUSTMARK CORPORATION
(Exact name of Registrant as specified in its charter)
MISSISSIPPI 64-0471500
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
248 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (601)354-5111
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 10, 1994:
COMMON STOCK, NO PAR VALUE 31,172,907
Class Number of shares
<PAGE> 2
TRUSTMARK CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993
Consolidated Statements of Income
Three and Six Months Ended
June 30, 1994 and 1993
Consolidated Statements of
Cash Flows - Six Months
Ended June 30, 1994 and 1993
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
SIGNATURES
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in Thousands Except Share Data)
<TABLE>
<CAPTION>
June 30,
1994 December 31,
(Unaudited) 1993*
----------- ------------
<S> <C> <C>
Assets
Cash and due from banks (noninterest-bearing) $ 221,821 $ 238,433
Federal funds sold and securities purchased
under reverse repurchase agreements 166,932 91,506
Trading account securities 526 2,555
Securities:
Available for sale, at fair value 593,702
At lower of aggregate cost or fair value
(fair value: $84,346) 84,278
Held to maturity (fair value: $1,183,525-1994;
$1,838,485-1993) 1,222,524 1,796,828
Loans 2,114,303 2,116,938
Less: Unearned income 27,007 33,112
Allowance for possible loan losses 62,636 62,650
---------- ----------
Net loans 2,024,660 2,021,176
Premises and equipment, net 59,555 58,749
Accrued interest receivable 36,951 34,982
Intangible assets 40,239 40,426
Other assets 66,629 63,093
---------- ----------
Total Assets $4,433,539 $4,432,026
========== ==========
Liabilities
Deposits:
Noninterest-bearing deposits $ 637,667 $ 676,601
Interest-bearing deposits 2,521,474 2,512,604
---------- ----------
Total deposits 3,159,141 3,189,205
Federal funds purchased 169,210 84,295
Securities sold under repurchase agreements 689,160 760,840
Accrued expenses and other liabilities 40,351 39,059
---------- ----------
Total Liabilities 4,057,862 4,073,399
Stockholders' Equity
Common stock, no par value:
Authorized, 40,000,000 shares
Issued and outstanding: 31,172,907 shares 12,989 12,989
Surplus 220,888 220,888
Retained earnings 145,525 124,750
Net unrealized loss on securities available for
sale, net of tax (3,725)
---------- ----------
Total Stockholders' Equity 375,677 358,627
---------- ----------
Total Liabilities and Stockholders' Equity $4,433,539 $4,432,026
========== ==========
</TABLE>
*Derived from audited financial statements
See notes to consolidated financial statements
<PAGE> 4
TRUSTMARK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 42,988 $ 39,232 $ 84,358 $ 78,524
Interest and dividends on securities:
Taxable interest and dividend income 26,502 30,605 52,876 58,513
Interest income exempt from federal
income taxes 1,619 1,798 3,223 3,666
Interest on federal funds sold and securities purchased
under reverse repurchase agreements 1,513 567 3,633 2,711
----------- ------------ ------------- ------------
Total Interest Income 72,622 72,202 144,090 143,414
Interest Expense
Interest on deposits 20,156 22,121 40,106 45,172
Interest on federal funds purchased and securities sold
under repurchase agreements 7,741 5,245 14,457 10,193
----------- ------------ ------------- ------------
Total Interest Expense 27,897 27,366 54,563 55,365
----------- ------------ ------------- ------------
Net Interest Income 44,725 44,836 89,527 88,049
Provision for loan losses 323 4,218 538 8,004
----------- ------------ ------------- ------------
Net Interest Income After Provision
for Loan Losses 44,402 40,618 88,989 80,045
Other Income
Trust service income 2,162 1,975 4,393 3,951
Service charges on deposit accounts 4,207 4,024 8,395 8,116
Other account charges, fees and commissions 4,488 3,815 8,830 7,337
Securities gains 36 26 40 45
Other 268 839 866 1,707
----------- ------------ ------------- ------------
Total Other Income 11,161 10,679 22,524 21,156
Other Expenses
Salaries 13,987 13,460 28,686 26,170
Employee benefits 2,577 2,359 5,536 5,029
Net occupancy - premises 1,928 1,714 3,734 3,299
Equipment expense 3,077 2,885 6,048 5,532
Services and fees 4,458 3,897 8,496 7,714
Other real estate expenses 74 331 223 1,460
FDIC insurance assessment 1,782 1,779 3,563 3,559
Amortization of intangible assets 1,719 1,378 3,394 3,823
Other 4,945 4,402 11,100 10,191
----------- ------------ ------------- ------------
Total Other Expenses 34,547 32,205 70,780 66,777
----------- ------------ ------------- ------------
Income before income taxes and cumulative effect of
change in accounting principle 21,016 19,092 40,733 34,424
Income taxes 7,073 5,556 13,723 10,886
----------- ------------ ------------- ------------
Income before cumulative effect of change in
accounting principle 13,943 13,536 27,010 23,538
Cumulative effect on prior years (to December 31, 1992) of
change in accounting for income taxes 1,519
----------- ------------ ------------- ------------
Net Income $ 13,943 $ 13,536 $ 27,010 $ 25,057
=========== ============ ============= ===========
Per Share Data
Income before cumulative effect of change in
accounting principle $ 0.45 $ 0.46 $ 0.87 $ 0.80
Cumulative effect on prior years (to December 31, 1992) of
change in accounting for income taxes 0.05
----------- ------------ ------------- ------------
Net Income Per Share $ 0.45 $ 0.46 $ 0.87 $ 0.85
=========== ============ ============= ============
Dividends Per Share $ 0.1000 $ 0.0933 $ 0.2000 $ 0.1866
=========== ============ ============= ============
Weighted average shares outstanding 31,172,907 29,476,383 31,172,907 29,476,383
=========== ============ ============= ============
</TABLE>
See notes to consolidated financial statements
<PAGE> 5
TRUSTMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1994 1993
------- -------
<S> <C> <C>
Operating Activities
Net income $27,010 $25,057
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 538 8,004
Provision for depreciation and amortization 7,967 7,916
Writedowns and (gains)/losses on other real
estate (66) 1,156
Amortization of security discounts (3,430) (3,532)
Gains on sales of securities (40) (45)
Other 1,255 (864)
Increase in accrued interest receivable (1,969) (2,621)
Increase in intangible assets (3,207) (1,626)
Increase in deferred income taxes (325) (5,066)
Decrease in other assets 535 7,830
Increase (decrease) in other liabilities 1,292 (854)
------- -------
Net cash provided by operating activities 29,560 35,355
------- -------
Investing Activities
Proceeds from calls and maturities of securities
available for sale 141,273
Proceeds from calls and maturities of securities
carried at lower of aggregate cost or fair
value 136,347
Proceeds from calls and maturities of securities
held to maturity 222,195 271,248
Proceeds from sales of securities available for
sale 190,876
Proceeds from sales of securities carried at
lower of aggregate cost or fair value 40,029
Purchases of securities available for sale (216,709)
Purchases of securities carried at lower of
aggregate cost or fair value (152,900)
Purchases of securities held to maturity (275,317) (533,052)
Net (increase) decrease in federal funds sold
and securities purchased under reverse
repurchase agreements (75,426) 100,367
Net increase in loans (5,188) (38,573)
Purchases of premises and equipment (4,922) (2,865)
Proceeds from sales of premises and equipment 110 38
-------- --------
Net cash used by investing activities (23,108) (179,361)
-------- --------
Financing Activities
Net decrease in deposits (30,064) (82,435)
Net increase in federal funds purchased
and securities sold under repurchase agreements 13,235 213,545
Cash dividends (6,235) (5,502)
-------- --------
Net cash (used) provided by financing activities (23,064) 125,608
-------- --------
Decrease in cash and cash equivalents (16,612) (18,398)
Cash and cash equivalents at beginning of year 238,433 252,410
-------- --------
Cash and cash equivalents at end of quarter $221,821 $234,012
======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) In the opinion of Management, the accompanying unaudited and audited
consolidated financial statements contain all adjustments (consisting solely of
normal recurring adjustments) necessary to present fairly Trustmark
Corporation's financial position as of June 30, 1994 and December 31, 1993, the
results of operations for the three and six month periods ended June 30, 1994
and 1993 and the cash flows for the six month period ended June 30, 1994 and
1993.
(2) During the first six months of 1994, the Corporation paid approximately
$17,237,000 in income taxes and $54,903,000 in interest on deposit liabilities
and other borrowings. This compares to $16,360,000 for income taxes and
$55,759,000 for interest on deposits and other borrowings for the first six
months of 1993.
(3) For the six months ended June 30, 1994 and 1993, noncash transfers from
loans to foreclosed properties were $966,000 and $1,251,000, respectively. On
January 1, 1994, noncash transfers to securities available-for-sale were
$84,000,000 from securities held-for-sale and $629,000,000 from securities
held-to-maturity.
(4) On January 1, 1994 the Corporation adopted SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." Debt securities not
classified as trading account securities or investment securities expected to
be held to maturity and all equity securities are classified as
available-for-sale securities and reported at fair value, with net unrealized
gains and losses reported, net of income tax, as a separate component of
stockholders' equity. The net unrealized loss reported in stockholders' equity
at June 30, 1994 is $3,725,000.
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated statements found elsewhere in this report.
ACQUISITIONS
On March 28, 1994, Trustmark Corporation (Corporation) and First National
Financial Corporation, parent company of First National Bank of Vicksburg,
Mississippi entered into an agreement in principle whereby First National
Financial Corporation will be merged into Trustmark Corporation. The merger
agreement stipulates that the shareholders of First National Financial
Corporation will receive approximately 3.6 million shares of Trustmark
Corporation common stock and the right to receive $1.1 million in cash on the
closing date. The merger, which is subject to approval by shareholders and the
appropriate regulatory authorities and will be accounted for as a pooling of
interests, is expected to be consummated during October 1994.
Trustmark Corporation reported total assets at June 30, 1994 of $4.434
billion and currently has 152 locations serving 43 Mississippi cities. At June
30, 1994, First National Financial Corporation had total assets of $304.3
million. First National has eight locations in Vicksburg, Mississippi and one
in Jackson, Mississippi.
After the close of business on July 31, 1993, UniSouth Banking Corporation
(UniSouth), of Columbus, Mississippi, was merged with Trustmark National Bank.
This business combination has been accounted for by the purchase method of
accounting. Accordingly, the consolidated statements of income and cash flows
for the three and six month periods ended June 30, 1993 do not reflect the
impact of this merger. All other financial statements include the effect of
this merger since its consummation.
EARNINGS SUMMARY
Trustmark Corporation reported net income for the second quarter of 1994
of $13.9 million or $.45 per share compared to $13.5 million or $.46 per share
for the same time period in 1993. Earnings for the six months ended June 30,
1994, were $27.0 million or $.87 per share compared to $25.1 million or $.85
per share for the same time period in 1993. The Corporation was able to
achieve historical highs for net income for both the second quarter and the six
months ended June 30, 1994 as a result of a substantially lower provision for
loan losses combined with continued improvement in net interest income, modest
growth in noninterest income and effective management of noninterest expenses.
It should also be noted that net income for the six months ended June 30, 1993
was positively impacted by the adoption of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," as of January 1, 1993.
The cumulative effect of this change in accounting principle was to increase
net income by $1.5 million or $.05 per share.
The return on average assets (ROA) for the second quarter of 1994 was
1.25% compared to 1.29% for the same time period in 1993.
<PAGE> 8
For the six months ended June 30, 1994, ROA was 1.21% compared to 1.20% for
the first six months of 1993. The return on average equity (ROE) was 14.92%
for the second quarter of 1994 compared to 17.46% for the same time period in
1993. For the six months ended June 30, 1994, ROE was 14.72% compared to 16.51%
for the first six months of 1993.
ASSET/LIABILITY MANAGEMENT AND LIQUIDITY
A key objective of asset/liability management is to manage the
Corporation's assets and liabilities to optimize and maintain the spread
between interest earned and interest paid while ensuring an adequate liquidity
position. The Asset/Liability Committee monitors and adjusts the Corporation's
exposure to interest rates, within specific policy guidelines, based on its
view of current and expected market conditions. The primary tool utilized by
this committee is an asset/liability modeling system which is used to evaluate
exposure to interest rate risk and to project earnings and balance sheet
growth. Each month, the committee reviews the output of this model with
respect to the estimated impact of various interest rate scenarios on net
interest income and its compliance with policy guidelines. At June 30, 1994,
the Corporation's net interest income forecasts for the six month, twelve month
and second twelve month periods were within policy guidelines.
Another tool used to monitor the Corporation's overall interest rate
sensitivity is a gap analysis. The table below represents the Corporation's 90
day and one year gap position as of June 30, 1994 ($ in thousands):
<TABLE>
<CAPTION>
Interest Sensitive Within
90 days One Year
----------- -----------
<S> <C> <C>
Total rate sensitive assets $1,101,798 $1,646,719
Total rate sensitive liabilities 1,861,962 2,334,113
----------- -----------
Net gap $ (760,164) $ (687,394)
=========== ===========
</TABLE>
The analysis indicates that the Corporation is in a negative gap position
over the next three-month and twelve-month time horizons. Management believes
that it has adequate flexibility to alter the overall rate sensitivity
structure as necessary to minimize exposure to changes in interest rates. As
such, the Corporation's negative gap position has decreased by approximately
13% in the three-month time horizon and by approximately 20% in the
twelve-month time horizon since December 31, 1993 in response to rising
interest rates.
The Asset/Liability Committee is also responsible for maintaining
guidelines that provide for an adequate liquidity position to compensate for
expected and unexpected balance sheet fluctuations and to provide funds for
growth. Historically, the Corporation has maintained its liquidity from
deposits, excess funds purchased from downstream correspondent banks and
repurchase agreements with larger customers.
EARNING ASSETS
<PAGE> 9
At June 30, 1994, earning assets comprised 91.82% of total assets compared
to 91.58% at December 31, 1993. The decline in securities experienced during
the first six months of 1994 was generally offset by an increase in federal
funds sold and securities purchased under reverse repurchase agreements with
loans showing very little change since year end.
Total loans increased by $3.5 million during the first six months of 1994.
Commercial and industrial loans grew by $39.5 million during the first six
months of 1994 and have benefited from the improving economic atmosphere within
the state. The most significant increases have come from the public utility,
construction and services industries. In addition, consumer loans have grown
by $26.6 million primarily from the area of automobile loans. The most
substantial decrease in the loan portfolio was seen in real estate loans which
declined by $69.0 million. This decline can be traced to two major factors.
First, interest rates on mortgage loans have been rapidly rising during the
first two quarters of 1994, slowing the volume of mortgages refinanced.
Second, the Corporation continues to be committed to the growth of its mortgage
servicing portfolio. The Corporation intends to package and sell substantially
all qualified mortgage loans that the Corporation has originated or purchased
while retaining the right to service these mortgages. At June 30, 1994, the
Corporation's volume of residential mortgage loan servicing was approximately
$1.95 billion compared to $1.68 billion at the end of 1993. This 16.4%
increase can be attributed to the strong growth of loans purchased in the
correspondent market and the utilization of loans originated within the
Corporation.
The Corporation's emphasis on credit quality has produced a healthy loan
portfolio and a conservative approach to providing for potential loan losses.
This emphasis on credit quality can be seen in the Corporation's commitment to
the continued refinement of credit administration systems designed to monitor
overall policy compliance and the adequacy of supporting financial and
collateral documentation. As a result of recent improvements, it is
anticipated that the Corporation's ability to identify and address actual and
potential credit problems will be further strengthened.
The allowance for loan losses is maintained at a level which Management
and the Board of Directors believe is adequate to absorb estimated losses
inherent in the loan portfolio, plus estimated losses associated with
off-balance sheet credit instruments such as letters of credit. The adequacy of
the allowance is reviewed on a quarterly basis by using the criteria specified
in revised Comptroller of the Currency Banking Circular 201 as well as guidance
provided in the Interagency Policy Statement received in January 1994. Each
review includes analyses of historical loss experience, trends in portfolio
volume and composition, ratio analysis related to overall credit quality,
consideration of current economic conditions, estimated future losses in
significant criticized loans, changes in lending policies and procedures and
other pertinent information. This review is presented to the Credit Policy
Committee with subsequent review and approval by the Board of Directors.
The allowance for loan losses has remained at substantially
<PAGE> 10
the same level as December 31, 1993. The allowance currently approximates 3.0%
of total loans outstanding and provides the Corporation with a more than
adequate reserve coverage of nonperforming loans. Because of the imprecision
and subjectivity inherent in most estimates of expected credit losses,
Management will continue to take a prudent, yet conservative approach in the
evaluation of the allowance for loan losses.
Net charge-offs totaled $552 thousand for the first six months of 1994
which resulted in an annualized net charge-off ratio of .05%. The current level
of net charge-offs for the Corporation remains well below that of banks within
its peer group.
A measure of asset quality in the financial institutions industry is the
level of nonperforming assets. Nonperforming assets include nonperforming
loans, consisting of nonaccrual and restructured loans, and other real estate.
See the table below for more details ($ in thousands):
<TABLE>
<CAPTION>
6/30/94 12/31/93
------- -------
<S> <C> <C>
Loans accounted for on a nonaccrual basis $10,429 $ 9,784
Other real estate 3,464 3,961
Loans past due 90 days or more and still
accruing 635 1,217
------- -------
Total nonperforming assets and past due loans $14,528 $14,962
======= =======
</TABLE>
Asset quality of the Corporation is considered to be very good. The
overall volume of classified assets, which is comprised of classified loans and
other real estate owned, remains at approximately the same level reported at
year end and is favorable. As the table above illustrates, overall
nonperforming assets and past due loans remain well-controlled and continue to
compare favorably to peer levels. As of June 30, 1994, the Corporation knows
of no additional loans, other than those identified above, that Management has
serious doubts as to the ability of such borrowers to repay principal and
interest.
The securities portfolio is utilized to provide a quality investment
alternative for available funds and to provide a stable source of interest
income. The overall balance of the securities portfolio declined by $64.9
million during the first six months of 1994. This is partially attributable to
the Corporation's decision to replenish the balances in federal funds sold and
to provide funds for loan growth. Within the securities portfolio, the
available-for-sale portfolio was reduced due to recent instability in the bond
market. Reinvestment activity was mostly made in held-to-maturity securities
with higher yields while the balance was invested in federal funds sold.
Because of the recent instability in the bond market, the Corporation has
increased the short-term investment portfolio to its highest point in over one
year. This portfolio is utilized as an alternative to the overnight funds
market and has contributed an additional $509 thousand in interest income when
compared to investments in the overnight funds market. The short-term
portfolio will continue to play a vital role in maintaining the Corporation's
liquidity and profitability.
<PAGE> 11
The latest comparisons of the tax equivalent yield of the investment
portfolio show the Corporation remaining in the upper quartile when compared to
its peer group. This has been accomplished while maintaining the quality of
the portfolio.
On January 1, 1994, the Corporation adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under this new accounting
standard, debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as held to maturity and reported at
amortized cost. Debt and equity securities which are not classified as held to
maturity or as trading securities are classified as available-for-sale and
reported at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity, net of income taxes. At June 30, 1994, the
carrying values and fair values of securities classified as available-for-sale
were $599.7 million and $593.7 million, respectively. This resulted in an
unrecognized loss, net of tax, of approximately $3.73 million as a separate
component of stockholders' equity.
For the first six months of 1994, realized gains were $3.30 million on
securities available-for-sale while realized losses totaled $3.26 million
resulting in net security gains of $40 thousand. Gross unrealized gains
approximated $5.5 million while gross unrealized losses approximated $11.5
million on these securities. There were no realized gains or losses on the sale
of securities classified as held-to-maturity. Gross unrealized gains
approximated $7.4 million and gross unrealized losses approximated $46.4
million on securities classified as held-to-maturity at June 30, 1994.
Federal funds sold and securities purchased under reverse repurchase
agreements increased by $75.4 million when compared to the end of 1993.
Uncertain loan growth and unstable market conditions created the need for the
Corporation to utilize federal funds sold and securities purchased under
reverse repurchase agreements as a short-term investment alternative.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits provide the Corporation with its primary source of funds. Total
deposits at June 30, 1994 decreased by $30.0 million when compared to December
31, 1993. Interest-bearing deposits increased by $8.9 million while
noninterest-bearing deposits fell by $38.9 million during that time period.
While certificates of deposit have grown slightly since year end, balances in
money-market products have dropped. Recent increases in rates paid on
money-market mutual funds have caused some customers to shift their liquidity
preferences in order to seek higher rates.
Federal funds purchased increased $84.9 million when compared to December
31, 1993. This can be traced to an increase in funds purchased from
correspondent banks.
Securities sold under repurchase agreements fell by $71.7 million during
the first six months of 1994. With interest rates on the rise, some customers
who had purchased securities sold under repurchase agreements have sought
alternative products that would provide additional yield. However, this
remains a very popular alternative to traditional deposit products.
<PAGE> 12
STOCKHOLDERS' EQUITY
The Corporation has always placed a great emphasis on maintaining its
strong capital base. The Corporation's Management and Board of Directors
continually evaluate business decisions that may have an impact on the level of
stockholders' equity. It is their goal that the Corporation maintain a "well
capitalized" equity position. Based on the capital levels defined by banking
regulators, a "well capitalized" institution is one that has at least a 10%
total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and a 5%
Tier 1 leverage ratio. The Corporation's solid capital base is reflected in its
regulatory capital ratios. The table below illustrates these ratios at June
30, 1994 ($ in thousands):
<TABLE>
<S> <C>
Tier 1 Capital $368,052
Tier 2 Capital 30,475
--------
Total Qualifying Capital $398,527
========
Total Risk Weighted Assets $2,405,806
==========
Tier 1/Risk Weighted Assets 15.30%
Tier 2/Risk Weighted Assets 1.27%
------
Total Qualifying Capital/Risk Weighted Assets 16.57%
======
Leverage Ratio 8.23%
======
</TABLE>
As shown in the table above, the Corporation's capital ratios surpass the
minimum requirements of 4% for the Tier 1 capital ratio and 8% for the total
risk-based capital ratio. The Tier 1 leverage ratio generally must exceed 3%
and is driven by evaluation and discretion of the regulators.
At June 30, 1994, the Corporation had stockholders' equity of $375.7
million which contained a net unrealized loss on securities available-for-sale,
net of taxes, of $3.73 million. Based on its dividend payout ratio of 23.0%,
the Corporation retained 77.0% of its earnings for the six months ended June
30, 1994, generating an internal capital growth rate of 11.3%. Dividends for
the second quarter of 1994 remained at $.10 per share resulting in an annual
dividend rate of $.40 per share. Book value for the Corporation's common stock
was $12.05 at June 30, 1994, compared to the closing market price of $18.50.
NET INTEREST INCOME
Net interest income is an effective measurement of how well Management has
managed the Corporation's interest rate sensitive assets and liabilities. Net
interest income for the six months ended June 30, 1994 increased $1.48 million
when compared to the same time period in 1993. An increase in revenue from
earning
<PAGE> 13
assets combined with a decrease in interest expense contributed to this change.
Average earning assets rose 7.2% for the first six months of 1994 with
the yield on average earning assets declining 49 basis points when compared to
the same time period in 1993. This combination resulted in interest income
generated by earning assets increasing $676 thousand for the six months ended
June 30, 1994 when compared to the same time period in 1993. Declines in
interest earned from securities were more than offset by the increase in
interest and fees on loans and federal funds sold and securities purchased
under reverse repurchase agreements. The recent increases in the prime rate
were a major contributor to the growth in interest and fees on loans realized
during the second quarter of 1994.
Average interest-bearing liabilities rose 4.5% for the first six months of
1994 with the rate paid declining by 19 basis points when compared to the same
time period in 1993. As a result, interest expense generated by
interest-bearing liabilities declined by $802 thousand when compared to the
first six months of 1993. A reduction in both the average balance and rate
paid on interest- bearing deposits more than offset an increase in the average
balances of federal funds sold and securities purchased under reverse
repurchase agreements.
The table below illustrates the changes in net interest margin as a
percentage of average earning assets for the first six months of 1994 and 1993:
<TABLE>
<CAPTION>
Six months ended
------------------
6/30/94 6/30/93 Change
------ ------ -------
<S> <C> <C> <C>
Yield on interest-earning assets-FTE 7.15% 7.64% (.49)%
Rate on interest-bearing liabilities 2.66% 2.90% (.24)%
------ ------ -------
Net interest margin-FTE 4.49% 4.74% (.25)%
====== ====== =======
</TABLE>
The fully taxable equivalent (FTE) yield on tax exempt income has been computed
based on a 35% federal marginal tax rate for both 1994 and 1993. For the first
six months of 1994, the Corporation experienced compression in its net interest
margin due to the rates paid on interest-bearing liabilities declining slower
than the decline of yields on earning assets. However, the Corporation
achieved a higher net interest margin during the second quarter of 1994 when
compared to the first quarter by benefiting from recent increases in the prime
rate. The Corporation will continue to take the necessary precautions in order
to protect itself against a rapidly changing interest rate environment.
PROVISION FOR LOAN LOSSES
Management's prudent approach to improving credit quality has contributed
significantly to the increase in earnings experienced during the first six
months of 1994. Earnings for the six months ended June 30, 1994, were
positively impacted by the $7.5 million
<PAGE> 14
decline in the Corporation's provision for loan losses when compared to the
same time period in 1993.
NONINTEREST INCOME
The Corporation stresses the importance of growth in noninterest income as
one of its key long-term strategies. Noninterest income for the first six
months of 1994, excluding security gains, increased $1.4 million or 6.5% when
compared to the same time period in 1993. When comparing the second quarter of
1994 to the same time period in 1993, noninterest income increased $472
thousand or 4.4%. Trust service income increased by 11.2% when compared to the
first six months of 1993 as Trustmark continued to be one of the largest bank
providers of asset management services in Mississippi. Service charges
increased 3.4% primarily from an increase in the number of deposit accounts.
During the first six months of 1994, other account charges, fees and
commissions became the largest component of noninterest income. The two major
contributors to the 20.4% increase in this category were fees generated from
residential mortgage servicing and ATM usage. Management's commitment to the
continued growth of the mortgage servicing portfolio was seen by the 44.9%
increase in fees collected from servicing mortgages during the first six months
of 1994. The Corporation has added 10 off-premise ATM machines during the first
six months of 1994 in order to better serve its expanding customer base. The
revenues from other income decreased by 49.3% during the first six months of
1994 primarily from the reduction of net gains on the sale of loans. Security
gains for both 1994 and 1993 were immaterial.
NONINTEREST EXPENSE
Another long-term strategy of the Corporation is to continue to provide
quality service to its customers within the context of economic discipline.
The utilization of the newest technological advances in the financial industry
has allowed the Corporation to provide enhanced customer service while
improving its efficiency. This has allowed the Corporation's percentage of
overhead expenses to average assets to remain substantially below that of its
peer group. Noninterest expense for the six months ended June 30, 1994
increased $4.0 million or 6.0% when compared to the same time period in 1993.
When comparing only the second quarter of 1994 to 1993, noninterest expenses
increased by $2.3 million or 7.3%.
Salaries and employee benefits continue to comprise the largest portion of
other expenses and have increased 9.7% during the first six months of 1994 due
to normal annual compensation increases combined with an increase in
contributions to employee benefit plans. In addition, salaries and employee
benefits for the first six months of 1993 do not include expenses for the
employees of UniSouth which were merged into the Corporation on July 31, 1993.
The number of full-time equivalent employees totaled 2,056 at June 30, 1994,
2,072 at December 31, 1993 and 1,992 at June 30, 1993. Personnel expense for
the Corporation remains well below that of its peer group. Renovations to
facilities purchased and leased in the UniSouth acquisition as well as the
general maintenance of existing facilities have contributed to the $951
thousand increase
<PAGE> 15
in occupancy and equipment expenses during the first six months of 1994.
Services and fees expense increased by 10.1% during the same time period due to
increased expenses for communications and advertising. Decreased write-downs
were the major contributor to the 84.7% decrease in other real estate expenses
during the first six months of 1994. The Corporation's volume of other real
estate compares very favorably to that of its peer group. FDIC insurance
expense remained at essentially the same level as that of the prior year. The
amortization of intangible assets has decreased 11.2% when comparing the first
six months of 1994 to the same time period last year. Increased prepayments of
mortgages serviced resulted in the accelerated amortization of mortgage
servicing rights during the first quarter of 1993. In addition, the
amortization of intangible assets associated with the purchase of the Canton
Exchange Bank in 1983 was completed during the fourth quarter of 1993. Other
expenses increased 8.9% during the first six months of 1994 primarily due to
increased expenses related to the purchase and sale of loans in the mortgage
servicing portfolio, credit cards and loan collection.
INCOME TAXES
For the six months ended June 30, 1994, the Corporation's effective tax
rate was 33.7% compared to 27.2% for the first six months of 1993. This
increase in the effective tax rate is due to the Corporation's adoption of SFAS
No. 109, "Accounting for Income Taxes," during the first quarter of 1993. The
cumulative effect of this change in accounting principle was to decrease income
tax expense by $1.5 million. This reduced the Corporation's effective tax rate
for the first six months of 1993 by 4.4%.
OTHER REGULATORY MATTERS
In June 1993, the issuance of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," addressed how creditors should establish allowances for
credit losses on individual loans determined to be impaired. This standard
offers a definition of impairment and how the amount of impairment is measured.
SFAS No. 114 applies to financial statements for fiscal years beginning after
December 15, 1994. The effect of the implementation of this statement is not
expected to be material.
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments for the quarter ended June 30, 1994.
ITEM 2. CHANGES IN SECURITIES
A) None
B) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
A) None
B) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A) None
B) None
C) None
D) None
ITEM 5. OTHER INFORMATION
On May 4, 1994, the Corporation entered into an agreement to merge with
First National Financial Corporation, parent company of First National Bank of
Vicksburg, Mississippi, subject to approval by the shareholders and appropriate
regulatory authorities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K Current Report was filed on April 11, 1994 relative to Item 5
reported above.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
TRUSTMARK CORPORATION
(Registrant)
DATE: August 10, 1994 /s/ FRANK R. DAY
Frank R. Day, Chairman of the
Board, President and Chief
Executive Officer
DATE: August 10, 1994 /s/ DAVID R. CARTER
David R. Carter,
Secretary-Treasurer
