<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1996
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
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Mississippi 64-0471500
Trustmark Corporation
248 East Capitol Street
Jackson, MS 39201
(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 registrant's classes of
common stock, as of August 12, 1996.
Title Outstanding
Common stock, no par value 34,910,683
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1996 1995*
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks (noninterest-bearing) $ 330,864 $ 299,006
Federal funds sold and securities purchased
under reverse repurchase agreements 53,520 113,585
Trading account securities 814 226
Securities available for sale (at fair value) 629,440 488,693
Securities held to maturity (fair value: $1,447,146-1996;
$1,370,670-1995) 1,462,029 1,353,632
Loans 2,527,992 2,580,219
Less: Unearned income 4,811 8,128
Allowance for loan losses 63,000 62,000
--------- ---------
Net loans 2,460,181 2,510,091
Premises and equipment 61,033 61,193
Intangible assets 38,959 37,671
Other assets 131,294 128,495
--------- ---------
TOTAL ASSETS $5,168,134 $4,992,592
========= =========
LIABILITIES
Deposits:
Noninterest-bearing $ 778,421 $ 767,051
Interest-bearing 2,828,364 2,762,994
--------- ---------
Total deposits 3,606,785 3,530,045
Federal funds purchased 156,475 75,675
Securities sold under repurchase agreements 855,829 857,308
Other liabilities 52,364 50,812
--------- ---------
TOTAL LIABILITIES 4,671,453 4,513,840
STOCKHOLDERS' EQUITY
Common stock, no par value: Authorized, 100,000,000
shares, Issued and outstanding: 34,910,683 shares 14,546 14,546
Surplus 244,578 244,578
Retained earnings 237,344 214,166
Net unrealized gain on securities available for sale, net of tax 213 5,462
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 496,681 478,752
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $5,168,134 $4,992,592
========= =========
</TABLE>
* Derived from audited financial statements.
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ -------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 56,262 $ 55,834 $ 113,284 $ 108,350
Interest on securities:
Taxable interest income 30,690 27,458 59,335 55,395
Interest income exempt from federal income taxes 1,432 1,528 2,880 3,049
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 948 2,104 3,036 3,789
--------- --------- --------- ---------
TOTAL INTEREST INCOME 89,332 86,924 178,535 170,583
INTEREST EXPENSE
Interest on deposits 28,247 28,351 56,376 54,754
Interest on federal funds purchased and securities
sold under repurchase agreements 12,145 12,675 25,026 24,050
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 40,392 41,026 81,402 78,804
--------- --------- --------- ---------
NET INTEREST INCOME 48,940 45,898 97,133 91,779
Provision for loan losses 1,364 (791) 3,508 (228)
--------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 47,576 46,689 93,625 92,007
NONINTEREST INCOME
Trust service income 2,382 2,302 4,764 4,588
Service charges on deposit accounts 5,836 5,158 11,408 10,273
Other account charges, fees and commissions 7,190 6,460 14,035 11,744
Securities gains 50 0 46 120
Other income 880 1,328 1,885 2,239
--------- --------- --------- ---------
TOTAL NONINTEREST INCOME 16,338 15,248 32,138 28,964
NONINTEREST EXPENSES
Salaries and employee benefits 19,098 17,867 38,100 36,095
Net occupancy-premises 2,330 2,196 4,452 4,483
Equipment expenses 3,008 3,158 6,113 6,086
Services and fees 5,182 5,010 10,140 10,053
FDIC insurance assessment 507 1,898 1,005 3,797
Amortization of intangible assets 2,056 1,793 3,991 3,540
Other expenses 6,881 7,402 13,464 13,390
--------- --------- --------- ----------
TOTAL NONINTEREST EXPENSES 39,062 39,324 77,265 77,444
--------- --------- --------- ----------
INCOME BEFORE INCOME TAXES 24,852 22,613 48,498 43,527
Income taxes 8,665 7,898 16,942 14,928
--------- --------- --------- ----------
NET INCOME $ 16,187 $ 14,715 $ 31,556 $ 28,599
========= ========= ========= ==========
NET INCOME PER SHARE $ 0.46 $ 0.42 $ 0.90 $ 0.82
========= ========= ========= ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (000's) 34,911 34,911 34,911 34,911
</TABLE>
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1996 1995
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 31,556 $ 28,599
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,508 (228)
Provision for depreciation and amortization 8,656 8,782
Net accretion of securities (3,325) (1,523)
Securities gains (46) (120)
Gains and write-downs on other real estate (2) (99)
Other (960) (273)
Increase in intangible assets (5,279) (3,082)
Increase in deferred income taxes (1,589) (1,969)
(Increase) decrease in other assets (927) 4,245
Increase in other liabilities 1,552 6,987
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,144 41,319
--------- ---------
INVESTING ACTIVITIES
Proceeds from calls and maturities of securities available for sale 87,579 159,660
Proceeds from calls and maturities of securities held to maturity 108,272 27,366
Proceeds from sales of securities available for sale 155,905 92,500
Purchases of securities available for sale (392,145) (245,794)
Purchases of securities held to maturity (213,884) (18,011)
Net decrease (increase) in federal funds sold and securities
purchased under reverse repurchase agreements 60,065 (16,367)
Net decrease (increase) in loans 47,342 (152,083)
Purchases of premises and equipment (3,926) (3,452)
Proceeds from sales of premises and equipment 29 106
Proceeds from sales of other real estate 1,795 1,856
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (148,968) (154,219)
--------- ---------
FINANCING ACTIVITIES
Net increase in deposits 76,740 25,072
Net increase in federal funds purchased and securities
sold under repurchase agreements 79,321 94,169
Cash dividends paid (8,379) (7,506)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 147,682 111,735
--------- ---------
Increase(decrease) in cash and cash equivalents 31,858 (1,165)
Cash and cash equivalents at beginning of year 299,006 280,114
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 330,864 $ 278,949
========= =========
</TABLE>
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of Management, all adjustments (consisting of normal recurring accruals)
considered necessary for the fair presentation of these consolidated financial
statements have been included. The notes included herein should be read in
conjunction with the notes to the consolidated financial statements included in
Trustmark Corporation's 1995 annual report on Form 10-K.
The consolidated financial statements include the accounts of Trustmark
Corporation, its wholly-owned subsidiaries, First Building Corporation, F.S.
Corporation, Trustmark National Bank (the Bank) and the Bank's wholly-owned
subsidiary, Trustmark Financial Services, Inc. All intercompany profits,
balances and transactions have been eliminated.
NOTE 2 - LOANS
The following table summarizes the activity in the allowance for loan losses for
the six month periods ended June 30, 1996 and 1995 ($ in thousands):
1996 1995
-------- --------
Balance at January 1 $62,000 $65,014
Provision charged to expense 3,508 (228)
Loans charged off (4,380) (5,240)
Recoveries 1,872 1,904
-------- --------
Balance at June 30 $63,000 $61,450
======== ========
At June 30, 1996, the recorded investment in commercial loans considered to be
impaired under SFAS No. 114 was $9,244,000, all of which were on a nonaccrual
basis. As a result of direct write-downs, the specific allowance related to
these impaired loans is immaterial. For the three months ended June 30, 1996,
the average recorded investment in impaired loans was approximately $10,146,000,
and the amount of interest income recognized on impaired loans was immaterial.
Loans on which the accrual of interest has been discontinued or reduced totaled
$10,711,000 at June 30, 1996. The foregone interest associated with such loans
is immaterial.
NOTE 3 - CONTINGENCIES
In January 1995, a judgment was rendered in a Mississippi trial court against
the Corporation's subsidiary, Trustmark National Bank, in a case related to the
placement of collateral protection insurance ("CPI") by Trustmark on a
particular loan. The judgment awarded $500 thousand in actual damages (against
Trustmark and the insurance agent, jointly and severally) and $38 million in
punitive damages (against Trustmark only). Trustmark filed motions for entry of
judgment in its favor, or for a new trial, or to reduce the verdicts. The judge
took the motions under advisement in April 1995. On August 4, 1995, the court
reduced the punitive damage award from $38 million to $5 million. The judge left
the actual damage award intact. Notice of appeal has been filed by Trustmark
appealing this case to the Mississippi Supreme Court. Notice of cross-appeal has
been filed by the plaintiffs.
There are twenty-three other CPI-related suits against Trustmark pending in
federal court. On September 18, 1995, one of the federal court suits was
certified as a mandatory class action, with the class broadly defined to include
all persons who financed an automobile through Trustmark and whose loan accounts
were charged for CPI premiums. One of the CPI insurers, the CPI underwriter and
the insurance agent are also defendants to the class action. All plaintiffs in
pending suits are members of the mandatory class. On January 10, 1996, the
federal court entered an Order in the class action enjoining all other pending
CPI-related lawsuits (except for the case referred to in the paragraph above),
and enjoining all future CPI-related lawsuits. The court proceedings are matters
of public record.
The cases are being vigorously contested. Investigation is continuing. Similar,
but not identical, cases in other states have had a variety of results,
including settlements. Trustmark's program was consistent with those of numerous
other banks, including banks in Mississippi which are in the process of
defending or settling similar suits. While the ultimate outcome of this legal
matter cannot be predicted with reasonable certainty, Management believes that
the resolution of this matter will not have a material adverse effect on the
Corporation's consolidated financial position. However, Management cannot
predict with reasonable certainty the impact that it might have on the
Corporation's consolidated results of operations during periods until the
litigation is terminated.
<PAGE>
In addition, Trustmark is defendant in various other pending and threatened
legal actions arising in the normal course of business. In the opinion of
Management, and based on the advice of legal counsel, the ultimate resolution of
these matters will not have a material effect on the Corporation's consolidated
financial statements.
NOTE 4 - STATEMENTS OF CASH FLOWS
During the six months ended June 30, 1996 and 1995, the Corporation paid
approximately $18,872,000 and $13,775,000, respectively, in income taxes and
$82,126,000 and $76,156,000, respectively, in interest on deposit liabilities
and other borrowings. For the six months ended June 30, 1996 and 1995, noncash
transfers from loans to foreclosed properties were $920,000 and $569,000,
respectively.
NOTE 5 - RECENT PRONOUNCEMENTS
On January 1, 1996, the Corporation adopted Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights-an amendment of
FASB Statement No. 65." In accordance with SFAS No. 122, the cost of mortgage
loans purchased or originated with a definitive plan to sell the loans and
retain the mortgage servicing rights is allocated between the loans and the
servicing rights based on their estimated fair values at the purchase or
origination date. The adoption of SFAS No. 122 resulted in no material impact on
the Corporation's financial condition or results of operations.
<PAGE>
ITEM 2. 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 financial statements found elsewhere in this report.
EARNINGS SUMMARY
Trustmark Corporation, parent company of Trustmark National Bank, reported net
income of $16.187 million, or $.46 per share, for the second quarter of 1996,
compared to $14.715 million or $.42 per share, for the second quarter of 1995,
an increase of 10.0%. Net income for the six months ended June 30, 1996, was
$31.556 million, or $.90 per share, compared to $28.599 million, or $.82 per
share, for the same time period last year. Two key measures of profitability in
the financial services industry are return on average assets (ROA) and return on
average equity (ROE). During the second quarter of 1996, an ROA of 1.27% was
achieved compared to 1.21% for the second quarter of 1995. For the six months
ended June 30, 1996, ROA was 1.24% compared to 1.19% for the same time period in
1995. The improvements in the Corporation's performance are attributed primarily
to growth in both net interest income and noninterest income combined with a
continued emphasis on the control of noninterest expenses. For the second
quarter of 1996, ROE was 13.24% compared with 13.25% for the second quarter of
1995. For the six months ended June 30, 1996, ROE was 13.05% compared with
13.10% for the same time period in 1995. ROE has been lower during 1996 because
the pace of growth for equity exceeded that of net income.
ASSET/LIABILITY MANAGEMENT AND LIQUIDITY
A key objective of the Corporation's asset/liability management program is to
quantify, monitor and control interest rate risk and to assist Management in
maintaining stability in the net interest margin under varying interest rate
environments. The Asset/Liability Committee monitors and adjusts the
Corporation's exposure to interest rates, within specific policy guidelines,
based on its analysis of current and expected market conditions. The primary
tool utilized by this committee is an asset/liability modeling system used to
evaluate exposure to interest rate risk and to project earnings and balance
sheet growth. The Asset/Liability Committees of both senior bank officials and
the Board of Directors meet monthly to evaluate current and projected interest
rate risk positions.
Another tool used to monitor the Corporation's overall interest rate sensitivity
is a gap analysis. The table below represents the Corporation's 90 day and one
year gap position as of June 30, 1996 ($ in thousands):
Interest Sensitive Within
90 days One Year
--------- ---------
Total rate sensitive assets $ 1,292,944 $ 2,001,101
Total rate sensitive liabilities 1,862,058 2,706,602
--------- ---------
Net gap $ (569,114) $ (705,501)
========= =========
The analysis indicates that the Corporation is in a negative gap position over
the next three month and twelve month time horizons. This position has been
established in response to slightly falling interest rates. Management believes
there is adequate flexibility to alter the overall rate sensitivity structure as
necessary to minimize exposure to changes in interest rates should they occur.
The Asset/Liability Committee establishes guidelines by which they monitor the
current liquidity position to ensure adequate funding capacity. The
Corporation's goal is to maintain an adequate liquidity position to compensate
for expected and unexpected balance sheet fluctuations and to provide funds for
growth. This is accomplished through the active management of both the asset and
liability sides of the balance sheet and by maintaining accessibility to local,
regional and national funding sources. The ability to maintain consistent
earnings power and adequate capital also enhance the Corporation's liquidity.
EARNING ASSETS
The percentage of earning assets to total assets measures the effectiveness of
Management's efforts to invest available funds into the most efficient and
profitable uses. At June 30, 1996, earning assets were $4.669 billion, or 90.34%
of total assets, compared with $4.528 billion, or 90.70% at the end of 1995. A
decrease in federal funds sold and securities purchased under reverse repurchase
agreements at June 30, 1996 was the primary factor contributing to this decline
in earning assets to total assets.
<PAGE>
Total loans decreased by $48.9 million or 1.90% during the first six months of
1996. Commercial and consumer loans, including credit cards, made up the bulk of
the decline as lending to both businesses and individuals weakened in response
to a general softening of the economy. Loans secured by real estate also
decreased during the first six months of 1996 primarily in loans secured by
residential properties. This decline can be directly attributed to the
Corporation's policy of selling all qualified mortgage loans while retaining the
servicing rights. At June 30, 1996, the Corporation's volume of residential
mortgage loan servicing was approximately $2.655 billion compared with $2.473
billion at the end of 1995. This increase can be attributed to the strong growth
of loans purchased in the correspondent market and the continued emphasis on
loans originated within the Corporation.
The Corporation's conservative lending policies have produced consistently good
asset quality. A measure of asset quality in the financial institutions industry
is the level of nonperforming assets. Nonperforming assets include nonperforming
loans, consisting of nonaccrual and restructured loans, and other real estate as
reflected in the table below ($ in thousands):
June 30, December 31,
1996 1995
--------- ---------
Loans accounted for on a nonaccrual basis $10,711 $10,055
Other real estate 3,108 3,982
Loans past due 90 days or more & still accruing 2,163 1,810
--------- ---------
Total nonperforming assets and
loans past due 90 days or more $15,982 $15,847
========= =========
In spite of the slight increase shown above, the Corporation's level of
nonperforming assets and loans past due 90 days or more remain well controlled
and continue to compare favorably to peer levels. At June 30, 1996, Management
is not aware of any additional credits, other than those identified above, where
serious doubts as to the repayment of principal and interest exist.
The current level of the allowance for loan losses approximates 2.50% of total
loans' outstanding. The allowance for loan losses is maintained at a level that
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 and unfunded
lines of credit. The adequacy of the allowance is reviewed quarterly by using
the criteria specified in revised Comptroller of the Currency Banking Circular
201 as well as additional guidance provided by regulatory authorities. This
analysis is presented to the Credit Policy Committee with subsequent review and
approval by the Board of Directors. Because of the imprecision and subjectivity
inherent in most estimates of expected credit losses, Management will continue
to take a prudent approach in the evaluation of the allowance for loan losses.
Net charge-offs totaled $2.508 million during the first six months of 1996
compared with $3.336 million for the same time period in 1995, a net charge-off
ratio of .20% and .28%, respectively. Net charge-offs for the second quarter of
1996 were $1.364 million compared with $809 thousand for the same time period in
1995, a net charge-off ratio of .22% and .13%, respectively.
The securities portfolio is utilized to provide a quality investment alternative
for available funds and to provide a stable source of interest income. At June
30, 1996, total securities were $2.091 billion, an increase of $249.1 million or
13.5% from December 31, 1995. Included in the portfolio at June 30, 1996 were
securities available for sale with a fair value of $629.4 million and an
amortized cost of $629.1 million. The Corporation utilized its excess available
funds to provide a quality investment alternative as loan demand weakened during
the first six months of 1996. This growth was primarily centered in the U. S.
Treasury security portfolio. The latest comparisons of the tax equivalent yield
of the securities portfolio show the Corporation remaining in the upper half of
its peer group. This has been accomplished while maintaining the quality of the
portfolio.
<PAGE>
Securities available for sale had gross unrealized gains of $7.287 million at
June 30, 1996 while gross unrealized losses were $6.942 million. Gross
unrealized gains approximated $6.886 million and gross unrealized losses
approximated $21.769 million on securities classified as held to maturity at
June 30, 1996.
Federal funds sold and securities purchased under reverse repurchase agreements
decreased by $60.1 million when compared with the end of 1995. Market conditions
and liquidity needs are the driving forces behind the use of federal funds sold
and securities purchased under reverse repurchase agreements as short-term
investment products.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits originating within the communities served by Trustmark are the primary
source of funding for the Corporation's earning assets. Trustmark offers a
variety of products designed to attract and retain customers with the primary
focus on core deposits. Total deposits increased 2.17%, or $76.7 million, during
the first half of 1996 primarily from growth in interest-bearing deposits. With
interest rates on short-term savings instruments unchanged from March 31, 1996,
the growth in interest-bearing deposits has come primarily from CD's with
maturities of less than one year.
Federal funds purchased increased $80.8 million when compared with December 31,
1995. This can be traced to an increase in funds available for purchase from
correspondent banks. Securities sold under repurchase agreements declined by
.17% when compared with December 31, 1995.
CONTINGENCIES
In January 1995, a judgment was rendered in a Mississippi trial court against
the Corporation's subsidiary, Trustmark National Bank, in a case related to the
placement of collateral protection insurance ("CPI") by Trustmark on a
particular loan. The judgment awarded $500 thousand in actual damages (against
Trustmark and the insurance agent, jointly and severally) and $38 million in
punitive damages (against Trustmark only). Trustmark filed motions for entry of
judgment in its favor, or for a new trial, or to reduce the verdicts. The judge
took the motions under advisement in April 1995. On August 4, 1995, the court
reduced the punitive damage award from $38 million to $5 million. The judge left
the actual damage award intact. Notice of appeal has been filed by Trustmark
appealing this case to the Mississippi Supreme Court. Notice of cross-appeal has
been filed by the plaintiffs.
There are twenty-three other CPI-related suits against Trustmark pending in
federal court. On September 18, 1995, one of the federal court suits was
certified as a mandatory class action, with the class broadly defined to include
all persons who financed an automobile through Trustmark and whose loan accounts
were charged for CPI premiums. One of the CPI insurers, the CPI underwriter and
the insurance agent are also defendants to the class action. All plaintiffs in
pending suits are members of the mandatory class. On January 10, 1996, the
federal court entered an Order in the class action enjoining all other pending
CPI-related lawsuits (except for the case referred to in the paragraph above),
and enjoining all future CPI-related lawsuits. The court proceedings are matters
of public record.
The cases are being vigorously contested. Investigation is continuing. Similar,
but not identical, cases in other states have had a variety of results,
including settlements. Trustmark's program was consistent with those of numerous
other banks, including banks in Mississippi which are in the process of
defending or settling similar suits. While the ultimate outcome of this legal
matter cannot be predicted with reasonable certainty, Management believes that
the resolution of this matter will not have a material adverse effect on the
Corporation's consolidated financial position. However, Management cannot
predict with reasonable certainty the impact that it might have on the
Corporation's consolidated results of operations during periods until the
litigation is terminated.
In addition, Trustmark is defendant in various other pending and threatened
legal actions arising in the normal course of business. In the opinion of
Management, and based on the advice of legal counsel, the ultimate resolution of
these matters will not have a material effect on the Corporation's consolidated
financial statements.
<PAGE>
STOCKHOLDERS' EQUITY
The Corporation has always placed a great emphasis on maintaining a strong
capital base. The Corporation's goal is to maintain its position as a "well
capitalized" financial institution by expanding its capital base through
continued profitability, business combinations and possibly the sale of stock. 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, 1996 ($ in
thousands):
Tier 1 Capital $ 486,511 17.62%
Tier 2 Capital 34,865 1.26%
--------- ---------
Total Qualifying Capital $ 521,376 18.88%
========= =========
Total Risk Weighted Assets $2,761,025
=========
Leverage Ratio 9.49%
=========
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, 1996, the Corporation had stockholders' equity of $496.7 million,
which contained a net unrealized gain on securities available for sale, net of
taxes, of $213 thousand. This compares to total stockholders' equity at December
31, 1995 of $478.8 million, which contained a net unrealized gain on securities
available for sale, net of taxes, of $5.462 million. The period end and weighted
average number of shares of Trustmark Corporation's common stock for both the
second quarter and six month period ended June 30, 1996 was 34,910,683.
Based on a dividend payout ratio of 26.7%, the Corporation retained 73.3% of its
earnings during the first half of 1996, generating an internal capital growth
rate of 9.57%. Dividends for the second quarter of 1996 were $.12 per share,
resulting in a projected annual dividend rate of $.48 per share. Book value for
the Corporation's common stock was $14.23 at June 30, 1996, compared with the
closing market price of $21.00.
NET INTEREST INCOME
For the six months ended June 30, 1996, the Corporation's level of net interest
income increased by $5.4 million, or 5.83%, when compared with the same time
period in 1995. Net interest income for the second quarter of 1996 showed growth
of $3.0 million or 6.6% when compared with the second quarter of 1995. The
growth for both the three and six month periods can be attributed to the
Corporation's volume of earning assets increasing at a faster pace than its
volume of interest-bearing liabilities.
The table below illustrates the changes in the net interest margin as a
percentage of average earning assets for the periods shown:
<PAGE>
Quarter Ended Six Months Ended
June 30, June 30,
------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
Yield on interest-earning assets-FTE 7.78% 7.96% 7.78% 7.94%
Rate on interest-bearing liabilities 3.47% 3.71% 3.50% 3.61%
---- ---- ---- ----
Net interest margin-FTE 4.31% 4.25% 4.28% 4.33%
==== ==== ==== ====
The fully taxable equivalent (FTE) yield on tax-exempt income has been computed
based on a 35% federal marginal tax rate for all periods shown. The Corporation
will continue to take the necessary precautions to minimize exposure to changes
in interest rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects Management's assessment of the adequacy
of the allowance for loan losses to absorb potential write-offs in the loan
portfolio. Factors considered in the assessment include growth and composition
of the loan portfolio, historical credit loss experience, current and
anticipated economic conditions and changes in borrowers' financial positions.
During the six months ended June 30, 1996, the Corporation's provision for loan
losses was $3.508 million compared with a negative provision of $228 thousand
for the first half of 1995. The increase in the provision can be attributed to
the Corporation's decision to boost the allowance for loan losses given the
general softening of the economy experienced during 1996.
NONINTEREST INCOME
The Corporation stresses the importance of growth in noninterest income as one
of its key long-term strategies. This was accomplished during both the three and
six month periods ended June 30, 1996 as noninterest income, excluding
securities gains, increased when compared with the same time periods in 1995.
Other account charges, fees and commissions for the first six months of 1996
contributed the largest portion of the increase in noninterest income when
compared with the same time period in 1995. The major contributors to the 19.5%
increase in this category were fees generated from residential mortgage
servicing, discount brokerage fees and a variety of other fee producing products
and services. Service charges for the first six months of 1996 have also grown
by 11.0% when compared with the same time period in 1995.
Gross securities gains of $106 thousand and gross securities losses of $80
thousand were realized during the first half of 1996 because of calls and
dispositions of securities classified as available for sale.There were no sales
of securities held to maturity during the first six months of 1996. Gross
securities gains of $20 thousand were realized on calls and other dispositions
of these securities during that time period.
NONINTEREST EXPENSE
Another long-term strategy of the Corporation is to continue to provide quality
service to customers within the context of economic discipline. This is
illustrated by the decrease in noninterest expense for both the three and six
month periods ended June 30, 1996 when compared with the same time periods in
1995.
The efficiency ratio, a key indicator of the control of noninterest expense and
the growth of noninterest income, improved during both the three and six month
periods ended June 30, 1996 when compared with the same time periods in 1995.
The efficiency ratio was 58.77% for the quarter ended June 30, 1996 compared
with 60.53% for same time period in 1995. For the six months ended June 30, 1996
the efficiency ratio was 58.66% compared with 61.63% for the first half of 1995.
<PAGE>
The primary contributor to the decline in noninterest expenses experienced
during the six months ended June 30, 1996 was the FDIC insurance assessment.
Effective for the fourth quarter of 1995, the FDIC decreased the lowest
assessment rate for deposits insured through the BIF from $.23 per $100 of
deposits to $.04. In November of 1995, the FDIC again reduced the lowest
assessment rate for deposits insured by the BIF from $.04 per $100 of deposits
to zero. This reduction was effective for the first quarter of 1996. The
Corporation continues to pay $.23 per $100 of deposits on approximately $373
million of deposits insured by the Savings Association Insurance Fund (SAIF) as
the result of assisted purchases made through transactions defined as "Oakar" by
the FDIC.
Salaries and employee benefits continue to comprise the largest portion of
noninterest expenses and increased 5.6% when comparing the first six months of
1996 to the same time period in 1995. The number of full-time equivalent
employees totaled 2,198 at June 30, 1996 and 2,192 at June 30, 1995.
INCOME TAXES
For the six months ended June 30, 1996, the Corporation's effective tax rate was
34.2% compared with 34.3% for the first six months of 1995. This reduction in
the effective tax rate is due primarily to an increase in nontaxable income
related to the cash surrender values of life insurance policies from June 30,
1995 to June 30, 1996. This decrease was partially offset by a reduction in
tax-exempt interest as a percentage of net income for the first six months of
1996 when compared to the six months ended June 30, 1995.
OTHER REGULATORY MATTERS
Various legislative proposals regarding the future of the SAIF have been
reported recently. Several of these proposals include a one-time special
assessment for SAIF deposits. At the present time, Congress is still debating
the specific features of this legislation. Consequently, the Corporation does
not know when and if any such proposal may be adopted or the ultimate effect on
its insurance assessment resulting from deposits insured by the SAIF.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments for the quarter ended June 30, 1996 other
than those disclosed in the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. The following exhibits are included herein:
(27) Financial Data Schedule
Trustmark Corporation filed a Form 8-K on April 19, 1996 disclosing in Item 5,
Other Events, that Frank R. Day, Chairman of the Board, President and CEO, had
been diagnosed with amyotrophic lateral sclerosis. Mr. Day has not experienced
any difficulties and the illness has had no impact on the performance of his
duties. Plans are for Mr. Day to continue his service to Trustmark Corporation
and Trustmark National Bank in his present capacities.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Trustmark Corporation
By: /s/ Frank R. Day
-----------------------------------------------------------
Frank R. Day Chairman of the Board, President and CEO
Date: August 12, 1996
By: /s/ Harry M. Walker
-----------------------------------------------------------
Harry M. Walker Secretary
Date: August 12, 1996
By: /s/ Gerard R. Host
-----------------------------------------------------------
Gerard R. Host Treasurer
Date: August 12, 1996
<PAGE>
EXHIBIT INDEX
Exhibit Index Description
- ------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 330,864
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 53,520
<TRADING-ASSETS> 814
<INVESTMENTS-HELD-FOR-SALE> 629,440
<INVESTMENTS-CARRYING> 1,462,029
<INVESTMENTS-MARKET> 1,447,146
<LOANS> 2,523,181
<ALLOWANCE> 63,000
<TOTAL-ASSETS> 5,168,134
<DEPOSITS> 3,606,785
<SHORT-TERM> 1,012,304
<LIABILITIES-OTHER> 52,364
<LONG-TERM> 0
0
0
<COMMON> 14,546
<OTHER-SE> 482,135
<TOTAL-LIABILITIES-AND-EQUITY> 5,168,134
<INTEREST-LOAN> 113,284
<INTEREST-INVEST> 62,215
<INTEREST-OTHER> 3,036
<INTEREST-TOTAL> 178,535
<INTEREST-DEPOSIT> 56,376
<INTEREST-EXPENSE> 81,402
<INTEREST-INCOME-NET> 97,133
<LOAN-LOSSES> 3,508
<SECURITIES-GAINS> 46
<EXPENSE-OTHER> 77,265
<INCOME-PRETAX> 48,498
<INCOME-PRE-EXTRAORDINARY> 48,498
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,556
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
<YIELD-ACTUAL> 4.28
<LOANS-NON> 10,711
<LOANS-PAST> 2,163
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 62,000
<CHARGE-OFFS> 4,380
<RECOVERIES> 1,872
<ALLOWANCE-CLOSE> 63,000
<ALLOWANCE-DOMESTIC> 39,471
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 23,529
</TABLE>
