<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 March 31, 1997
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 64-1471500
Trustmark Corporation
P.O. Box 291
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 the latest practicable date.
Title Outstanding
Common stock, no par value 36,386,808
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996*
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks (noninterest-bearing) $287,258 $337,090
Federal funds sold and securities purchased
under reverse repurchase agreements 231,000 92,718
Trading account securities 679 102
Securities available for sale 572,456 527,942
Securities held to maturity (fair value: $1,404,319-1997;
$1,431,805-1996) 1,415,023 1,425,260
Loans 2,689,667 2,637,320
Less: Unearned income 2,346 2,747
Allowance for loan losses 63,800 63,000
---------- ----------
Net loans 2,623,521 2,571,573
Premises and equipment 64,424 61,535
Intangible assets 38,235 38,637
Other assets 144,487 138,827
---------- ----------
TOTAL ASSETS $5,377,083 $5,193,684
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing $791,120 $826,137
Interest-bearing 2,987,700 2,771,299
---------- ----------
Total deposits 3,778,820 3,597,436
Federal funds purchased 119,322 201,965
Securities sold under repurchase agreements 798,021 765,226
Other liabilities 133,178 104,873
---------- ----------
TOTAL LIABILITIES 4,829,341 4,669,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized: 100,000,000 shares
Issued and outstanding: 36,386,808 shares 15,161 14,546
Surplus 248,038 244,578
Retained earnings 283,704 261,850
Net unrealized gain on securities available for sale, net of tax 839 3,210
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 547,742 524,184
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,377,083 $5,193,684
========== ==========
</TABLE>
* Derived from audited financial statements.
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
------- -------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $59,336 $57,022
Interest on securities:
Taxable interest income 29,459 28,645
Interest income exempt from federal income taxes 1,526 1,448
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 1,485 2,088
------- -------
TOTAL INTEREST INCOME 91,806 89,203
INTEREST EXPENSE
Interest on deposits 29,522 28,129
Interest on federal funds purchased and securities
sold under repurchase agreements 11,250 12,881
Other interest expense 770 287
------- -------
TOTAL INTEREST EXPENSE 41,542 41,297
------- -------
NET INTEREST INCOME 50,264 47,906
Provision for loan losses 908 2,144
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 49,356 45,762
NONINTEREST INCOME
Trust service income 3,040 2,382
Service charges on deposit accounts 6,005 5,572
Other account charges, fees and commissions 7,725 6,845
Securities losses (4)
Other income 1,192 1,005
------- -------
TOTAL NONINTEREST INCOME 17,962 15,800
NONINTEREST EXPENSES
Salaries and employee benefits 20,937 19,002
Net occupancy - premises 2,399 2,122
Equipment expenses 2,989 3,105
Services and fees 5,658 4,958
FDIC insurance assessment (65) 498
Amortization of intangible assets 2,305 1,935
Other expenses 6,109 6,296
------- -------
TOTAL NONINTEREST EXPENSES 40,332 37,916
------- -------
INCOME BEFORE INCOME TAXES 26,986 23,646
Income taxes 9,311 8,277
------- -------
NET INCOME $17,675 $15,369
======= =======
NET INCOME PER SHARE $0.49 $0.44
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 36,386,808 34,910,683
</TABLE>
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $17,675 $15,369
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 908 2,144
Provision for depreciation and amortization 4,741 4,262
Net amortization (accretion) of securities 161 (1,608)
Securities losses (4)
Gains and writedowns on other real estate (5) (48)
Other 12,744 (464)
Increase in intangible assets (1,940) (2,872)
Increase in deferred income taxes (633) (919)
(Increase) decrease in other assets (4,828) 2,128
Increase in other liabilities 28,305 8,997
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 57,128 26,993
-------- --------
INVESTING ACTIVITIES
Proceeds from calls and maturities of securities available for sale 58,984 34,580
Proceeds from calls and maturities of securities held to maturity 57,014 52,270
Proceeds from sales of securities available for sale 96,645
Purchases of securities available for sale (109,391) (343,583)
Purchases of securities held to maturity (44,886) (96,590)
Net (increase) decrease in federal funds sold and securities
purchased under reverse repurchase agreements (138,282) 1,917
Net (increase) decrease in loans (52,271) 32,391
Purchases of premises and equipment (4,929) (1,743)
Proceeds from sales of premises and equipment 3 18
Proceeds from sales of other real estate 356 936
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (233,402) (223,159)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 181,384 99,603
Net (decrease) increase in federal funds purchased and
securities sold under repurchase agreements (49,848) 86,332
Cash dividends paid (5,094) (4,189)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 126,442 181,746
-------- --------
Decrease in cash and cash equivalents (49,832) (14,420)
Cash and cash equivalents at beginning of year 337,090 299,006
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $287,258 $284,586
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES
OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Management, all adjustments (consisting of normal recurring
accruals) considered necessary for the fair presentation of these consolidated
financial statements have been included. The notes included herein should be
read in conjunction with the notes to the consolidated financial statements
included in Trustmark Corporation's (the Corporation) 1996 annual report on Form
10-K.
The consolidated financial statements include the accounts of the
Corporation, its wholly-owned subsidiaries, First Building Corporation, F.S.
Corporation, Trustmark National Bank (the Bank) and the Bank's wholly-owned
subsidiary, Trustmark Financial Services, Inc. All intercompany profits,
balances and transactions have been eliminated.
NOTE 2 - LOANS
The following table summarizes the activity in the allowance for loan
losses for the three month periods ended March 31, 1997 and 1996 ($ in
thousands):
1997 1996
------- -------
Balance at beginning of year $63,000 $62,000
Provision charged to expense 908 2,144
Loans charged off (1,901) (2,077)
Recoveries 1,002 933
Allowance applicable to loans of acquired bank 791
------- -------
Balance at end of period $63,800 $63,000
======= =======
At March 31, 1997, the recorded investment in commercial loans considered
to be impaired under Statement of Accounting Standards (SFAS) No. 114 was $7.0
million, 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 March 31, 1997, the average recorded
investment in impaired loans was approximately $6.9 million, 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 $9.0 million at
March 31, 1997. The foregone interest associated with such loans is immaterial.
<PAGE>
NOTE 3 - CONTINGENCIES
Twenty-three suits are pending in federal court against the Corporation's
subsidiary, Trustmark National Bank, relating to the placement of collateral
protection insurance (CPI) on particular automobile and mobile home loans. On
September 18, 1995, one of the suits was certified as a mandatory class action,
with the class broadly defined to include all persons who financed an automobile
(or other property) through Trustmark and whose loans 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
and enjoining all future CPI-related lawsuits. In November 1996, a proposed
classwide settlement, filed in United States District Court for the Southern
District of Mississippi, received preliminary court approval. The proposed
settlement includes a cash payment of $4 million and forgiveness of uncollected
CPI debts. Notices were mailed to approximately 6,000 borrowers. Final court
approval of the proposed settlement was the subject of a fairness hearing held
by the United States District Court on April 14, 1997. The parties are awaiting
the court's decision. The effects of this proposed settlement are included in
the consolidated financial statements.
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 three months ended March 31, 1997, the Corporation did not make
an income tax payment. During the three months ended March 31, 1996, the
Corporation paid approximately $100 thousand in income taxes. During the three
months ended March 31, 1997 and 1996, the Corporation paid $39.6 million and
$40.7 million, respectively, in interest on deposit liabilities and other
borrowings. For the three months ended March 31, 1997 and and 1996, noncash
transfers from loans to foreclosed properties were $848 thousand and $437
thousand, respectively.
NOTE 5 - RECENT PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," which provides new accounting and reporting
standards for sales, securitizations, servicing of financial assets and
extinguishment of liabilities. This statement was adopted by the Corporation on
January 1, 1997, except for certain transactions which have been delayed until
after December 31, 1997. The adoption of this standard did not have a material
impact on the Corporations's financial condition or results of operations.
Management does not expect the impact of the delayed portion of this standard to
materially affect the Corporation's financial condition or results of
operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. This statement is effective for financial statements issued for
periods ending after December 15, 1997. Since the Corporation's capital
structure would not be defined as complex, Management does not expect the impact
of this standard to affect the Corporation's disclosure of EPS.
<PAGE>
In conjunction with SFAS No. 128, the FASB also issued SFAS No. 129,
"Disclosure of Information about Capital Structure." This statement continues
the requirements to disclose certain information about an entity's capital
structure that was found in previously issued accounting standards, but now
requires these disclosures for all entities. This statement is effective for
financial statements for periods ending after December 15, 1997. Since the
Corporation has been disclosing the information required by previous accounting
standards, Management does not expect the impact of this standard to affect the
Corporation's disclosures of its capital structure.
NOTE 6 - BUSINESS COMBINATIONS
During the first quarter of 1997, Trustmark Corporation completed its
merger with First Corinth Corporation (FCC) and its subsidiary, National Bank of
Commerce of Corinth (NBC). The Corporation issued approximately 1.5 million
shares of common stock in the merger which was accounted for as a pooling of
interests. As a result of this transaction, the Corporation has restated its
financial statements to include FCC and NBC as of January 1, 1997. Prior years'
financial statements were not restated as the changes would have been
immaterial.
<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.
FINANCIAL SUMMARY
Trustmark Corporation reported net income of $17.675 million, or $.49 per
share for the first quarter of 1997, compared with $15.369 million, or $.44 per
share for the first quarter of 1996. The increase in earnings reflects a higher
level of net interest income, continued improvement in other noninterest income
and controlled noninterest expense growth.
Total assets at March 31, 1997 increased 3.51% over 1996 to $5.377 billion,
while stockholders' equity increased by 12.73% over 1996 and equaled $547.742
million. The return on average assets for 1997 was 1.36% compared with 1.20% for
1996.
BUSINESS COMBINATIONS
A strategic objective of the Corporation is to achieve asset growth through
mergers and acquisitions. Management is continually evaluating new market areas
in which to expand and provide its financial services.
During the first quarter of 1997, Trustmark Corporation completed its
merger with First Corinth Corporation (FCC) and its subsidiary, National Bank of
Commerce of Corinth (NBC). The Corporation issued approximately 1.5 million
shares of common stock in the merger which was accounted for as a pooling of
interests. As a result of this transaction, the Corporation has restated its
financial statements to include FCC and NBC as of January 1, 1997. Prior years'
financial statements were not restated as the changes would have been
immaterial.
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, consisting of executive officers,
sets the day-to-day operating guidelines and approves strategies affecting net
interest income and coordinates activities within board policy limits. 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
manage balance sheet growth. The Asset/Liability Committees of both executive
officers and the Board of Directors meet monthly to evaluate current and
projected interest rate risk positions and review the balance sheet composition.
The interest rate sensitivity gap analysis shown in the accompanying table
compares the volume of rate sensitive assets against rate sensitive liabilities
during the next year. This analysis is a relatively straightforward tool which
is useful mainly in highlighting significant short-term repricing volume
mismatches. The table presents the rate sensitivity gap analysis at March 31,
1997 ($ in thousands):
<PAGE>
Interest Sensitive Within
90 days One Year
---------- ----------
Total rate sensitive assets $ 1,523,117 $ 2,259,794
Total rate sensitive liabilities 1,735,585 2,621,774
---------- ----------
Net gap $ (212,468) $ (361,980)
========== ==========
The analysis indicates that the Corporation is in a negative gap position
over the next three and twelve month time periods. However, this position has
decreased significantly since the end of 1996 in response to an increase in
overnight investments. 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 and adequate capital also enhances 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. Earning assets at March 31, 1997 were $4.906 billion, or 91.25%
of total assets, compared with $4.681 billion, or 90.12% of total assets for
December 31, 1996.
Loans are the largest category of earning assets for the Corporation and
produce the highest level of interest income. At March 31, 1997, total loans
were $2.687 billion, an increase of $52.7 million, or 2.00%, from the $2.635
billion reported at December 31, 1996. This loan growth is attributable to
strengthened demand for both commercial and consumer credit in the Corporation's
market areas.
Loans secured by real estate increased $50.8 million during the first
quarter of 1997 primarily in 1-4 family residential properties and commercial
real estate. The Corporation has increased its residential and commercial real
estate loans through competitive pricing, superior customer service and a retail
network of its community banks.
The Corporation's conservative lending policies have produced consistently
strong asset quality. A measure of asset quality in the financial institutions
industry is the level of nonperforming assets. Nonperforming assets include
nonperforming loans, consisting of nonaccrual and restructured loans, and other
real estate as reflected in the table below ($ in thousands):
<PAGE>
March 31, December 31,
--------------- -----------
1997 1996 1996
------ ------ ------
Nonaccrual loans $9,014 $12,554 $8,390
Restructured loans 0 0 0
------ ------ ------
Nonperforming loans 9,014 12,554 8,390
Other real estate (ORE) 3,227 3,534 2,734
------ ------ ------
Nonperforming assets 12,241 16,088 11,124
Accruing loans past due 90 days or more 2,117 2,507 2,407
------ ------ ------
Total nonperforming assets and
loans past due 90 days or more $14,358 $18,595 $13,531
====== ====== ======
Nonperforming assets/Total loans + ORE .45% .42% .63%
====== ====== ======
As seen above, the Corporation's level of nonperforming assets and loans
past due 90 days or more at March 31, 1997 remained essentially unchanged from
the December 31, 1996 level while improving from the March 31, 1996 level. The
Corporation has historically maintained relatively low levels of nonperforming
assets due to strong underwriting standards, consistent credit reviews and a
prudent loan charge-off policy. At March 31, 1997, 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 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. A
formal review is prepared quarterly to assess the risk in the loan portfolio and
to determine the adequacy of the allowance for loan losses. This analysis is
presented to the Credit Policy Committee with subsequent review and approval by
the Board of Directors. At March 31, 1997, the allowance for loan losses was
$63.8 million, representing 2.37% of total loans outstanding and providing 708%
coverage of nonperforming loans. This compares with an allowance for loan losses
of $63.0 million at December 31, 1996, representing 2.39% of total loans
outstanding and providing 751% coverage of nonperforming loans.
Net charge-offs were $899 thousand or .14% of average loans for the three
months ended March 31, 1997, down $245 thousand or 21.4% from $1.144 million or
.18% of average loans for the three months ended March 31, 1996. The
Corporation's level of net charge-offs for 1997 compares favorably to its peer
group.
The securities portfolio is utilized to provide a quality investment
alternative for available funds and a stable source of interest income. At March
31, 1997, securities available for sale (AFS), with a carrying value of $572.5
million, and securities held to maturity (HTM), with a carrying value of $1.415
billion, combined to create a securities portfolio totaling $1.987 billion,
<PAGE>
an increase of $34.3 million or 1.75% from December 31, 1996. This growth has
come primarily from the purchase of shorter term U. S. Government securities
that have provided the Corporation a greater degree of liquidity in addition to
providing additional collateral for pledging purposes.
Management continues to stress credit quality as one of the strategic goals
of the securities portfolio. This is clearly visible as more than 86% of the
portfolio is invested in U. S. Government and Agency securities.
At March 31, 1997, securities AFS had a carrying value of $572.5 million
and an amortized cost of $571.1 million. This compares with a carrying value of
$527.9 million and an amortized cost of $522.7 million at December 31, 1996. At
March 31, 1997, gross unrealized gains were $8.7 million on securities AFS while
gross unrealized losses were $7.4 million. Net unrealized gains are shown as a
separate component of stockholders' equity, net of taxes and equaled $839
thousand at March 31, 1997.
The carrying value of securities HTM was $1.415 billion at March 31, 1997
compared with $1.425 billion at year end 1996. The fair value of HTM securities
at March 31, 1997 was $1.404 billion compared with $1.432 billion at year end
1996. Gross unrealized gains were $6.6 million and gross unrealized losses were
$17.3 million on securities HTM at March 31, 1997.
Federal funds sold and securities purchased under reverse repurchase
agreements were $231.0 million at March 31, 1997, an increase of $138.3 million
when compared with year end 1996. The Corporation has utilized federal funds
sold and securities purchased under reverse repurchase agreements as a
short-term investment to match the short-term maturities of seasonal
governmental time deposits sold during the first quarter of 1997.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits originating within the communities served by the Bank are the
primary source of funding for the Corporation's earning assets. Total deposits
were $3.779 billion at March 31, 1997, an increase of $181.4 million, or 5.0%,
over year end 1996. Noninterest-bearing deposits declined by $35.0 million while
interest-bearing deposits grew $216.4 million when comparing March 31, 1997 to
December 31, 1996. This growth in interest-bearing deposits is linked directly
to substantial increases in certificates of deposit. The Corporation has
continued to bring in new core deposits from a special certificates of deposit
program that began in 1996. In addition, purchases of certificates of deposit of
$100,000 or more have grown primarily from governmental units who traditionally
have an increase in receipts during the first quarter of each year.
Other interest-bearing liabilities include all interest-bearing liabilities
except deposits. Short-term liabilities included in this category consist of
federal funds purchased and securities sold under agreements to repurchase.
Federal funds purchased were $119.3 million at March 31, 1997 and decreased
$82.6 million when compared with year end 1996. Securities sold under repurchase
agreements totaled $798.0 million at March 31, 1997, an increase of $32.8
million since year end 1996. Because of the funding available from certificates
of deposit, the Corporation was able to reduce its overall need for funds from
other interest-bearing liabilities.
<PAGE>
CONTINGENCIES
Twenty-three suits are pending in federal court against the Corporation's
subsidiary, Trustmark National Bank, relating to the placement of collateral
protection insurance (CPI) on particular automobile and mobile home loans. On
September 18, 1995, one of the suits was certified as a mandatory class action,
with the class broadly defined to include all persons who financed an automobile
(or other property) through Trustmark and whose loans 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
and enjoining all future CPI-related lawsuits. In November 1996, a proposed
classwide settlement, filed in United States District Court for the Southern
District of Mississippi, received preliminary court approval. The proposed
settlement includes a cash payment of $4 million and forgiveness of uncollected
CPI debts. Notices were mailed to approximately 6,000 borrowers. Final court
approval of the proposed settlement was the subject of a fairness hearing held
by the United States District Court on April 14, 1997. The parties are awaiting
the court's decision. The effects of this proposed settlement are included in
the consolidated financial statements.
In addition, Trustmark is defendant in various other pending and threatened
legal actions arising in the normal course of business. In the opinion of
Management, and based on the advice of legal counsel, the ultimate resolution of
these matters will not have a material effect on the Corporation's consolidated
financial statements.
STOCKHOLDERS' EQUITY
The regulatory capital ratios for the Corporation and the Bank are shown
below compared to the minimums that are currently required under capital
adequacy standards imposed by their regulators. Management believes, at March
31, 1997, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject. The most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as well
capitalized. The Corporation's and the Bank's actual, as well as minimum,
regulatory capital amounts and ratios at March 31, 1997 are presented in the
table below ($ in thousands):
Actual Minimum Regulatory
Regulatory Capital Capital Required
------------------ -----------------
Amount Ratio Amount Ratio
-------- ------- -------- -------
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $575,299 19.45% $236,571 8.00%
Trustmark National Bank $560,457 19.04% $235,484 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $538,003 18.19% $118,286 4.00%
Trustmark National Bank $523,329 17.78% $117,742 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $538,003 10.21% $210,743 4.00%
Trustmark National Bank $523,329 9.96% $210,184 4.00%
<PAGE>
At March 31, 1997, the Corporation had stockholders' equity of $547.7
million, which contained a net unrealized gain on securities available for sale,
net of taxes, of $839 thousand. This compares to total stockholders' equity at
December 31, 1996 of $524.2 million, which contained a net unrealized gain on
securities available for sale, net of taxes, of $3.2 million.
Based on a dividend payout ratio of 28.57%, the Corporation retained 71.43%
of its earnings during the first quarter of 1997, generating an internal capital
growth rate of 9.44%. Dividends for the first quarter of 1997 were $.14 per
share compared to $.12 per share for the first quarter of 1996. Book value for
the Corporation's common stock was $15.05 at March 31, 1997, compared with the
closing market price of $24.50.
NET INTEREST INCOME
Net interest income (NII) is interest income generated by earning assets
reduced by the interest expense of funding those assets. NII is the principal
source of income for the Corporation. Consequently, changes in the mix and
volume of earning assets and interest-bearing liabilities, and their related
yields and interest rates, can have a major impact on earnings.
For the first quarter of 1997, the Corporation's level of NII increased by
$2.4 million, or 4.9%, when compared with the same time in 1996. The improvement
in NII for 1997 was due to a higher volume of average earning assets combined
with a relatively stable interest rate environment producing an increase in
interest income while the Corporation was able to slightly decrease the costs of
its funding sources.
For the first quarter of 1997, average earning assets increased 2.9% when
compared to the first quarter of 1996. This was driven by a 2.3% increase in
average securities and a 5.1% increase in average loans. When this growth was
combined with relatively stable interest rates, the yield on average earning
assets increased by eight basis points when compared to the first quarter of
1996. This combination resulted in an increase in total interest income of $2.6
million, or 2.9%, when comparing the first quarter of 1997 with 1996.
Average interest-bearing liabilities grew by only .23% during the first
quarter of 1997. Growth of 4.3% in interest-bearing deposits was offset by a
decline of 10.9% in federal funds purchased and securities sold under repurchase
agreements. Since federal funds purchased and securities sold under repurchase
agreements are the higher yielding interest-bearing liabilities, their decline
had a substantial impact on the yield of interest-bearing liabilities dropping
by six basis points during the first quarter of 1997. As a result, total
interest expense increased by only $245 thousand when comparing the first
quarter of 1997 to the same time in 1996.
The table below illustrates the changes in the net interest margin as a
percentage of average earning assets for the periods shown:
<PAGE>
Three Months Ended
March 31,
------------------
1997 1996
---- ----
Yield on interest-earning assets-FTE 7.87% 7.79%
Rate on interest-bearing liabilities 3.50% 3.56%
---- ----
Net interest margin-FTE 4.37% 4.23%
==== ====
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 first quarter of 1997, the Corporation's provision for
loan losses was $908 thousand compared with $2.144 million for the first quarter
of 1996. The increase in the provision during 1996 can be attributed to
Management's decision to raise the allowance for loan losses given the overall
growth and composition of the loan portfolio.
NONINTEREST INCOME
The Corporation stresses the importance of growth in noninterest income as
one of its key long-term strategies. This was accomplished during the first
quarter of 1997, as noninterest income, excluding securities gains, increased
13.6% when compared with the same time in 1996.
The largest single category of noninterest income, other account charges,
fees and commissions, increased $880 thousand, or 12.9%, during the first
quarter of 1997. The major contributors to the growth in this category during
these periods were fees generated from residential mortgage servicing, discount
brokerage services, credit cards, ATMs and a variety of other fee producing
products and services.
Service charges for the first quarter of 1997 grew by $433 thousand, or
7.8%, when compared with the first quarter of 1996. This increase can be
attributed to a reduction in the amount of waived service charges and a higher
volume of consumer account activity.
Trust service income increased by $658 thousand during the first quarter of
1997 as the Bank continued to be one of the largest providers of asset
management services in Mississippi. At March 31, 1997, the Bank had trust
accounts with an asset market value of approximately $5.0 billion.
The increase in other income experienced during the first quarter of 1997
can be attributed primarily to gains on the sale of mortgage loans in the
secondary market.
<PAGE>
NONINTEREST EXPENSE
Another long-term strategy of the Corporation is to continue to provide
quality service to customers within the context of economic discipline. The
efficiency ratio, a key indicator of the control of noninterest expense and the
growth of noninterest income, was 57.9% for the first quarter of 1997 compared
with 58.4% for the first quarter of 1996.
Salaries and employee benefits continue to comprise the largest portion of
noninterest expenses and increased $1.935 million, or 10.2%, when comparing 1997
with 1996. The primary reasons for the increase were enhancements to employee
benefit plans and additional personnel. The number of full-time equivalent
employees totaled 2,306 at March 31, 1997 (including 45 as a result of the
merger with First Corinth Corp.) and 2,206 at March 31, 1996.
Services and fees increased $700 thousand when comparing the first quarter
of 1997 to the same time in 1996. Increased costs for professional fees,
advertising and communication expense contributed to this increase.
Several changes in the FDIC assessment took place during 1996 and 1997 and
resulted in a decline of the FDIC assessment by $563 thousand when comparing the
first quarter of 1997 to the first quarter of 1996. As a result of the passage
on September 30, 1996 of the Deposit Insurance Funds Act(DIFA), the Corporation
received a refund of its fourth quarter FDIC assessment on January 2, 1997. This
was offset somewhat by the new Financing Corporation (FICO) assessment that
began in 1997 for both Bank Insurance Fund (BIF) and Savings Association
Insurance Fund (SAIF) assessable deposits. For the first quarter of 1996, the
Corporation paid an FDIC assessment on its deposits insured by the SAIF at the
rate of $.23 per $100 of SAIF assessable deposits. This assessment was reduced
to zero by the DIFA legislation which was effective for 1997.
The amortization of intangible assets increased $370 thousand when
comparing the first quarter of 1997 with the same time in 1996. The amount of
mortgages serviced increased 12.8% when comparing March 31, 1997 with March 31,
1996 and provided a larger base of mortgage servicing rights that began
amortization during that period. In addition, the Corporation adopted Statement
of Financial Accounting Standards(SFAS) No. 122 in January 1996 which eliminated
the distinction between purchased mortgage servicing rights and the mortgage
servicing rights on loans originated by the Corporation. This resulted in an
additional $1.6 million in originated mortgage servicing rights that began
amortization in 1996.
INCOME TAXES
For the three months ended March 31, 1997, the Corporation's effective tax
rate was 34.5% compared with 35.0% for the first three months of 1996. The
decrease in the Corporation's effective tax rate is due primarily to an increase
in tax-exempt interest as a percentage of pretax income.
OFF-BALANCE SHEET INSTRUMENTS
The Corporation's principal objective in issuing derivatives for purposes
other than trading is asset/liability management. To achieve that objective, the
Corporation enters into forward interest rate contracts involving commitments to
sell mortgages
<PAGE>
originated or purchased by the Corporation. Interest rate forward contracts are
commitments to either purchase or sell a financial instrument at a specific
future date for a specified price and may be settled in cash or through delivery
of the financial instrument. These contracts allow the Corporation to fix the
interest rate at which it can offer mortgage loans to its customers or purchase
mortgages from other financial institutions. Gains or losses on the sale of
mortgages in the secondary market are recorded upon the sale of the mortgages
and included in other income. Any decline in the market value of mortgages which
are pending sale in the secondary market and are held by the Corporation at the
end of a financial reporting period is recognized at that time. As of March 31,
1997, the Corporation's exposure under commitments to sell mortgages is
immaterial. The remaining maturity on all forward interest rate contracts is
less than one year.
OTHER REGULATORY MATTERS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which provides
new accounting and reporting standards for sales, securitizations, servicing of
financial assets and extinguishment of liabilities. This statement was adopted
by the Corporation on January 1, 1997, except for certain transactions which
have been delayed until after December 31, 1997. The adoption of this standard
did not have a material impact on the Corporations's financial condition or
results of operations. Management does not expect the impact of the delayed
portion of this standard to materially affect the Corporation's financial
condition or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. This statement is effective for financial statements issued for
periods ending after December 15, 1997. Since the Corporation's capital
structure would not be defined as complex, Management does not expect the impact
of this standard to affect the Corporation's disclosure of EPS.
In conjunction with SFAS No. 128, the FASB also issued SFAS No. 129,
"Disclosure of Information about Capital Structure." This statement continues
the requirements to disclose certain information about an entity's capital
structure that was found in previously issued accounting standards but now
requires these disclosures for all entities. This statement is effective for
financial statements for periods ending after December 15, 1997. Since the
Corporation has been disclosing the information required by previous accounting
standards, Management does not expect the impact of this standard to affect the
Corporation's disclosures of its capital structure.
<PAGE>
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments for the quarter ended March 31, 1997,
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
There were no reports on Form 8-K filed during the quarter ended March 31,
1997.
<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: May 13, 1997
By: /s/ Harry M. Walker
--------------------------------------------------------------
Harry M. Walker Secretary
Date: May 13, 1997
By: /s/ Gerard R. Host
--------------------------------------------------------------
Gerard R. Host Treasurer
Date: May 13, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 287,258
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 231,000
<TRADING-ASSETS> 679
<INVESTMENTS-HELD-FOR-SALE> 572,456
<INVESTMENTS-CARRYING> 1,415,023
<INVESTMENTS-MARKET> 1,404,319
<LOANS> 2,687,321
<ALLOWANCE> 63,800
<TOTAL-ASSETS> 5,377,083
<DEPOSITS> 3,778,820
<SHORT-TERM> 917,343
<LIABILITIES-OTHER> 133,178
<LONG-TERM> 0
0
0
<COMMON> 15,161
<OTHER-SE> 532,581
<TOTAL-LIABILITIES-AND-EQUITY> 5,377,083
<INTEREST-LOAN> 59,336
<INTEREST-INVEST> 30,985
<INTEREST-OTHER> 1,485
<INTEREST-TOTAL> 91,806
<INTEREST-DEPOSIT> 29,522
<INTEREST-EXPENSE> 41,542
<INTEREST-INCOME-NET> 50,264
<LOAN-LOSSES> 908
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 40,332
<INCOME-PRETAX> 26,986
<INCOME-PRE-EXTRAORDINARY> 26,986
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,675
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
<YIELD-ACTUAL> 4.36
<LOANS-NON> 9,014
<LOANS-PAST> 2,117
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 63,791
<CHARGE-OFFS> 1,901
<RECOVERIES> 1,002
<ALLOWANCE-CLOSE> 63,800
<ALLOWANCE-DOMESTIC> 44,394
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 19,406
</TABLE>
