<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 September 30, 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 64-0471500
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 November 12, 1997.
Title Outstanding
Common stock, no par value 36,426,554
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996*
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks (noninterest-bearing) $ 292,894 $ 337,090
Federal funds sold and securities purchased
under reverse repurchase agreements 29,856 92,718
Trading account securities 106 102
Securities available for sale (at fair value) 647,040 527,942
Securities held to maturity (fair value: $1,381,529-1997;
$1,431,805-1996) 1,370,435 1,425,260
Loans 2,850,455 2,637,320
Less: Unearned income 1,683 2,747
Allowance for loan losses 64,100 63,000
------------- ------------
Net loans 2,784,672 2,571,573
Premises and equipment 66,965 61,535
Intangible assets 40,105 38,637
Other assets 139,779 138,827
------------- ------------
TOTAL ASSETS $ 5,371,852 $ 5,193,684
============= ============
LIABILITIES
Deposits:
Noninterest-bearing $ 815,305 $ 826,137
Interest-bearing 2,908,273 2,771,299
------------- ------------
Total deposits 3,723,578 3,597,436
Federal funds purchased 233,679 201,965
Securities sold under repurchase agreements 672,891 765,226
Other short term borrowings 110,490 26,361
Other liabilities 48,967 78,512
------------- ------------
TOTAL LIABILITIES 4,789,605 4,669,500
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity
Common stock, no par value:
Authorized: 100,000,000 shares
Issued and outstanding: 36,436,554 shares-1997;
34,910,683-1996 15,182 14,546
Surplus 249,012 244,578
Retained earnings 308,815 261,850
Net unrealized gain on securities available for sale, net of tax 9,238 3,210
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 582,247 524,184
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,371,852 $ 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 Nine Months Ended
September 30, September 30,
==================== =====================
1997 1996 1997 1996
======= ======= ======== ========
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $62,472 $57,848 $182,261 $171,132
Interest on securities:
Taxable interest income 29,845 30,426 89,871 89,761
Interest income exempt from federal income taxes 1,420 1,259 4,439 4,139
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 378 773 3,176 3,809
------- ------- -------- --------
TOTAL INTEREST INCOME 94,115 90,306 279,747 268,841
INTEREST EXPENSE
Interest on deposits 30,481 28,073 90,286 84,449
Interest on federal funds purchased and securities
sold under repurchase agreements 11,825 12,051 34,687 37,077
Other interest expense 926 1,204 3,328 1,960
------- ------- -------- --------
TOTAL INTEREST EXPENSE 43,232 41,328 128,301 123,486
------- ------- -------- --------
NET INTEREST INCOME 50,883 48,978 151,446 145,355
Provision for loan losses 1,013 1,190 3,278 4,698
------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 49,870 47,788 148,168 140,657
NONINTEREST INCOME
Trust service income 3,060 2,956 8,941 7,720
Service charges on deposit accounts 6,464 5,995 18,525 17,403
Other account charges, fees and commissions 8,287 7,447 24,147 21,482
Securities gains 41 47 451 93
Other income 728 1,033 3,289 2,918
------- ------- -------- --------
TOTAL NONINTEREST INCOME 18,580 17,478 55,353 49,616
NONINTEREST EXPENSES
Salaries and employee benefits 21,566 19,153 63,840 57,253
Net occupancy - premises 2,459 2,454 7,258 6,906
Equipment expenses 3,231 3,196 9,691 9,309
Services and fees 5,237 5,173 16,587 15,313
FDIC insurance assessment 155 1,600 245 2,605
Amortization of intangible assets 2,357 2,156 7,060 6,147
Other expense 7,367 5,328 19,761 18,036
------- ------- -------- --------
TOTAL NONINTEREST EXPENSES 42,372 39,060 124,442 115,569
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 26,078 26,206 79,079 74,704
Income taxes 8,324 8,689 26,108 25,631
------- ------- -------- --------
NET INCOME $17,754 $17,517 $ 52,971 $ 49,073
======= ======= ======== ========
NET INCOME PER SHARE $0.49 $0.50 $1.46 $1.41
======= ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 36,352,223 34,910,683 36,375,153 34,910,683
</TABLE>
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
===============================
1997 1996
========= =========
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 52,971 $ 49,073
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,278 4,698
Provision for depreciation and amortization 14,386 13,288
Net accretion of securities (27) (4,255)
Securities gains (451) (93)
Other 11,891 (1,606)
Increase in intangible assets (6,011) (7,589)
Decrease (increase) in deferred income taxes 1,294 (956)
Increase in other assets (8,044) (10,082)
(Decrease) increase in other liabilities (9,778) 7,403
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 59,509 49,881
--------- ---------
INVESTING ACTIVITIES
Proceeds from calls and maturities of securities available for sale 85,144 120,799
Proceeds from calls and maturities of securities held to maturity 176,288 155,514
Proceeds from sales of securities available for sale 64,139 215,338
Purchases of securities available for sale (254,925) (392,145)
Purchases of securities held to maturity (111,859) (247,491)
Net decrease in federal funds sold and securities
purchased under reverse repurchase agreements 66,912 73,985
Net increase in loans (191,618) (17,930)
Purchases of premises and equipment (11,536) (5,817)
Proceeds from sales of premises and equipment 334 35
Proceeds from sales of other real estate 1,554 2,226
Cash paid in business combination, net of cash
equivalents of acquired bank (1,319)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (176,886) (95,486)
--------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 89,121 (10,703)
Net (decrease) increase in federal funds purchased and
securities sold under repurchase agreements (60,621) 74,712
Net increase in short term borrowings 64,416 1,566
Cash dividends paid (15,278) (12,567)
Common stock repurchased and retired (4,457)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 73,181 53,008
--------- ---------
(Decrease) increase in cash and cash equivalents (44,196) 7,403
Cash and cash equivalents at beginning of year 337,090 299,006
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 292,894 $ 306,409
========= =========
</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. Certain reclassifications have been made to prior period amounts to
conform to current period presentation.
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 nine month periods ended September 30, 1997 and 1996 ($ in
thousands):
1997 1996
------- -------
Balance at beginning of year $63,000 $62,000
Provision charged to expense 3,278 4,698
Loans charged off (6,658) (6,757)
Recoveries 3,136 3,059
Allowance applicable to loans of acquired banks 1,344
------- -------
Balance at end of period $64,100 $63,000
======= =======
At September 30, 1997, the recorded investment in commercial loans
considered to be impaired under Statement of Financial Accounting Standards
(SFAS) No. 114 was $11.0 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 nine months ended September 30, 1997, the average
recorded investment in impaired loans was approximately $11.2 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 $13.6
million at September 30, 1997. The foregone interest associated with such loans
is immaterial.
NOTE 3 - CONTINGENCIES
The ongoing litigation against the Corporation's subsidiary, Trustmark
National Bank, relating to the placement of collateral protection insurance
(CPI) on particular automobile and mobile home loans has been substantially
finalized. A settlement of the federal court class action was the subject of an
April 14, 1997 settlement hearing. The federal district court approved the
settlement by judgment entered July 10, 1997. Notices of appeal by three class
members were subsequently dismissed. The settlement funds were disbursed on
August 28, 1997. The effects of the settlement are included in the consolidated
financial statements. Administrative details required to conclude the settlement
process must be completed before the end of 1997. There are twenty-one class
members who elected to opt out of the compensatory damages portion of the
<PAGE>
settlement. These class members have the right to pursue in the federal court
such individual claims against the Bank. In the opinion of Management, and based
on the advice of legal counsel, the ultimate resolution of such claims will not
have a material effect on the Corporation's consolidated financial statements.
In addition, the Bank is defendant in various 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 nine months ended September 30, 1997 and 1996, the Corporation
paid approximately $24.7 and $27.5 million, respectively, in income taxes.
During the nine months ended September 30, 1997 and 1996, the Corporation paid
$122.9 and $123.9 million, respectively, in interest on deposit liabilities and
other borrowings. For the nine months ended September 30, 1997 and 1996, noncash
transfers from loans to foreclosed properties were $1.7 million and $1.2
million, respectively.
NOTE 5 - RECENT PRONOUNCEMENTS
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 this
standard to have an impact on 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 this standard to have an impact on the
Corporation's disclosures of its capital structure.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The statement
is effective for fiscal years beginning after December 15, 1997. Management
intends to comply with this standard.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997. Management does not expect this standard to have a material
impact on the Corporation's financial statement disclosures.
NOTE 6 - BUSINESS COMBINATIONS
On September 19, 1997, Perry County Bank (PCB) of New Augusta, Mississippi,
was merged with Trustmark National Bank. The stockholders of PCB received
<PAGE>
approximately 205,746 shares of Trustmark Corporation common stock and
approximately $3,541,376 cash in connection with the merger. This business
combination has been accounted for by the purchase method of accounting.
Therefore, the results of operations, ending balances and average balances
include the impact of this merger only since its consumation. See table below:
Fair value of assets acquired, net of cash equivalents $ 41,112
Excess cost over net tangible assets acquired 2,630
Liabilities assumed (36,967)
Common stock issued (5,456)
Cash paid in business combination, net of cash --------
equivalents of acquired bank $ 1,319
========
On September 9, 1997,the Corporation announced plans to merge its
subsidiary, Trustmark National Bank, with Smith County Bank (SCB) located in
Taylorsville, Mississippi. SCB reported total assets at September 30, 1997, of
approximately $97 million and has five locations in Smith and Jones counties.
Under the terms of the agreement, the Corporation will exchange its shares of
common stock for all of SCB's common shares. The exchange rate will be based on
the average fair value of the Corporation's common stock over a specified period
prior to the merger. The merger is subject to the approval of the stockholders
of SCB and applicable regulatory authorities. The merger, which will be
accounted for as a purchase, is expected to be completed early in the first
quarter of 1998.
On February 28, 1997, the 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 year's 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 $17.8 million, or $0.49 per
share for the third quarter of 1997, compared with $17.5 million, or $0.50 per
share for the third quarter of 1996. Net income for the nine months ended
September 30, 1997 was $53.0 million, or $1.46 per share, compared with $49.1
million, or $1.41 per share, for the nine months ended September 30, 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 September 30, 1997 increased 3.43% over year end 1996 to
$5.372 billion, while stockholders' equity increased 11.08% over year end 1996
and equaled $582.2 million. The return on average assets for the nine months
ended September 30, 1997 was 1.34% compared with 1.28% for the same period in
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.
On September 19, 1997, Perry County Bank (PCB) in New Augusta, Mississippi
was merged with Trustmark National Bank. At the merger date, PCB had
approximately $23 million in net loans, $43 million in total assets and $37
million in total deposits. The stockholders of PCB received 205,746 shares of
Trustmark Corporation common stock and approximately $3.5 million cash in
connection with the merger. This business combination has been accounted for by
the purchase method of accounting. Therefore, consolidated results of
operations, ending balances and average balances include the impact of this
merger since its consummation.
On September 9,1997, the Corporation announced plans to merge its
subsidiary, Trustmark National Bank, with Smith County Bank (SCB) located in
Taylorsville, Mississippi. SCB reported total assets at September 30, 1997, of
approximately $97 million and has five locations in Smith and Jones counties.
Under the terms of the agreement, the Corporation will exchange its shares of
common stock for all of SCB's common shares. The exchange rate will be based on
the average fair value of the Corporation's common stock over a specified period
prior to the merger. The merger is subject to the approval of the stockholders
of SCB and applicable regulatory authorities. The merger, which will be
accounted for as a purchase, is expected to be completed early in the first
quarter of 1998.
On February 28, 1997, Trustmark Corporation completed its merger with First
Corinth Corporation (FCC) and its subsidiary, National Bank of Commerce of
Corinth (NBC). At February 28, 1997, FCC and subsidiary had approximately $64
million in net loans, $134 million in total assets and $113 million in total
deposits. The Corporation issued approximately 1.5 million shares of common
stock in the merger which was accounted for as a pooling of interests. As a
result of this transaction, the Corporation has restated its financial
statements to include FCC and NBC as of January 1, 1997. Prior years' financial
statements were not restated as the changes would have been immaterial.
ASSET/LIABILITY MANAGEMENT AND LIQUIDITY
A key objective of the Corporation's asset/liability management program is
to quantify, monitor and control interest rate risk and to assist Management in
maintaining stability in the net interest margin under varying interest rate
environments. The Asset/Liability Committee, consisting of executive officers,
sets the day-to-day operating guidelines and approves strategies affecting net
interest income and coordinates activities within board policy limits. The
primary tool utilized by this committee is an asset/liability modeling system
used to
<PAGE>
evaluate exposure to interest rate risk and to project earnings and manage
balance sheet growth. The Asset/Liability Committees of both executive officers
and the board of directors meet monthly to evaluate current and projected
interest rate risk positions and review the balance sheet composition.
The interest rate sensitivity gap analysis shown in the accompanying table
compares the volume of rate sensitive assets against rate sensitive liabilities
during the next year. This analysis is a relatively straightforward tool which
is useful mainly in highlighting significant short-term repricing volume
mismatches. The following table presents the rate sensitivity gap analysis at
September 30, 1997 ($ in thousands):
Interest Sensitive Within
-------------------------
90 days One Year
---------- ----------
Total rate sensitive assets $1,277,877 $2,044,889
Total rate sensitive liabilities 1,643,628 2,507,205
---------- ----------
Net gap ($365,751) ($462,316)
========== ==========
The analysis indicates that the Corporation is in a negative gap position
over the next three and twelve month periods. 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 September 30, 1997 were $4.896 billion, or
91.15% of total assets, compared with $4.680 billion, or 90.12% of total assets
for December 31, 1996, an increase of $216 million, or 4.61%, and is primarily
the result of business combinations which were completed during 1997.
Loans are the largest category of earning assets for the Corporation and
produce the highest level of interest income. At September 30, 1997, total loans
were $2.849 billion, an increase of $214.2 million, or 8.13%, from the $2.635
billion reported at December 31, 1996. Approximately $87 million of this growth
is the result of business combinations while the remainder can be attributed to
a Management strategy to place 15 year mortgages in its portfolio rather than
selling them in the secondary market with the rights to service.
The Corporation's conservative lending policies have produced consistently
strong asset quality. A measure of asset quality in the financial institutions
industry is the level of nonperforming assets. Nonperforming assets include
nonperforming loans, consisting of nonaccrual and restructured loans, and other
real estate as reflected in the following table ($ in thousands):
<PAGE>
September 30, Dec. 31,
----------------- -------
1997 1996 1996
------- ------- -------
Nonaccrual loans $13,617 $9,460 $ 8,390
Restructured loans 0 0 0
------- ------- -------
Nonperforming loans 13,617 9,460 8,390
Other real estate (ORE) 2,873 2,969 2,734
------- ------- -------
Nonperforming assets 16,490 12,429 11,124
Accruing loans past due 90 days or more 2,180 5,884 2,407
------- ------- -------
Total nonperforming assets and
loans past due 90 days or more
loans past due 90 days or more $18,670 $18,313 $13,531
======= ======= =======
Nonperforming assets/Total loans + ORE 0.58% 0.48% 0.42%
======= ======= =======
As seen above, the Corporation's level of nonperforming assets and loans
past due 90 days or more at September 30, 1997 was slightly higher compared to
December 31, 1996. The Corporation's level of nonperforming assets continues to
be less than those of its peer group. The Corporation has controlled its level
of nonperforming assets by maintaining strong underwriting standards, consistent
credit reviews and a prudent loan charge-off policy. At September 30, 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 September 30, 1997, the allowance for loan losses was
$64.1 million, representing 2.25% of total loans outstanding. This compares with
an allowance for loan losses of $63.0 million at December 31, 1996, representing
2.39% of total loans outstanding. The increase of $1.1 million is directly the
result of 1997 business combinations.
Net charge-offs were $3.522 million or 0.17% of average loans for the nine
months ended September 30, 1997, down $176 thousand from $3.698 million or 0.19%
of average loans for the nine months ended September 30, 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
September 30, 1997, securities available for sale (AFS), with a carrying value
of $647 million, and securities held to maturity (HTM), with a carrying value of
$1.370 billion, combined to create a securities portfolio totaling $2.017
billion, an increase of $64 million or 3.29% from December 31, 1996. This
increase is primarily the result of business combinations completed during 1997.
Also, growth has come in the area of shorter term U. S. Government securities
that have provided the Corporation a greater degree of liquidity and additional
collateral for pledging purposes. Management continues to stress asset quality
as one of the strategic goals of the securities portfolio and continues to
invest 87% of the portfolio in U. S. Government and Agency securities.
At September 30, 1997, securities AFS had a carrying value of $647 million
and an amortized cost of $632.1 million. This compares with a carrying value of
$527.9 million and an amortized cost of $522.7 million at December 31, 1996. At
September 30, 1997, gross unrealized gains were $16.4 million on securities AFS
while gross unrealized losses were $1.5 million. Net unrealized gains are shown
as a separate component of stockholders' equity, net of taxes and equaled $9.2
million at September 30, 1997.
The carrying value of securities HTM was $1.370 billion at September 30,
1997 compared with $1.425 billion at year end 1996. The fair value of HTM
<PAGE>
securities at September 30, 1997 was $1.382 billion compared with $1.432 billion
at year end 1996. Gross unrealized gains were $14.6 million and gross unrealized
losses were $3.5 million on securities HTM at September 30, 1997.
Federal funds sold and securities purchased under reverse repurchase
agreements were $29.9 million at September 30, 1997, a decrease of $62.9 million
when compared with year end 1996. The Corporation utilizes these products as a
short-term investment alternative whenever it has excess liquidity. The decline
during the first nine months of 1997 reflects Management's decision to invest in
higher yielding loans and securities.
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 $3.724 billion at September 30, 1997, an increase of $126.1 million, or
3.51%, over year end 1996. Business combinations completed during 1997 are
mainly responsible for this growth.
Federal funds purchased were $233.7 million at September 30, 1997 and
increased $31.7 million when compared with year end 1996. Securities sold under
repurchase agreements totaled $672.9 million at September 30, 1997, a decrease
of $92.3 million since year end 1996. During the last quarter of 1996, the
Corporation began to increase its utilization of demand notes as a low cost
source of funding. At September 30, 1997, the balance in demand notes was $94.6
million compared to $26.4 million at December 31, 1996. Because of the funding
available from demand notes, the Corporation was able to reduce its overall need
for funds from securities sold under repurchase agreements.
CONTINGENCIES
The ongoing litigation against the Corporation's subsidiary, Trustmark
National Bank, relating to the placement of collateral protection insurance
(CPI) on particular automobile and mobile home loans has been substantially
finalized. A settlement of the federal court class action was the subject of an
April 14, 1997 settlement hearing. The federal district court approved the
settlement by judgment entered July 10, 1997. Notices of appeal by three class
members were subsequently dismissed. The settlement funds were disbursed on
August 28, 1997. The effects of the settlement are included in the consolidated
financial statements. Administrative details required to conclude the settlement
process must be completed before the end of 1997. There are twenty-one class
members who elected to opt out of the compensatory damages portion of the
settlement. These class members have the right to pursue in the federal court
such individual claims against the Bank. In the opinion of Management, and based
on the advice of legal counsel, the ultimate resolution of such claims will not
have a material effect on the Corporation's consolidated financial statements.
In addition, the Bank 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
September 30, 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. Actual and minimum, regulatory capital amounts and ratios at
September 30, 1997, for the Corporation and the Bank are presented in the table
below ($ in thousands):
<PAGE>
<TABLE>
<CAPTION>
Actual Minimum Regulatory
Regulatory Capital Capital Required
------------------ ------------------
Amount Ratio Amount Ratio
-------- ------ -------- -----
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $600,646 19.68% $244,112 8.00%
Trustmark National Bank $575,844 18.94% $243,170 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $562,183 18.42% $122,056 4.00%
Trustmark National Bank $537,526 17.68% $121,585 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $562,183 10.71% $209,875 4.00%
Trustmark National Bank $537,526 10.27% $209,378 4.00%
</TABLE>
At September 30, 1997, the Corporation had stockholders' equity of $582.2
million, which contained a net unrealized gain on securities available for sale,
net of taxes, of $9.2 million. 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 28.77%, the Corporation retained 71.23%
of its earnings during the first nine months of 1997, generating an internal
capital growth rate of 9.10%. Dividends for the third quarter of 1997 were $.14
per share compared to $.12 per share for the third quarter of 1996. Book value
for the Corporation's common stock was $15.98 at September 30, 1997, compared
with the closing market price of $32.25.
In connection with the PCB and SCB mergers, the Corporation's board of
directors has authorized the Corporation to purchase shares of its common stock
in open market transactions. The Corporation has purchased approximately 166,000
shares of its common stock reducing its number of common shares outstanding to
36,426,554 at November 12, 1997.
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 nine months of 1997, the Corporation's level of NII increased
by $6.1 million, or 4.2%, when compared with the same period in 1996. The
improvement in NII for 1997 was the result of business combinations in addition
to more rapid growth of average earning assets when compared to interest-bearing
liabilities combined with a relatively stable interest rate environment. This
analysis is also true for the third quarter of 1997 when compared with the same
period in 1996.
For the first nine months of 1997, average earning assets increased 3.3%
when compared to the same period in 1996. This was driven by a 7.3% 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 nine months of 1996. This combination resulted in an
increase in total interest income of $10.9 million, or 4.1%, when comparing the
first nine months of 1997 with 1996.
Average interest-bearing liabilities grew by 1.1% during the first nine
months of 1997. Interest-bearing deposits experienced growth of 3.9% during the
first nine months of 1997 while average funds purchased and securities sold
under repurchase agreements declined 8.6%. In addition, the Corporation's
increased utilization of demand notes during 1997 led to substantial growth in
this category when comparing the first three quarters of 1997 and 1996. As a
result of these factors, total interest expense increased by $4.8 million when
comparing the first three quarters of 1997 to the same period in 1996.
<PAGE>
The table below illustrates the changes in the net interest margin as a
percentage of average earning assets for the periods shown:
Nine Months Ended
September 30,
-----------------
1997 1996
----- -----
Yield on interest-earning assets-FTE 7.87% 7.79%
Rate on interest-bearing liabilities 3.55% 3.53%
----- -----
Net interest margin-FTE 4.32% 4.26%
===== =====
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 nine months of 1997, the Corporation's provision for
loan losses was $3.3 million compared with $4.7 million for the first three
quarters 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
three quarters of 1997, as noninterest income, excluding securities gains,
increased 10.9% when compared with the same period in 1996. By comparison,
noninterest income increased 6.4% during the third quarter of 1997 when compared
to the same period in 1996.
The largest single category of noninterest income, other account charges,
fees and commissions, increased $2.7 million, or 12.4%, during the first three
quarters of 1997. Business combinations completed during 1997 accounted for most
of this increase. Other contributors to the growth in this category during these
periods were fees generated from residential mortgage servicing, discount
brokerage services, credit cards and a variety of other fee producing products
and services.
Service charges for the first three quarters of 1997 grew by $1.1 million,
or 6.5%, when compared with the first three quarters 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 $1.2 million during the first three
quarters of 1997 as the Bank continued to be one of the largest providers of
asset management services in Mississippi. At September 30, 1997, the Bank had
trust accounts with assets under management with fair values of approximately
$5.5 billion.
Gross securities gains of $503 thousand and gross securities losses of $57
thousand were realized during the first nine months of 1997 because of calls and
dispositions of securities classified as available for sale. There were no sales
of securities held to maturity during the first nine months of 1997. Gross
securities gains of $6 thousand were realized on calls and other dispositions of
these securities during that 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. The
efficiency ratio, a key indicator of the control of noninterest expense and the
growth of noninterest income, was 59.1% for the nine months ended September 30,
1997 and 59.9% for the third quarter of 1997. Total noninterest expense
<PAGE>
increased 7.7% during the first nine months of 1997 compared with 8.5% during
the third quarter of 1997.
Salaries and employee benefits continue to comprise the largest portion of
noninterest expenses and increased $6.6 million, or 11.5%, when comparing 1997
with 1996. The number of full-time equivalent employees totaled 2,287 at
September 30, 1997 and 2,207 at September 30, 1996. These increases are the
direct result of 1997 business combinations..
Services and fees increased $1.3 million when comparing the first three
quarters of 1997 to the same period in 1996. Increased costs for professional
fees and communications 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 $2.4 million when comparing the
first three quarters of 1997 to the same period in 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 three
quarters of 1996, the Corporation paid an FDIC assessment on its deposits
insured by the SAIF at a 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 $913 thousand when
comparing the first three quarters of 1997 with the same period in 1996. The
amount of mortgages serviced increased 10.1% when comparing September 30, 1997
with September 30, 1996 and provided a larger base of mortgage servicing rights
that began amortization during that period.
INCOME TAXES
For the nine months ended September 30, 1997, the Corporation's effective
tax rate was 33.0% compared with 34.3% for the first nine 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 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 September 30, 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.
REGULATORY MATTERS
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
<PAGE>
structure would not be defined as complex, Management does not expect this
standard to have an impact on 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 this standard to have an impact on the
Corporation's disclosures of its capital structure.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The statement
is effective for fiscal years beginning after December 15, 1997. Management does
not expect the this standard to have a material impact on the Corporation's
disclosure of Comprehensive Income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997. Management does not expect this standard to have a material
impact on the Corporation's financial statement disclosures.
OTHER MATTERS
The Corporation is in the process of identifying which of its systems could
be adversely affected by the year 2000 issue and is developing an implementation
plan to resolve the issue. Management does not expect the cost of any required
modifications to have a material effect on the Corporation's consolidated
financial statements.
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments for the quarter ended September 30,
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 September
30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Trustmark Corporation has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
By:/s/ Frank R. Day
--------------------------------------------------------------------------
Frank R. Day Chairman of the Board
Date: November 12, 1997
By:/s/ Richard G. Hickson
--------------------------------------------------------------------------
Richard G. Hickson President & Chief Executive Officer
Date: November 12, 1997
By:/s/ Gerard R. Host
--------------------------------------------------------------------------
Gerard R. Host Treasurer
Date: November 12, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 292,894
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 29,856
<TRADING-ASSETS> 106
<INVESTMENTS-HELD-FOR-SALE> 647,040
<INVESTMENTS-CARRYING> 1,370,435
<INVESTMENTS-MARKET> 1,381,529
<LOANS> 2,848,772
<ALLOWANCE> 64,100
<TOTAL-ASSETS> 5,371,852
<DEPOSITS> 3,723,578
<SHORT-TERM> 1,017,060
<LIABILITIES-OTHER> 48,967
<LONG-TERM> 0
0
0
<COMMON> 15,182
<OTHER-SE> 567,065
<TOTAL-LIABILITIES-AND-EQUITY> 5,371,852
<INTEREST-LOAN> 182,261
<INTEREST-INVEST> 94,310
<INTEREST-OTHER> 3,176
<INTEREST-TOTAL> 279,747
<INTEREST-DEPOSIT> 90,286
<INTEREST-EXPENSE> 128,301
<INTEREST-INCOME-NET> 151,446
<LOAN-LOSSES> 3,278
<SECURITIES-GAINS> 451
<EXPENSE-OTHER> 124,442
<INCOME-PRETAX> 79,079
<INCOME-PRE-EXTRAORDINARY> 79,079
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,971
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.46
<YIELD-ACTUAL> 4.32
<LOANS-NON> 13,617
<LOANS-PAST> 2,180
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 64,344
<CHARGE-OFFS> 6,658
<RECOVERIES> 3,136
<ALLOWANCE-CLOSE> 64,100
<ALLOWANCE-DOMESTIC> 46,711
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 17,389
</TABLE>
