<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, 1998
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 10, 1998.
Title Outstanding
Common stock, no par value 72,773,616
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
September 30, December 31,
1998 1997*
============ ===========
Assets
Cash and due from banks (noninterest-bearing) $ 299,849 $ 292,555
Federal funds sold and securities purchased
under reverse repurchase agreements 273,656 70,786
Trading account securities 51 99
Securities available for sale (at fair value) 654,138 610,471
Securities held to maturity (fair value:
$1,250,843-1998; $1,407,167-1997) 1,225,464 1,396,928
Loans 3,579,321 2,983,655
Less: Allowance for loan losses 66,150 64,100
------------ -----------
Net loans 3,513,171 2,919,555
Premises and equipment 70,710 67,958
Intangible assets 49,111 40,085
Other assets 146,526 146,721
------------ -----------
Total Assets $ 6,232,676 $ 5,545,158
============ ===========
Liabilities
Deposits:
Noninterest-bearing $ 885,236 $ 898,679
Interest-bearing 2,996,660 2,920,270
------------ -----------
Total deposits 3,881,896 3,818,949
Federal funds purchased 620,033 283,468
Securities sold under repurchase agreements 924,352 665,232
Short term borrowings 111,746 140,058
Other liabilities 49,280 43,826
------------ -----------
Total Liabilities 5,587,307 4,951,533
Commitments and Contingencies
Stockholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 72,773,616 shares - 1998;
72,740,708 - 1997 15,161 15,154
Surplus 246,430 246,768
Retained earnings 364,200 320,901
Net unrealized gain on securities available for
sale, net of tax 19,578 10,802
------------ -----------
Total Stockholders' Equity 645,369 593,625
------------ -----------
Total Liabilities and Stockholders' Equity $ 6,232,676 $ 5,545,158
============ ===========
* 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,
=================== ===================
1998 1997 1998 1997
======== ======== ======== ========
Interest Income
<S> <C> <C> <C> <C>
Interest and fees on loans $ 74,964 $ 62,472 $212,947 $182,261
Interest on securities:
Taxable interest income 29,158 29,845 89,233 89,871
Interest income exempt from federal income taxes 1,573 1,420 4,506 4,439
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 1,484 378 2,919 3,176
-------- -------- -------- --------
Total Interest Income 107,179 94,115 309,605 279,747
Interest Expense
Interest on deposits 31,483 30,481 94,394 90,286
Interest on federal funds purchased and securities
sold under repurchase agreements 17,546 11,825 42,688 34,687
Other interest expense 1,131 926 4,787 3,328
-------- -------- -------- --------
Total Interest Expense 50,160 43,232 141,869 128,301
-------- -------- -------- --------
Net Interest Income 57,019 50,883 167,736 151,446
Provision for loan losses 2,221 1,013 5,188 3,278
-------- -------- -------- --------
Net Interest Income After
Provision for Loan Losses 54,798 49,870 162,548 148,168
Noninterest Income
Service charges on deposit accounts 7,816 6,464 22,203 18,525
Other account charges, fees and commissions 6,571 5,165 18,907 15,110
Mortgage servicing fees 3,343 3,357 10,165 9,855
Trust service income 3,515 3,060 10,237 8,941
Securities gains 10 41 40 451
Other income 1,290 493 3,608 2,471
-------- -------- -------- --------
Total Noninterest Income 22,545 18,580 65,160 55,353
Noninterest Expenses
Salaries and employee benefits 22,388 21,566 66,757 63,840
Net occupancy - premises 2,692 2,459 7,468 7,258
Equipment expenses 2,982 3,231 9,305 9,691
Services and fees 6,758 5,237 20,362 16,587
Amortization of intangible assets 2,635 2,357 7,584 7,060
Other expense 7,210 7,522 20,752 20,006
-------- -------- -------- --------
Total Noninterest Expenses 44,665 42,372 132,228 124,442
-------- -------- -------- --------
Income Before Income Taxes 32,678 26,078 95,480 79,079
Income taxes 11,501 8,324 34,172 26,108
-------- -------- -------- --------
Net Income $ 21,177 $ 17,754 $ 61,308 $ 52,971
======== ======== ======== ========
Earnings Per Share
Basic $ 0.29 $ 0.24 $ 0.84 $ 0.73
======== ======== ======== ========
Diluted $ 0.29 $ 0.24 $ 0.84 $ 0.73
======== ======== ======== ========
</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,
======================
1998 1997
========= =========
Operating Activities
<S> <C> <C>
Net income $ 61,308 $ 52,971
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,188 3,278
Provision for depreciation and amortization 14,711 14,386
Net accretion of securities (540) (27)
Securities gains (40) (451)
Increase in intangible assets (10,056) (6,011)
Decrease in deferred income taxes 1,483 1,294
Increase in other assets (8,793) (8,044)
Increase (decrease) in other liabilities 4,945 (9,778)
Other (2,443) (1,457)
--------- ---------
Net cash provided by operating activities 65,763 46,161
--------- ---------
Investing Activities
Proceeds from calls and maturities of securities available for sale 50,508 85,144
Proceeds from calls and maturities of securities held to maturity 288,954 176,288
Proceeds from sales of securities available for sale 174,440 64,139
Purchases of securities available for sale (224,155) (254,925)
Purchases of securities held to maturity (109,346) (111,859)
Net (increase) decrease in federal funds sold and securities
purchased under reverse repurchase agreements (202,870) 66,912
Net increase in loans (552,977) (191,618)
Purchases of premises and equipment (6,662) (11,536)
Proceeds from sales of premises and equipment 94 334
Proceeds from sales of other real estate 2,339 1,554
Net assets assumed in immaterial pooling of interests
business combination 13,348
Cash equivalents of acquired bank, net of cash paid 13,035 (1,319)
--------- ---------
Net cash used by investing activities (566,640) (163,538)
--------- ---------
Financing Activities
Net (decrease) increase in deposits (25,153) 89,121
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements 595,685 (60,621)
Net (decrease) increase in short term borrowings (28,312) 64,416
Common stock purchased and retired (16,040) (4,457)
Cash dividends paid (18,009) (15,278)
--------- ---------
Net cash provided by financing activities 508,171 73,181
--------- ---------
Increase (decrease) in cash and cash equivalents 7,294 (44,196)
Cash and cash equivalents at beginning of year 292,555 337,090
--------- ---------
Cash and cash equivalents at end of period $ 299,849 $ 292,894
========= =========
</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. Certain reclassifications have been
made to prior period amounts to conform with current year presentation. The
notes included herein should be read in conjunction with the notes to the
consolidated financial statements included in Trustmark Corporation's (the
Corporation) 1997 annual report on Form 10-K.
The consolidated financial statements include the accounts of the
Corporation, its wholly-owned subsidiary, Trustmark National Bank (the Bank) and
the Bank's wholly-owned subsidiaries, Trustmark Financial Services, Inc. and
Trustmark Insurance Agency, Inc. All intercompany profits, balances and
transactions have been eliminated.
NOTE 2 - BUSINESS COMBINATIONS
On March 13, 1998, Smith County Bank (SCB) in Taylorsville, Mississippi was
merged in a business combination accounted for by the purchase method of
accounting. At the merger date, SCB had approximately $44 million in net loans,
$98 million in total assets and $88 million in total deposits. The stockholders
of SCB received 725,000 shares of Trustmark Corporation common stock (adjusted
for the two-for-one stock split discussed in Note 5) in connection with the
merger. Excess cost over net assets acquired equaled $6.7 million and has been
allocated to core deposit intangibles. SCB's results of operations, which are
not material, have been included in the financial statements from the merger
date.
NOTE 3 - LOANS
The following table summarizes the activity in the allowance for loan
losses for the nine month periods ended September 30, 1998 and 1997 ($ in
thousands):
1998 1997
-------- --------
Balance at beginning of year $ 64,100 $ 63,000
Provision charged to expense 5,188 3,278
Loans charged off (8,502) (6,658)
Recoveries 4,064 3,136
Allowance applicable to loans of acquired bank 1,300 1,344
-------- --------
Balance at end of period $ 66,150 $ 64,100
======== ========
At September 30, 1998, the carrying value of commercial loans considered to
be impaired under Statement of Financial Accounting Standards (SFAS) No. 114 was
$10.0 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 September 30, 1998, the average carrying
value of impaired loans was approximately $11.6 million, and the amount of
interest income recognized on these loans was immaterial. Loans on which the
accrual of interest has been discontinued or reduced totaled $12.9 million at
September 30, 1998. The foregone interest associated with such loans is
immaterial.
<PAGE>
NOTE 4 - CONTINGENCIES
The Corporation and its subsidiaries are parties to lawsuits and other
claims that arise in the ordinary course of business; some of the lawsuits
assert claims related to the lending, collection, servicing, investment, trust
and other business activities of Trustmark National Bank; and some of the
lawsuits allege substantial claims for damages. The cases are being vigorously
contested. In the regular course of business, Management evaluates estimated
losses or costs related to litigation, and provision is made for anticipated
losses whenever Management believes that such losses are probable and can be
reasonably estimated. At the present time, Management believes, based on the
advice of legal counsel, that the final resolution of pending legal proceedings
will not have a material impact on the Corporation's consolidated financial
position or results of operations.
NOTE 5 - STOCKHOLDERS' EQUITY
On February 10, 1998, the Corporation announced a two-for-one stock split.
The additional shares were issued on March 30, 1998, to shareholders of record
on March 20, 1998. All per share data and number of common shares have been
restated to reflect the effect of this stock split.
At the Corporation's annual shareholders' meeting, which was held April 14,
1998, an amendment to the Articles of Incorporation was approved increasing the
number of authorized common shares from 100 million to 250 million. This
increase will allow the Corporation to issue additional shares to consummate
business combinations, implement stock splits or dividends or for other
corporate purposes.
Basic and diluted EPS were computed by dividing net income by the weighted
average shares of common stock outstanding. For the nine months ended September
30, 1998 and 1997, weighted average shares were 72,935,602 and 72,750,306,
respectively. For the three months ended September 30, 1998 and 1997, weighted
average shares were 72,773,616 and 72,704,446, respectively.
NOTE 6 - COMPREHENSIVE INCOME
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 and is effective for
fiscal years beginning after December 15, 1997. The Corporation adopted this
statement effective January 1, 1998. The purpose of reporting comprehensive
income is to report a measure of all changes in equity of the Corporation that
result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The following
table reflects the calculation of comprehensive income for the Corporation ($ in
thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income $21,177 $17,754 $61,308 $52,971
Unrealized holding gains/(losses)
arising during the period on
securities available for sale, net of tax (795) 3,937 1,488 6,028
------- ------- ------- -------
Comprehensive Income $20,382 $21,691 $62,796 $58,999
======= ======= ======= =======
</TABLE>
<PAGE>
NOTE 7 - STATEMENTS OF CASH FLOWS
During the nine months ended September 30, 1998 and 1997, the Corporation
paid approximately $36.1 million and $24.7 million, respectively, in income
taxes. During the nine months ended September 30, 1998 and 1997, the Corporation
paid $145.2 million and $123.2 million, respectively, in interest on deposit
liabilities and other borrowings. For the nine months ended September 30, 1998
and 1997, noncash transfers from loans to foreclosed properties were $1.1
million and $1.7 million, respectively.
NOTE 8 - RECENT PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The impact on the financial position and to the financial statements of the
Corporation has not been evaluated.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement amends FASB
Statement No. 65, "Accounting for Certain Mortgage Banking Activities" and will
affect accounting and reporting standards for classifying securitized mortgage
loans held for sale. This Statement shall be effective for the first fiscal
quarter beginning after December 15, 1998. The adoption of this Statement will
not have a material impact on the Corporation's consolidated financial
statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following provides a narrative discussion and analysis of significant
changes in the Corporation's results of operations and financial condition. This
discussion should be read in conjunction with the consolidated financial
statements included elsewhere in this report.
The Securities Litigation Reform Act evidences Congress' determination that
the disclosure of forward-looking information is desirable for investors and
encourages such disclosure by providing a safe harbor for forward-looking
statements by Management. Certain of the information included in this discussion
contains forward-looking statements and information that are based on
Management's belief as well as certain assumptions made by, and information
currently available to Management. Specifically, Management's Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements with respect to the adequacy of the allowance for
loan losses; the effect of legal proceedings on the Corporation's financial
condition, results of operations and liquidity; and Year 2000 compliance issues.
Although Management of the Corporation believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks materialize, or should any such underlying assumptions prove to be
significantly different, actual results may vary materially from those
anticipated, estimated, projected or expected.
FINANCIAL SUMMARY
Trustmark Corporation reported net income for the third quarter of 1998 of
$21.2 million compared with $17.8 million for the third quarter of 1997, an
increase of 19.3%. Basic and diluted earnings were $0.29 per share for the third
quarter of 1998 compared with $0.24 per share for the third quarter of 1997. Net
income for the nine months ended September 30, 1998 was $61.3 million, an
increase of 15.7% when compared with $53.0 million earned during the first nine
months of 1997. Basic and diluted earnings per share were $0.84 per share for
the first nine months of 1998 compared with $0.73 per share for the first nine
months of 1997. Trustmark's performance for the nine months ended September 30,
1998 resulted in a return on average assets of 1.42%, a return on average equity
of 13.44% and an efficiency ratio of 55.63%.
Total assets at September 30, 1998 increased 12.4% over December 31, 1997
to reach $6.2 billion, while net loans increased 20.3% to reach $3.5 billion and
total deposits increased 1.7% to $3.9 billion. Stockholders' equity was $645.4
million at September 30, 1998, an 8.7% increase when compared with December 31,
1997.
BUSINESS COMBINATIONS
Acquisitions have been, and are expected to continue to be, a significant
part of the Corporation's growth strategy and have enhanced the market position
of the Corporation in the state of Mississippi. Management is continually
evaluating new market areas in which to expand and to provide its financial
services.
On March 13, 1998, Smith County Bank (SCB) in Taylorsville, Mississippi was
merged in a business combination accounted for by the purchase method of
accounting. At the merger date, SCB had approximately $44 million in net loans,
$98 million in total assets and $88 million in total deposits. The stockholders
of SCB received approximately 725,000 shares of the Corporation's common stock
(adjusted for the two-for-one stock split) in connection with the merger. Excess
cost over net assets acquired equaled $6.7 million and has been allocated to
core deposit intangibles. SCB's results of operations, which are not material,
have been included in the financial statements from the merger date.
ASSET/LIABILITY MANAGEMENT
Overview
Market risk is the risk of loss arising from adverse changes in market
prices and rates. The Corporation has risk management policies to monitor and
limit exposure to market risk. The Corporation's market risk is comprised
<PAGE>
primarily of interest rate risk created by its core banking activities in loans
and deposits. Management continually develops and applies effective strategies
to manage these risks. In asset/liability management activities, policies are in
place that are designed to manage interest rate risk. 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 policy limits established by the Board of Directors based on
the Corporation's tolerance for risk. A key objective of the Corporation's
asset/liability management program is to quantify, monitor and manage interest
rate risk and to assist Management in maintaining stability in the net interest
margin under varying interest rate environments.
Market/Interest Rate Risk Management
The Corporation's primary purpose in managing interest rate risk is to
effectively invest the Corporation's capital and to manage and preserve the
value created by its core banking business. The Corporation utilizes an
investment portfolio as well as off-balance sheet instruments to manage the
interest rate risk naturally created through its business activities. The
primary tool utilized by the Asset/Liability Committee is a modeling system that
provides information which is used to evaluate the Corporation's exposure to
interest rate risk, to project earnings and manage balance sheet growth. This
modeling system incorporates Management's expectations regarding loan demand,
deposit product preferences, price and funds availability, prepayment rates and
the rate differential between financial instruments. Interest rate change
scenarios of plus and minus 100, 200 and 300 basis points are run in the model
against the Corporation's balance sheet and the results of these simulations
show the impact on future results of operations. The Asset/Liability Committees
of both the Bank's executive officers and the Corporation's Board of Directors
meet monthly to evaluate current and projected interest rate risk positions and
their adherence to the Corporation's policy limits and review its balance sheet
composition.
Static gap analysis is another tool that can be utilized for interest rate
risk measurement. Management realizes that this method for analyzing interest
sensitivity does not provide a complete picture of the Corporation's exposure to
interest rate changes since it illustrates a point-in-time measurement and,
therefore, does not incorporate the effects of future balance sheet trends,
changes in prepayment speeds or varying interest rate scenarios. This analysis
is a relatively straightforward tool which is useful mainly in highlighting
significant short-term repricing volume mismatches. Utilized in the table below
are Management's assumptions relating to prepayments of certain loans and
securities as well as the maturity for rate sensitive assets and liabilities.
The following table presents the Corporation's rate sensitivity static gap
analysis at September 30, 1998 ($ in thousands):
Interest Sensitive Within
-------------------------
90 days One Year
---------- ----------
Total rate sensitive assets $1,659,015 $2,572,221
Total rate sensitive liabilities 2,100,979 3,215,839
---------- ----------
Net gap $ (441,964) $ (643,618)
========== ==========
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.
Derivative Financial Instruments
Derivatives are used to hedge interest rate exposures by modifying the
interest rate characteristics of specific balance sheet instruments. The
Corporation regularly enters into certain derivative financial instruments,
namely forward interest rate contracts, as part of its normal asset/liability
management strategies. At September 30, 1998, the Corporation's obligations
under forward contracts consist of commitments to sell mortgage loans originated
<PAGE>
and/or purchased in the secondary market at a future date. These obligations are
entered into by the Corporation in order to fix the interest rate at which it
can offer mortgage loans to its customers or purchase mortgage loans from other
financial institutions. Realized gains and losses on forward contracts and the
sale of mortgage loans in the secondary market are recorded upon the sale of the
mortgages and included in other income. At September 30, 1998, the Corporation's
exposure under commitments to sell mortgages was immaterial.
Liquidity
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. The Asset/Liability Committee establishes guidelines by which
they monitor the current liquidity position to ensure adequate funding capacity.
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, 1998, were $5.733 billion, or
91.98% of total assets, compared with $5.062 billion, or 91.29% of total assets
for December 31, 1997, an increase of $671 million, or 13.25%, and is primarily
the result of growth in the loan portfolio as well as the business combination
completed during the first quarter of 1998.
Loans
Loans, the largest category of earning assets for the Corporation, produce
the highest level of interest income. At September 30, 1998, total loans were
$3.579 billion, an increase of $595.7 million, or 19.96%, from the $2.984
billion reported at December 31, 1997. At September 30, 1998, loans were 62.4%
of the Corporation's earning assets compared with 58.9% at December 31, 1997.
The growth in the loan portfolio can be attributed primarily to increases in
loans secured by real estate. Within the real estate category, increases in
loans secured by residential properties can be attributed to a Management
strategy to retain 10 to 15 year conventional mortgages in its portfolio and the
active promotion of its equity line product during the second and third quarter
of 1998. In addition, at September 30, 1998, approximately $41 million of loan
growth is the result of the SCB business combination.
The Corporation's lending policies have produced consistently strong asset
quality. A measure of asset quality in the financial institutions industry is
the level of nonperforming assets. Nonperforming assets include nonperforming
loans, consisting of nonaccrual and restructured loans, and other real estate as
reflected in the following table ($ in thousands):
September 30, Dec. 31,
------------------ -------
1998 1997 1997
------- ------- -------
Loans accounted for on a nonaccrual basis $12,885 $13,617 $14,242
Other real estate (ORE) 1,284 2,873 2,340
Accruing loans past due 90 days or more 2,371 2,180 2,570
------- ------- -------
Total nonperforming assets and
loans past due 90 days or more $16,540 $18,670 $19,152
======= ======= =======
Nonperforming assets/Total loans plus ORE 0.40% 0.58% 0.56%
======= ======= ======
As indicated in the table above, the Corporation's level of nonperforming
assets and loans past due 90 days or more at September 30, 1998, is down over
the past year. At September 30, 1998, the Corporation's percentage of
nonperforming assets to total loans plus other real estate continues to be less
than its peer group. The Corporation has controlled its level of nonperforming
assets by maintaining strong underwriting standards, consistent credit reviews
<PAGE>
and a prudent loan charge-off policy. At September 30, 1998, 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, 1998, the allowance for loan losses was
$66.2 million, representing 1.85% of total loans outstanding. This compares with
an allowance for loan losses of $64.1 million at December 31, 1997, representing
2.15% of total loans outstanding. The increase of $2.1 million is primarily the
result of the SCB business combination.
Net charge-offs were $4.438 million or 0.18% of average loans for the nine
months ended September 30, 1998, an increase of $916 thousand from $3.522
million or 0.17% of average loans for the first nine months of 1997. The
Corporation's percentage of net charge-offs to average loans for 1998 continues
to compare favorably to its peer group.
Securities
The securities portfolio is utilized to provide a quality investment
alternative for available funds and a stable source of interest income. At
September 30, 1998, securities available for sale (AFS), with a carrying value
of $654.1 million, and securities held to maturity (HTM), with a carrying value
of $1.225 billion, combined to create a securities portfolio totaling $1.879
billion, a decrease of $128 million or 6.37% from December 31, 1997.
Management continues to stress asset quality as one of the strategic goals
of the securities portfolio which can be seen by the investment of 86% of the
portfolio in U. S. Treasury and U. S. Government agency obligations. The REMIC
and CMO issues held in the securities portfolio are 100% U. S. Government agency
issues. In order to avoid excessive yield volatility from unexpected
prepayments, the Corporation's normal practice is to purchase investment
securities at or near par value to reduce the risk of premium write-offs.
At September 30, 1998, securities AFS had a carrying value of $654.1
million and an amortized cost of $622.4 million. This compares with a carrying
value of $610.5 million and an amortized cost of $593.0 million at December 31,
1997. At September 30, 1998, gross unrealized gains were $31.8 million on
securities AFS while gross unrealized losses were $109 thousand. Net unrealized
gains are shown as a separate component of stockholders' equity, net of taxes
and equaled $19.6 million at September 30, 1998.
The carrying value of securities HTM was $1.225 billion at September 30,
1998 compared with $1.397 billion at year end 1997. The fair value of HTM
securities at September 30, 1998 was $1.251 billion compared with $1.407 billion
at year end 1997. Gross unrealized gains were $25.8 million and gross unrealized
losses were $439 thousand on securities HTM at September 30, 1998.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase
agreements were $273.7 million at September 30, 1998, an increase of $202.9
million when compared with year end 1997. The Corporation utilizes these
products as a short-term investment alternative whenever it has excess
liquidity.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
The Corporation's deposit base is its primary source of funding and
consists of deposits from the communities served by the Corporation. Total
deposits were $3.882 billion at September 30, 1998, an increase of $62.9
million, or 1.65%, over year end 1997. This increase was the result of $77.4
million contributed by the SCB merger, offset by a $14.5 million decline in
total deposits.
<PAGE>
Overall, the net change in other interest bearing liabilities was an
increase of approximately $567.4 million. Federal funds purchased were $620.0
million at September 30, 1998, an increase of $336.6 million when compared with
year end 1997. Securities sold under repurchase agreements totaled $924.4
million at September 30, 1998, an increase of $259.1 million from year end 1997.
The primary reason for the variation in these two categories is an increased
need for liquidity due to more rapid growth in loans than growth in deposits. At
September 30, 1998, the balance of other short term borrowings was $111.7
million compared with $140.0 million at December 31, 1997.
CONTINGENCIES
The Corporation and its subsidiaries are parties to lawsuits and other
claims that arise in the ordinary course of business; some of the lawsuits
assert claims related to the lending, collection, servicing, investment, trust
and other business activities of Trustmark National Bank; and some of the
lawsuits allege substantial claims for damages. The cases are being vigorously
contested. In the regular course of business, Management evaluates estimated
losses or costs related to litigation, and provision is made for anticipated
losses whenever Management believes that such losses are probable and can be
reasonably estimated. At the present time, Management believes, based on the
advice of legal counsel, that the final resolution of pending legal proceedings
will not have a material impact on the Corporation's consolidated financial
position or results of operations.
STOCKHOLDERS' EQUITY
The regulatory capital ratios for the Corporation and the Bank are shown in
the following table compared to the minimum ratios that are currently required
under capital adequacy standards imposed by regulators. At September 30, 1998,
the Corporation and the Bank meet all capital adequacy requirements to which
they are subject. The most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized. Actual and
minimum, regulatory capital amounts and ratios at September 30, 1998, for the
Corporation and the Bank are as follows ($ in thousands):
<TABLE>
<CAPTION>
Actual Minimum Regulatory
Regulatory Capital Capital Required
------------------- ------------------
Amount Ratio Amount Ratio
-------- ------ -------- -----
Total Capital (to Risk Weighted Assets)
<S> <C> <C> <C> <C>
Trustmark Corporation $656,866 17.64% $297,956 8.00%
Trustmark National Bank $646,160 17.39% $297,190 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $610,068 16.38% $148,978 4.00%
Trustmark National Bank $599,481 16.14% $148,595 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $610,068 10.21% $239,106 4.00%
Trustmark National Bank $599,481 10.05% $238,698 4.00%
</TABLE>
At September 30, 1998, the Corporation had stockholders' equity of $645.4
million, which contained a net unrealized gain on securities available for sale,
net of taxes, of $19.6 million. This compares to total stockholders' equity at
December 31, 1997 of $593.6 million, which contained a net unrealized gain on
securities available for sale, net of taxes, of $10.8 million. Approximately
$15.7 million of capital was added during the first quarter of 1998 from shares
issued in connection with the SCB business combination.
<PAGE>
In connection with the SCB merger, the Corporation's Board of Directors
authorized the Corporation to repurchase shares of its common stock in open
market transactions in order to acquire all or part of the common shares issued
in connection with this merger. During the second quarter of 1998, the
Corporation purchased and retired 692,472 shares of its common stock in open
market transactions.
Based on a dividend payout ratio of 29.76%, the Corporation retained 70.24%
of its earnings during the first nine months of 1998, generating an internal
capital growth rate of 9.44%. Dividends for the third quarter of 1998 were
$0.0825 per share compared with $0.07 per share for the third quarter of 1997.
Book value for the Corporation's common stock was $8.87 at September 30, 1998,
compared with the closing market price of $15.50.
NET INTEREST INCOME
Net interest income (NII) is interest income generated by earning assets
reduced by the interest expense of funding those assets and is the Corporation's
principal source of income. Consequently, changes in the mix and volume of
earning assets and interest-bearing liabilities, and their related yields and
interest rates, can have a significant impact on earnings.
For the nine months ended September 30, 1998, the Corporation's level of
NII increased by $16.3 million, or 10.8%, when compared with the same time
period in 1997. This increase comes primarily from more rapid growth of average
earning assets, primarily in the loan portfolio, when compared to
interest-bearing liabilities during a period of relatively stable interest
rates. For the quarter ending September 30, 1998, net interest income increased
12.1% when compared to the same period in 1997.
For the first nine months of 1998, average earning assets increased 9.9%
when compared to the same period in 1997. This was driven by an 18.9% increase
in average loans. When this growth was combined with relatively stable interest
rates, the yield on average earning assets increased by six basis points when
compared to the same time period in 1997. This combination resulted in an
increase in total interest income of $29.9 million, or 10.7%, when comparing the
first nine months of 1998 with 1997.
Average interest-bearing liabilities grew by 9.6% during the first nine
months of 1998. Interest-bearing deposits experienced growth of 4.6% during the
same period while average funds purchased and securities sold under repurchase
agreements increased 20.3%. In addition, the Corporation's increased utilization
of other short term borrowings during the first nine months of 1998 led to
substantial growth in this category when comparing 1998 and 1997. As a result of
these factors, total interest expense increased by $13.6 million when comparing
the first nine months of 1998 to 1997.
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,
-----------------
1998 1997
----- -----
Yield on interest-earning assets-FTE 7.93% 7.87%
Rate on interest-bearing liabilities 3.58% 3.56%
----- -----
Net interest margin-FTE 4.35% 4.31%
===== =====
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 its interest rate risk policies to manage 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 inherent write-offs in the
loan portfolio. Factors considered in the assessment include 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 1998, the Corporation's provision for loan losses was
$5.188 million, which represents 0.21% of average loans, compared with $3.278
<PAGE>
million, 0.16% of average loans, during the same time period in 1997. The
Corporation's ratio of the provision for loan losses to average loans continues
to compare favorably to the peer group.
NONINTEREST INCOME
The Corporation stresses the importance of growth in noninterest income as
one of its key long-term strategies. The Corporation recently implemented a new
customer focused sales culture which has produced improved service delivery and
sales of products at all customer points of contact. As a result, noninterest
income has been favorably impacted. During the first nine months of 1998,
noninterest income, excluding securities gains, increased $10.2 million, or
18.6%, when compared with the first nine months of 1997. Noninterest income
increased 21.6% during the quarter ended September 30, 1998, when compared to
the same period in 1997.
The largest single category of noninterest income, service charges on
deposit accounts, grew by $3.7 million, or 19.9%, when the first nine months of
1998 are compared with 1997. Service charge income during the third quarter of
1998 was positively impacted by the Corporation's promotion of its umbrella
checking account, which offers customers the choice of a fixed monthly service
fee combined with a number of other services at no extra charge.
Other account charges, fees and commissions, increased $3.8 million, or
25.1%, when the first nine months of 1998 are compared with 1997. Major
contributors to the growth in this category during these periods were fees
generated from discount brokerage services, credit cards, ATMs and a variety of
other fee producing products and services.
Mortgage servicing fees grew by 3.20% when comparing the first nine months
of 1998 with 1997 as the amount of mortgages serviced increased 11.0%. At
September 30, 1998, the Corporation serviced approximately $3.4 billion in
mortgages.
Trust service income increased by 14.5% when the first nine months of 1998
are compared with 1997 as the Bank continued to be one of the largest providers
of asset management services in Mississippi. At September 30, 1998, the Bank had
trust accounts with assets under management with fair values of approximately
$5.3 billion.
Gross securities gains of $40 thousand were realized during the first nine
months of 1998 due to sales of securities classified as available for sale.
There were no sales of securities classified as held to maturity during the
first nine months of 1998.
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 55.63% for the first nine months of 1998
compared with 59.08% for the first nine months of 1997. Total noninterest
expense increased $7.8 million, or 6.3%, when comparing the first nine months of
1998 with the same time period in 1997. For the third quarter of 1998, total
noninterest expense increased 5.4% when compared to the same period in 1997.
Salaries and employee benefits continue to comprise the largest portion of
noninterest expenses and increased $2.9 million, or 4.6%, when comparing the
first nine months of 1998 with 1997. The number of full-time equivalent
employees totaled 2,199 at September 30, 1998; 2,309 at December 31, 1997; and
2,287 at September 30, 1997.
The Corporation has been successful in controlling its net occupancy and
equipment expenses as evidenced by the relatively flat growth in these
categories when comparing the first nine months of 1998 to the first nine months
<PAGE>
of 1997. This control has been achieved in spite of the Corporation completing
three business combinations since the beginning of 1997.
Services and fees increased $3.8 million when comparing the first nine
months of 1998 with the same time period in 1997. Increased costs for legal
fees, communications expense and expenses related to Year 2000 compliance
contributed to this increase.
Management will continue to monitor closely the level of noninterest
expenses as part of its effort to continue to improve the profitability of the
Corporation.
INCOME TAXES
For the nine months ended September 30, 1998, the Corporation's combined
effective tax rate was 35.8% compared with 33.0% for the first nine months of
1997. The increase in the Corporation's effective tax rate is due primarily to a
decrease in tax-exempt interest and various other permanent items as a
percentage of pre-tax income.
RECENT PRONOUNCEMENTS
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The impact on the financial position and to the financial
statements of the Corporation has not been evaluated.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement amends FASB
Statement No. 65, "Accounting for Certain Mortgage Banking Activities" and will
affect accounting and reporting standards for classifying securitized mortgage
loans held for sale. The adoption of this Statement will not have a material
impact on the Corporation's consolidated financial statements.
YEAR 2000 COMPLIANCE
The Corporation has established a task-force to review all computer-based
systems and applications and develop an action plan to ensure that its computer
and information systems, as well as equipment on which the Corporation relies,
will function properly in the year 2000. This process involves modifying or
replacing certain hardware and software maintained by the Corporation as well as
communicating with external service providers to ensure they are taking
appropriate action to remedy any Year 2000 issues. The Corporation contemplates
having substantially all systems and applications changed for the year 2000 by
December 31, 1998 with final testing to take place during 1999. The Corporation
is taking steps to review Year 2000 readiness on the part of important
suppliers. There can be no guarantee, however, that the systems of other
companies on which the Corporation relies will be timely converted. Accordingly,
the Corporation is assessing the extent to which its operations are vulnerable
to other companies' systems and developing contingency plans to minimize the
impact on operations should those organizations fail to remediate their systems
properly. Based on our current evaluation of outside companies, the Corporation
does not expect the contingency plans to be implemented. Based upon current
information, Management presently believes that specific costs related to the
Year 2000 systems issues will not have a material impact 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,
1998, 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, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 BY: /s/ Richard G. Hickson
----------------------------- -------------------------
Frank R. Day Richard G. Hickson
Chairman of the Board President & Chief
Executive Officer
DATE: November 10, 1998 DATE: November 10, 1998
BY: /s/ Gerard R. Host
-----------------------------
Gerard R. Host
Treasurer
(Chief Financial and
Accounting Officer)
DATE: November 10, 1998
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 299,849
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 273,656
<TRADING-ASSETS> 51
<INVESTMENTS-HELD-FOR-SALE> 654,138
<INVESTMENTS-CARRYING> 1,225,464
<INVESTMENTS-MARKET> 1,250,843
<LOANS> 3,579,321
<ALLOWANCE> 66,150
<TOTAL-ASSETS> 6,232,676
<DEPOSITS> 3,881,896
<SHORT-TERM> 1,656,131
<LIABILITIES-OTHER> 49,280
<LONG-TERM> 0
0
0
<COMMON> 15,161
<OTHER-SE> 630,208
<TOTAL-LIABILITIES-AND-EQUITY> 6,232,676
<INTEREST-LOAN> 212,947
<INTEREST-INVEST> 93,739
<INTEREST-OTHER> 2,919
<INTEREST-TOTAL> 309,605
<INTEREST-DEPOSIT> 94,394
<INTEREST-EXPENSE> 141,869
<INTEREST-INCOME-NET> 167,736
<LOAN-LOSSES> 5,188
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 132,228
<INCOME-PRETAX> 95,480
<INCOME-PRE-EXTRAORDINARY> 95,480
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,308
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
<YIELD-ACTUAL> 4.35
<LOANS-NON> 12,885
<LOANS-PAST> 2,371
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 64,100
<CHARGE-OFFS> 8,502
<RECOVERIES> 4,064
<ALLOWANCE-CLOSE> 66,150
<ALLOWANCE-DOMESTIC> 54,444
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 11,706
</TABLE>
