<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 August 13, 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)
June 30, December 31,
1998 1997*
=========== ============
Assets
Cash and due from banks (noninterest-bearing) $ 339,735 $ 292,555
Federal funds sold and securities purchased
under reverse repurchase agreements 36,060 70,786
Trading account securities 309 99
Securities available for sale (at fair value) 659,442 610,471
Securities held to maturity (fair value:
$1,322,400-1998; $1,407,167-1997) 1,307,708 1,396,928
Loans 3,308,073 2,983,655
Less: Allowance for loan losses 65,400 64,100
----------- ------------
Net loans 3,242,673 2,919,555
Premises and equipment 69,785 67,958
Intangible assets 48,677 40,085
Other assets 152,381 146,721
----------- ------------
Total Assets $ 5,856,770 $ 5,545,158
=========== ============
Liabilities
Deposits:
Noninterest-bearing $ 917,842 $ 898,679
Interest-bearing 3,047,511 2,920,270
----------- ------------
Total deposits 3,965,353 3,818,949
Federal funds purchased 476,007 283,468
Securities sold under repurchase agreements 610,651 665,232
Other short term borrowings 132,403 140,058
Other liabilities 48,653 43,826
----------- ------------
Total Liabilities 5,233,067 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 349,027 320,901
Net unrealized gain on securities available for
sale, net of tax 13,085 10,802
----------- ------------
Total Stockholders' Equity 623,703 593,625
----------- ------------
Total Liabilities and Stockholders' Equity $ 5,856,770 $ 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 Six Months Ended
June 30, June 30,
=================== ===================
1998 1997 1998 1997
======== ======== ======== ========
Interest Income
<S> <C> <C> <C> <C>
Interest and fees on loans $ 71,506 $ 60,453 $137,983 $119,789
Interest on securities:
Taxable interest income 29,948 30,567 60,075 60,026
Interest income exempt from federal income taxes 1,500 1,493 2,933 3,019
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 607 1,313 1,435 2,798
-------- -------- -------- --------
Total Interest Income 103,561 93,826 202,426 185,632
Interest Expense
Interest on deposits 31,886 30,283 62,911 59,805
Interest on federal funds purchased and securities
sold under repurchase agreements 12,931 11,612 25,142 22,862
Other interest expense 2,028 1,632 3,656 2,402
-------- -------- -------- --------
Total Interest Expense 46,845 43,527 91,709 85,069
-------- -------- -------- --------
Net Interest Income 56,716 50,299 110,717 100,563
Provision for loan losses 2,168 1,357 2,967 2,265
-------- -------- -------- --------
Net Interest Income After
Provision for Loan Losses 54,548 48,942 107,750 98,298
Noninterest Income
Service charges on deposit accounts 7,429 6,056 14,387 12,061
Other account charges, fees and commissions 6,516 5,162 12,336 9,945
Mortgage servicing fees 3,445 3,282 6,822 6,498
Trust service income 3,406 2,841 6,722 5,881
Securities gains 30 410 30 410
Other income 1,480 1,060 2,318 1,978
-------- -------- -------- --------
Total Noninterest Income 22,306 18,811 42,615 36,773
Noninterest Expenses
Salaries and employee benefits 22,108 21,337 44,369 42,274
Net occupancy - premises 2,501 2,400 4,776 4,799
Equipment expenses 3,353 3,471 6,323 6,460
Services and fees 6,980 5,692 13,604 11,350
Amortization of intangible assets 2,568 2,398 4,949 4,703
Other expense 7,147 6,440 13,542 12,484
-------- -------- -------- --------
Total Noninterest Expenses 44,657 41,738 87,563 82,070
-------- -------- -------- --------
Income Before Income Taxes 32,197 26,015 62,802 53,001
Income taxes 11,691 8,473 22,671 17,784
-------- -------- -------- --------
Net Income $ 20,506 $ 17,542 $ 40,131 $ 35,217
======== ======== ======== ========
Earnings Per Share
Basic $ 0.28 $ 0.24 $ 0.55 $ 0.48
======== ======== ======== ========
Diluted $ 0.28 $ 0.24 $ 0.55 $ 0.48
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
=========================
1998 1997
========= =========
Operating Activities
<S> <C> <C>
Net income $ 40,131 $ 35,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,967 2,265
Provision for depreciation and amortization 9,657 9,619
Net (accretion) amortization of securities (303) 145
Securities gains (30) (410)
Increase in intangible assets (6,949) (3,899)
Decrease (increase) in deferred income taxes 930 (570)
Increase in other assets (8,502) (6,330)
Increase in other liabilities 4,318 528
Other (1,707) (1,100)
--------- ---------
Net cash provided by operating activities 40,512 35,465
--------- ---------
Investing Activities
Proceeds from calls and maturities of securities available for sale 36,490 81,772
Proceeds from calls and maturities of securities held to maturity 198,667 108,390
Proceeds from sales of securities available for sale 55,764 53,237
Purchases of securities available for sale (107,590) (249,473)
Purchases of securities held to maturity (101,240) (91,487)
Net decrease in federal funds sold and securities
purchased under reverse repurchase agreements 34,726 62,082
Net increase in loans (280,911) (95,836)
Purchases of premises and equipment (3,747) (7,786)
Proceeds from sales of premises and equipment 86 331
Proceeds from sales of other real estate 826 1,339
Net assets assumed in immaterial pooling of interests
business combination 13,348
Cash equivalents of acquired bank, net of cash paid 13,035
--------- ---------
Net cash used by investing activities (153,894) (124,083)
--------- ---------
Financing Activities
Net increase in deposits 58,304 99,987
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements 137,958 (113,314)
Net (decrease) increase in short term borrowings (7,655) 48,162
Common stock purchased and retired (16,040)
Cash dividends paid (12,005) (10,188)
--------- ---------
Net cash provided by financing activities 160,562 24,647
--------- ---------
Increase (decrease) in cash and cash equivalents 47,180 (63,971)
Cash and cash equivalents at beginning of year 292,555 337,090
--------- ---------
Cash and cash equivalents at end of period $ 339,735 $ 273,119
========= =========
</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) 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) in connection with the merger. Excess cost over
net assets acquired equaled $6.7 million and has been allocated to core deposit
intangibles. SCB's results of operations, which are not material, have been
included in the financial statements from the merger date.
NOTE 3 - LOANS
The following table summarizes the activity in the allowance for loan
losses for the six month periods ended June 30, 1998 and 1997 ($ in thousands):
1998 1997
-------- --------
Balance at beginning of year $ 64,100 $ 63,000
Provision charged to expense 2,967 2,265
Loans charged off (5,627) (4,411)
Recoveries 2,660 2,155
Allowance applicable to loans of acquired bank 1,300 791
-------- --------
Balance at end of period $ 65,400 $ 63,800
======== ========
At June 30, 1998, the carrying value of commercial loans considered to be
impaired under Statement of Financial Accounting Standards (SFAS) No. 114 was
$11.5 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 June 30, 1998, the average carrying value
of impaired loans was approximately $11.1 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 $14.4 million at June 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.
In connection with recent mergers, the Corporation's Board of Directors
authorized the Corporation to purchase shares of its common stock in open market
transactions. During the second quarter of 1998, the Corporation purchased and
retired 692,472 shares of its common stock.
Basic and diluted EPS was computed by dividing net income by the weighted
average shares of common stock outstanding. For the six months ended June 30,
1998 and 1997, weighted average shares were 73,017,938 and 72,773,616,
respectively. For the three months ended June 30, 1998 and 1997, weighted
average shares were 73,148,640 and 72,773,616, respectively.
NOTE 6 - STATEMENTS OF CASH FLOWS
During the six months ended June 30, 1998 and 1997, the Corporation paid
approximately $24.3 and $18.6 million, respectively, in income taxes. During the
six months ended June 30, 1998 and 1997, the Corporation paid $93.3 million and
$79.9 million, respectively, in interest on deposit liabilities and other
borrowings. For the six months ended June 30, 1998 and 1997, noncash transfers
from loans to foreclosed properties were $678 thousand and $1.1 million,
respectively.
NOTE 7 - RECENT PRONOUNCEMENTS
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statements establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The impact on the financial position and to the financial
statements of the Corporation has not been evaluated.
NOTE 8 - COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements and is effective for
fiscal
<PAGE>
years beginning after December 15, 1997. The Corporation adopted this statement
effective January 1, 1998. The purpose of reporting comprehensive income is to
report a measure of all changes in equity of the Corporation that result from
recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners. The following table
reflects the calculation of comprehensive income for the Corporation for the
three and six month periods ended June 30, 1998 and 1997, respectively ($ in
thousands):
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Net income $20,506 $17,542 $40,131 $35,217
Unrealized holding gains/(losses)
arising during the period on securities
available for sale, net of tax 1,966 4,462 2,283 2,091
------- ------- ------- -------
Comprehensive Income $22,472 $22,004 $42,414 $37,308
======= ======= ======= =======
<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 second quarter of 1998 of
$20.5 million compared with $17.5 million for the second quarter of 1997, an
increase of 16.9%. On a per share basis, second quarter 1998 basic and diluted
earnings were $0.28 per share compared with $0.24 per share for the second
quarter of 1997. Net income for the six months ended June 30, 1998 was $40.1
million, an increase of 14.0% when compared with $35.2 million earned during the
same period in 1997. Basic and diluted earnings per share were $0.55 and $0.48
for the first six months of 1998 and 1997, respectively. The Corporation's
performance for the six months ended June 30, 1998 resulted in a return on
average assets of 1.42%, a return on average equity of 13.39% and an efficiency
ratio of 55.99%.
Total assets at June 30, 1998 increased 5.6% over December 31, 1997 to
reach $5.9 billion, while net loans increased 11.1% to reach $3.2 billion and
total deposits increased 3.8% to $4.0 billion. Stockholders' equity was $624
million at June 30, 1998, a 5.1% 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
<PAGE>
limit exposure to market risk. The Corporation's market risk is comprised
primarily of interest rate risk created by its core banking activities in loans
and deposits. Management continually develops and applies cost effective
strategies to manage these risks. In asset and 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
is run quarterly in order to provide information 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 spread of rates between different
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 June 30, 1998 ($ in thousands):
Interest Sensitive Within
90 days One Year
----------- -----------
Total rate sensitive assets $ 1,489,079 $ 2,372,217
Total rate sensitive liabilities 2,073,195 3,043,048
----------- -----------
Net gap ($ 584,116) ($ 670,831)
=========== ===========
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 financialinstruments,
<PAGE>
forward interest rate contracts, as part of its normal asset/liability
management strategies. At June 30, 1998, the Corporation's obligations under
forward contracts consist of commitments to sell mortgage loans originated
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. Any decline in market value of mortgages
held for sale by the Corporation at the end of a financial reporting period is
recognized at that time. As of June 30, 1998, the Corporation's exposure under
commitments to sell mortgages is 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 June 30, 1998 were $5.312 billion, or 90.69%
of total assets, compared with $5.062 billion, or 91.29% of total assets for
December 31, 1997, an increase of $250 million, or 4.93%, and is primarily the
result of the business combination completed during the first quarter of 1998
and growth in the loan portfolio.
Loans
Loans, the largest category of earning assets for the Corporation, produce
the highest level of interest income. At June 30, 1998, total loans were $3.308
billion, an increase of $324.4 million, or 10.87%, from the $2.984 billion
reported at December 31, 1997. At June 30, 1998, loans were 62.3% of the
Corporation's earning assets compared with 58.9% at December 31, 1997.
Approximately $42 million of the growth in the loan portfolio is the result of
the SCB business combination while the remainder can be attributed primarily to
increases in loans secured by real estate. Within the real estate category,
increases in loans secured by residential properties can be attributed to a
Management strategy to retain 10 to 15 year conventional mortgages in its
portfolio.
The Corporation's lending policies have produced consistently strong asset
quality. A measure of asset quality in the financial institutions industry is
the level of nonperforming assets. Nonperforming assets include nonperforming
loans, consisting of nonaccrual and restructured loans, and other real estate as
reflected in the following table ($ in thousands):
June 30, Dec. 31,
---------------- --------
1998 1997 1997
------- ------- --------
Loans accounted for on a nonaccrual basis $14,431 $13,291 $ 14,242
Other real estate (ORE) 2,276 2,471 2,340
Accruing loans past due 90 days or more 4,908 2,380 2,570
------- ------- --------
Total nonperforming assets and loans past
due 90 days or more $21,615 $18,142 $ 19,152
======= ======= ========
Nonperforming assets/Total loans plus ORE 0.50% 0.58% 0.56%
======= ======= ========
As seen above, the Corporation's level of nonperforming assets and loans
past due 90 days or more at June 30, 1998 was somewhat higher than both the
December 31 and June 30, 1997 levels. However, at June 30, 1998, the
<PAGE>
Corporation's level of nonperforming assets declined as a percentage of loans
plus ORE and 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 and a prudent loan charge-off policy. At
June 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 June 30, 1998, the allowance for loan losses was
$65.4 million, representing 1.98% 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 $1.3 million is directly the
result of the SCB business combination.
Net charge-offs were $2.967 million or 0.19% of average loans for the six
months ended June 30, 1998, an increase of $711 thousand from $2.256 million or
0.17% of average loans for first six months of 1997. The Corporation's level of
net charge-offs 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 June
30, 1998, securities available for sale (AFS), with a carrying value of $659.4
million, and securities held to maturity (HTM), with a carrying value of $1.308
billion, combined to create a securities portfolio totaling $1.967 billion, a
decrease of $40 million or 2.01% 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 June 30, 1998, securities AFS had a carrying value of $659.4 million and
an amortized cost of $638.3 million. This compares with a carrying value of
$610.5 million and an amortized cost of $593.0 million at December 31, 1997. At
June 30, 1998, gross unrealized gains were $21.6 million on securities AFS while
gross unrealized losses were $365 thousand. Net unrealized gains are shown as a
separate component of stockholders' equity, net of taxes and equaled $13.1
million at June 30, 1998.
The carrying value of securities HTM was $1.308 billion at June 30, 1998
compared with $1.397 billion at year end 1997. The fair value of HTM securities
at June 30, 1998 was $1.322 billion compared with $1.407 billion at year end
1997. Gross unrealized gains were $16.2 million and gross unrealized losses were
$1.5 million on securities HTM at June 30, 1998.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase
agreements were $36.0 million at June 30, 1998, a decrease of $34.7 million when
compared with year end 1997. The Corporation utilizes these products as a
short-term investment alternative whenever it has excess liquidity. The decline
during the first six months of 1998 reflects Management's decision to invest in
higher yielding loans and securities.
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 $3.965 billion at June 30, 1998, an increase of $146.4 million, or
<PAGE>
3.83%, over year end 1997. The SCB business combination completed during the
first quarter of 1998 was responsible for approximately $79.9 million of this
growth.
Federal funds purchased were $476.0 million at June 30, 1998, an increase
of $192.5 million when compared with year end 1997. The primary reason for this
variation is an increased need for liquidity due to more rapid growth in loans
than growth in deposits. Securities sold under repurchase agreements totaled
$610.7 million at June 30, 1997, a decrease of $54.6 million from year end 1997.
At June 30, 1998, the balance of other short term borrowings was $132.4 million
compared with $140.0 million at December 31, 1997. Overall, the net change in
other interest bearing liabilities was an increase of approximately $130.3
million.
CONTINGENCIES
The Corporation and its subsidiaries are parties to lawsuits and other
claims that arise in the ordinary course of business; some of the lawsuits
assert claims related to the lending, collection, servicing, investment, trust
and other business activities of Trustmark National Bank; and some of the
lawsuits allege substantial claims for damages. The cases are being vigorously
contested. In the regular course of business, Management evaluates estimated
losses or costs related to litigation, and provision is made for anticipated
losses whenever Management believes that such losses are probable and can be
reasonably estimated. At the present time, Management believes, based on the
advice of legal counsel, that the final resolution of pending legal proceedings
will not have a material impact on the Corporation's consolidated financial
position or results of operations.
STOCKHOLDERS' EQUITY
The regulatory capital ratios for the Corporation and the Bank are shown in
the table below compared to the minimum ratios that are currently required under
capital adequacy standards imposed by their regulators. At June 30, 1998, the
Corporation and the Bank meet all capital adequacy requirements to which they
are subject. The most recent notification from the Office of the Comptroller of
the Currency categorized the Bank as well capitalized. Actual and minimum,
regulatory capital amounts and ratios at June 30, 1998, for the Corporation and
the Bank are as follows ($ 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 $637,896 18.44% $276,709 8.00%
Trustmark National Bank $626,788 18.17% $275,900 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $594,387 17.18% $138,354 4.00%
Trustmark National Bank $583,403 16.92% $137,950 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $594,387 10.31% $230,531 4.00%
Trustmark National Bank $583,403 10.14% $230,105 4.00%
</TABLE>
At June 30, 1998, the Corporation had stockholders' equity of $623.7
million, which contained a net unrealized gain on securities available for sale,
net of taxes, of $13.0 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
<PAGE>
$15.7 million of capital was added during the first quarter of 1998 from shares
issued in connection with the SCB business combination.
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. At June 30, 1998, the number of shares outstanding was
72,773,616 while weighted average shares outstanding for the six months ended
June 30, 1998 was 73,017,938.
Based on a dividend payout ratio of 30.91%, the Corporation retained 69.09%
of its earnings during the first six months of 1998, generating an internal
capital growth rate of 9.25%. Dividends for the second quarter of 1998 were
$0.0825 per share compared with $0.07 per share for the second quarter of 1997.
Book value for the Corporation's common stock was $8.57 at June 30, 1998,
compared with the closing market price of $21.94.
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 six months ended June 30, 1998, the Corporation's level of NII
increased by $10.2 million, or 10.1%, 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 June 30, 1998, net interest income increased 12.8 % when compared to the
same period in 1997.
For the first six months of 1998, average earning assets increased 7.4%
when compared to the same period in 1997. This was driven by an 16.1% increase
in average loans. When this growth was combined with relatively stable interest
rates, the yield on average earning assets increased by eleven basis points when
compared to the same time period in 1997. This combination resulted in an
increase in total interest income of $16.8 million, or 9.1%, when comparing the
first six months of 1998 with 1997.
Average interest-bearing liabilities grew by 6.5% during the first six
months of 1998. Interest-bearing deposits experienced growth of 4.2% during that
time period while average funds purchased and securities sold under repurchase
agreements increased 6.4%. In addition, the Corporation's increased utilization
of other short term borrowings during the first six 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 $6.6 million when comparing
the first six 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:
Six Months Ended
June 30,
----------------
1998 1997
----- -----
Yield on interest-earning assets-FTE 7.97% 7.86%
Rate on interest-bearing liabilities 3.56% 3.54%
----- -----
Net interest margin-FTE 4.41% 4.32%
===== =====
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.
<PAGE>
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 six months of 1998, the Corporation's provision for
loan losses was $2.967 million compared with $2.265 million during the same time
period in 1997. For both periods presented, the provision for loan losses was
approximately the same amount as net charge-offs.
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 six
months of 1998, as noninterest income, excluding securities gains, increased
$6.2 million, or 17.1%, when compared with the first six months of 1997.
Noninterest income increased 21.1% during the quarter ended June 30, 1998 when
compared to the same period in 1997.
The largest single category of noninterest income, service charges on
deposit accounts, grew by $2.3 million, or 19.3%, when the first six months of
1998 is compared with 1997. This increase can be attributed to growth in the
sale of deposit products combined with increased activity.
Other account charges, fees and commissions, increased $2.4 million, or
24.0%, when the first six months of 1998 is 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 5.0% when comparing the first six months of
1998 with 1997 as the amount of mortgages serviced increased 10.3%. At June 30,
1998, the Corporation serviced approximately $3.3 billion in mortgages.
Trust service income increased by 14.3% when the first six months of 1998
is compared with 1997 as the Bank continued to be one of the largest providers
of asset management services in Mississippi. At June 30, 1998, the Bank had
trust accounts with assets under management with fair values of approximately
$5.8 billion.
Gross securities gains of $30 thousand were realized during the first six
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 half 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 55.99% for the first six months of 1998
compared with 58.69% for the first six months of 1997. Total noninterest expense
increased $5.5 million, or 6.7%, when comparing the first six months of 1998
with the same time period in 1997. For the second quarter of 1998, total
noninterest expense increased 7.0% when compared to the same period in 1997.
Salaries and employee benefits continue to comprise the largest portion of
noninterest expenses and increased $2.1 million, or 5.0%, when comparing the
first six months of 1998 with 1997. The number of full-time equivalent employees
totaled 2,216 at June 30, 1998, 2,309 at December 31, 1997 and 2,335 at June 30,
1997.
The Corporation has been successful in controlling its net occupancy and
equipment expenses as evidenced by the decrease in both categories when
comparing the first six months of 1998 to the first six months of 1997. These
decreases were achieved in spite of the Corporation completing three business
combinations since the beginning of 1997.
Services and fees increased $2.3 million when comparing the first six
months of 1998 with the same time period in 1997. Increased costs for legal fees
and communications expense contributed to this increase.
<PAGE>
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 six months ended June 30, 1998, the Corporation's combined
effective tax rate was 36.1% compared with 33.6% for the first six months of
1997. The increase in the Corporation's effective tax rate is due primarily to a
decrease in tax-exempt income 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 Statements 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 have not been evaluated.
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 will function properly in the year 2000. This plan,
which has been approved by the Board of Directors and Management, includes the
Corporation's approach to having all systems and applications changed for the
year 2000 by December 31, 1998 with final testing to take place during 1999. At
this time, Management believes that implementation of its year 2000 action plan
will not materially affect the Corporation's operations in the future. However,
the Corporation could possibly be affected by the unsuccessful attempt of other
entities in addressing this issue. Management does not expect the costs of
achieving year 2000 compliance 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 June 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 June 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: BY: /s/ Richard G. Hickson
---------------------------- -------------------------
Frank R. Day Richard G. Hickson
Chairman of the Board President & Chief
Executive Officer
DATE: August 13, 1998 DATE: August 13, 1998
BY: /s/ Gerard R. Host
----------------------------
Gerard R. Host
Treasurer
(Chief Financial and
Accounting Officer)
DATE: August 13, 1998
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 339,735
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 36,060
<TRADING-ASSETS> 309
<INVESTMENTS-HELD-FOR-SALE> 659,442
<INVESTMENTS-CARRYING> 1,307,708
<INVESTMENTS-MARKET> 1,322,400
<LOANS> 3,308,073
<ALLOWANCE> 65,400
<TOTAL-ASSETS> 5,856,770
<DEPOSITS> 3,965,353
<SHORT-TERM> 1,219,061
<LIABILITIES-OTHER> 48,653
<LONG-TERM> 0
0
0
<COMMON> 15,161
<OTHER-SE> 608,542
<TOTAL-LIABILITIES-AND-EQUITY> 5,856,770
<INTEREST-LOAN> 137,983
<INTEREST-INVEST> 63,008
<INTEREST-OTHER> 1,435
<INTEREST-TOTAL> 202,426
<INTEREST-DEPOSIT> 62,911
<INTEREST-EXPENSE> 91,709
<INTEREST-INCOME-NET> 110,717
<LOAN-LOSSES> 2,967
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 87,563
<INCOME-PRETAX> 62,802
<INCOME-PRE-EXTRAORDINARY> 62,802
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,131
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
<YIELD-ACTUAL> 4.41
<LOANS-NON> 14,431
<LOANS-PAST> 4,908
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 64,100
<CHARGE-OFFS> 5,627
<RECOVERIES> 2,660
<ALLOWANCE-CLOSE> 65,400
<ALLOWANCE-DOMESTIC> 52,175
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 13,225
</TABLE>
