<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 April 29, 1998.
Title Outstanding
Common stock, no par value 73,466,088
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
March 31, December 31,
1998 1997*
=========== ============
Assets
Cash and due from banks (noninterest-bearing) $ 297,262 $ 292,555
Federal funds sold and securities purchased
under reverse repurchase agreements 88,303 70,786
Trading account securities 517 99
Securities available for sale (at fair value) 708,753 610,471
Securities held to maturity (fair value:
$1,361,513-1998; $1,407,167-1997) 1,349,862 1,396,928
Loans 3,141,928 2,983,655
Less: Allowance for loan losses 65,400 64,100
----------- ------------
Net loans 3,076,528 2,919,555
Premises and equipment 69,846 67,958
Intangible assets 47,383 40,085
Other assets 145,377 146,721
----------- ------------
Total Assets $5,783,831 $5,545,158
=========== ============
Liabilities
Deposits:
Noninterest-bearing $ 883,467 $ 898,679
Interest-bearing 3,117,773 2,920,270
----------- ------------
Total deposits 4,001,240 3,818,949
Federal funds purchased 184,518 283,468
Securities sold under repurchase agreements 731,296 665,232
Other short term borrowings 185,697 140,058
Other liabilities 57,805 43,826
----------- ------------
Total Liabilities 5,160,556 4,951,533
Commitments and Contingencies
Stockholders' Equity Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 73,466,088 shares - 1998;
72,740,708 - 1997 15,305 15,154
Surplus 262,326 246,768
Retained earnings 334,525 320,901
Net unrealized gain on securities available for
sale, net of tax 11,119 10,802
----------- ------------
Total Stockholders' Equity 623,275 593,625
----------- ------------
Total Liabilities and Stockholders' Equity $5,783,831 $5,545,158
=========== ============
* Derived from audited financial statements.
See notes to consolidated financial statements.
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TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
Three Months Ended
March 31,
==================
1998 1997
======= =======
Interest Income
Interest and fees on loans $66,477 $59,336
Interest on securities:
Taxable interest income 30,127 29,459
Interest income exempt from federal income taxes 1,433 1,526
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 828 1,485
------- -------
Total Interest Income 98,865 91,806
Interest Expense
Interest on deposits 31,025 29,522
Interest on federal funds purchased and securities
sold under repurchase agreements 12,211 11,250
Other interest expense 1,628 770
------- -------
Total Interest Expense 44,864 41,542
------- -------
Net Interest Income 54,001 50,264
Provision for loan losses 799 908
------- -------
Net Interest Income After
Provision for Loan Losses 53,202 49,356
Noninterest Income
Service charges on deposit accounts 6,958 6,005
Other account charges, fees and commissions 5,820 4,783
Mortgage servicing fees 3,377 3,216
Trust service income 3,316 3,040
Other income 838 918
------- -------
Total Noninterest Income 20,309 17,962
Noninterest Expenses
Salaries and employee benefits 22,261 20,937
Net occupancy - premises 2,275 2,399
Equipment expenses 2,970 2,989
Services and fees 6,624 5,658
Amortization of intangible assets 2,381 2,305
Other expense 6,395 6,044
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Total Noninterest Expenses 42,906 40,332
------- -------
Income Before Income Taxes 30,605 26,986
Income taxes 10,980 9,311
------- -------
Net Income $19,625 $17,675
======= =======
Earnings Per Share
Basic $ 0.27 $ 0.24
======= =======
Diluted $ 0.27 $ 0.24
======= =======
See notes to consolidated financial statements.
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TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
============================
1998 1997
========= =========
Operating Activities
<S> <C> <C>
Net income $ 19,625 $ 17,675
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 799 908
Provision for depreciation and amortization 4,708 4,741
Net (accretion) amortization of securities (591) 161
Increase in intangible assets (3,047) (1,940)
Decrease (increase) in deferred income taxes 56 (633)
Decrease (increase) in other assets 1,144 (4,828)
Increase in other liabilities 13,470 11,032
Other (585) (609)
--------- ---------
Net cash provided by operating activities 35,579 26,507
--------- ---------
Investing Activities
Proceeds from calls and maturities of securities available for sale 22,491 58,984
Proceeds from calls and maturities of securities held to maturity 95,929 57,014
Proceeds from sales of securities available for sale 101
Purchases of securities available for sale (90,439) (109,391)
Purchases of securities held to maturity (40,381) (44,886)
Net increase in federal funds sold and securities
purchased under reverse repurchase agreements (17,517) (138,282)
Net increase in loans (113,632) (52,271)
Purchases of premises and equipment (1,791) (4,929)
Proceeds from sales of premises and equipment 14 3
Proceeds from sales of other real estate 375 356
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 (131,815) (220,054)
--------- ---------
Financing Activities
Net increase in deposits 94,191 181,384
Net decrease in federal funds purchased and
securities sold under repurchase agreements (32,886) (49,848)
Net increase in short term borrowings 45,639 17,273
Cash dividends paid (6,001) (5,094)
--------- ---------
Net cash provided by financing activities 100,943 143,715
--------- ---------
Increase (decrease) in cash and cash equivalents 4,707 (49,832)
Cash and cash equivalents at beginning of year 292,555 337,090
--------- ---------
Cash and cash equivalents at end of period $ 297,262 $ 287,258
========= =========
</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 subsidiary, Trustmark Financial Services, Inc. All
intercompany profits, balances and transactions have been eliminated.
NOTE 2 - LOANS
The following table summarizes the activity in the allowance for loan
losses for the three month periods ended March 31, 1998 and 1997 ($ in
thousands):
1998 1997
-------- --------
Balance at beginning of year $ 64,100 $ 63,000
Provision charged to expense 799 908
Loans charged off (2,334) (1,901)
Recoveries 1,535 1,002
Allowance applicable to loans of acquired bank 1,300 791
-------- --------
Balance at end of period $ 65,400 $ 63,800
======== ========
At March 31, 1998, the carrying value of commercial loans considered to be
impaired under Statement of Financial Accounting Standards (SFAS) No. 114 was
$11.1 million, all of which were on a nonaccrual basis. As a result of direct
write-downs, the specific allowance related to these impaired loans is
immaterial. For the three months ended March 31, 1998, the average carrying
value of impaired loans was approximately $11.4 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
March 31, 1998. The foregone interest associated with such loans is immaterial.
NOTE 3 - 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.
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NOTE 4 - 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. As a result, the Corporation's current outstanding shares have
increased to 73,466,088. All per share data and number of common shares have
been restated to reflect the effect of this stock split.
Basic and diluted EPS was computed by dividing net income by the weighted
average shares of common stock outstanding, 72,885,784 for the first quarter of
1998 and 72,773,616 shares for the first quarter of 1997.
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.
NOTE 5 - STATEMENTS OF CASH FLOWS
During the three months ended March 31, 1998, the Corporation paid
approximately $1.5 million in income taxes. There were no income taxes paid in
the first quarter 1997. During the three months ended March 31, 1998 and 1997,
the Corporation paid $44.5 million and $39.6 million, respectively, in interest
on deposit liabilities and other borrowings. For the three months ended March
31, 1998 and 1997, noncash transfers from loans to foreclosed properties were
$346 thousand and $848 thousand, respectively.
NOTE 6 - 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 7 - RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement is effective for fiscal years beginning after December
15, 1997. Management intends to comply with this standard in 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement revises
employers' disclosures about pension and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. This
statement is effective for fiscal years beginning after December 15, 1997.
Management intends to comply with this standard in 1998.
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,
<PAGE>
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 for the three months ended March 31, 1998 and 1997, respectively ($
in thousands):
Three Months Ended March 31,
----------------------------
1998 1997
-------- --------
Net Income $ 19,625 $ 17,675
Unrealized holding gains/(losses) arising
during the period on securities available
for sale, net of tax 317 (2,371)
-------- --------
Comprehensive Income $ 19,942 $ 15,304
======== ========
<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 and the supplemental financial data 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 first quarter of 1998 of
$19.6 million, an 11.0% increase over the first quarter of 1997 earnings of
$17.7 million. On a per share basis, first quarter 1998 basic and diluted
earnings were $0.27 per share compared with $0.24 per share for the first
quarter of 1997. The Corporation's first quarter 1998 performance resulted in a
return on average assets of 1.43% and a return on average equity of 13.38%. The
Corporation's first quarter efficiency ratio was 56.6%.
Total assets at March 31, 1998 increased 4.3% over December 31, 1997 to
reach $5.8 billion, while net loans increased 5.4% to reach $3.1 billion and
total deposits increased 4.8% to $4.0 billion. Stockholders' equity was $623.3
million at March 31, 1998, a 5.0% 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 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
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,
<PAGE>
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 March 31, 1998 ($ in thousands):
Interest Sensitive Within
90 days One Year
----------- -----------
Total rate sensitive assets $ 1,453,033 $ 2,327,917
Total rate sensitive liabilities 1,859,715 2,798,930
----------- -----------
Net gap $ (406,682) $ (471,013)
=========== ===========
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,
forward interest rate contracts, as part of its normal asset/liability
management strategies. At March 31, 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
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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 March 31, 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 March 31, 1998 were $5.289 billion, or 91.45%
of total assets, compared with $5.062 billion, or 91.29% of total assets for
December 31, 1997, an increase of $227 million, or 4.49%, 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 March 31, 1998, total loans were $3.142
billion, an increase of $158.3 million, or 5.30%, from the $2.984 billion
reported at December 31, 1997. At March 31, 1998, loans were 59.4% of the
Corporation's earning assets compared with 58.9% at December 31, 1997.
Approximately $44 million of the growth in the loan portfolio is the result of
the SCB business combination while the remainder can be attributed primarily to
increases in loans secured by real estate. Within the real estate category,
increases in loans secured by residential properties can be attributed to a
Management strategy to retain 10 to 15 year conventional mortgages in its
portfolio.
The Corporation's lending policies have produced consistently strong asset
quality. A measure of asset quality in the financial institutions industry is
the level of nonperforming assets. Nonperforming assets include nonperforming
loans, consisting of nonaccrual and restructured loans, and other real estate as
reflected in the following table ($ in thousands):
3/31/98 12/31/97
------- --------
Loans accounted for on a nonaccrual basis $14,367 $14,242
Other real estate (ORE) 2,342 2,340
Accruing loans past due 90 days or more 4,875 2,570
------- --------
Total nonperforming assets and loans past due
90 days or more loans past due 90 days or more $21,584 $19,152
======= ========
Nonperforming assets/Total loans plus ORE 0.53% 0.56%
======= ========
As seen above, the Corporation's level of nonperforming assets and loans
past due 90 days or more remains well controlled and continues to be less than
those of its peer group. The Corporation has controlled its level of
nonperforming assets by maintaining strong underwriting standards, consistent
credit reviews and a prudent loan charge-off policy. At March 31, 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
<PAGE>
is adequate to absorb estimated losses inherent in the loan portfolio, plus
estimated losses associated with off-balance sheet credit instruments such as
letters of credit and unfunded lines of credit. A formal review is prepared
quarterly to assess the risk in the loan portfolio and to determine the adequacy
of the allowance for loan losses. This analysis is presented to the Credit
Policy Committee with subsequent review and approval by the Board of Directors.
At March 31, 1998, the allowance for loan losses was $65.4 million, representing
2.08% 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 $799 thousand or 0.11% of average loans for the
quarter ended March 31, 1998, a decrease of $100 thousand from $899 thousand or
0.14% of average loans for first quarter of 1997. The Corporation's level of net
charge-offs for 1998 compares 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 March
31, 1998, securities available for sale (AFS), with a carrying value of $708.8
million, and securities held to maturity (HTM), with a carrying value of $1.350
billion, combined to create a securities portfolio totaling $2.059 billion, an
increase of $51.2 million or 2.55% from December 31, 1997. This increase is
primarily the result of the SCB business combination completed during the first
quarter of 1998.
Management continues to stress asset quality as one of the strategic goals
of the securities portfolio which can be seen by the investment of 87% of the
portfolio in U. S. Treasury and U. S. Government agency obligations. The REMIC
and CMO issues held in the securities portfolio are over 99% 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 March 31, 1998, securities AFS had a carrying value of $708.8 million
and an amortized cost of $690.7 million. This compares with a carrying value of
$610.5 million and an amortized cost of $593.0 million at December 31, 1997. At
March 31, 1998, gross unrealized gains were $19.2 million on securities AFS
while gross unrealized losses were $1.2 million. Net unrealized gains are shown
as a separate component of stockholders' equity, net of taxes and equaled $11.1
million at March 31, 1998.
The carrying value of securities HTM was $1.350 billion at March 31, 1998
compared with $1.397 billion at year end 1997. The fair value of HTM securities
at March 31, 1998 was $1.362 billion compared with $1.407 billion at year end
1997. Gross unrealized gains were $15.2 million and gross unrealized losses were
$3.6 million on securities HTM at March 31, 1998.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase
agreements were $88.3 million at March 31, 1998, an increase of $17.5 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 $4.001 billion at March 31, 1998, an increase of $182.2 million,
or 4.77%, 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 $184.5 million at March 31, 1998, a decrease
of $99.0 million when compared with year end 1997. The primary reason for the
decline resulted from the reclassification of $100 million of term federal funds
purchased (maturity more than one day) to short term borrowings at March 31,
1998. Securities sold under repurchase agreements totaled $731.3 million at
March 31, 1997, an increase of
<PAGE>
$66.1 million from year end 1997. At March 31, 1998, the balance of other short
term borrowings was $185.7 million compared with $140.0 million at December 31,
1997. This increase is the direct result of the reclassification of term federal
funds purchased mentioned above. Overall, the net change in other interest
bearing liabilities was an increase of approximately $12.8 million.
CONTINGENCIES
The Corporation and its subsidiaries are parties to lawsuits and other
claims that arise in the ordinary course of business; some of the lawsuits
assert claims related to the lending, collection, servicing, investment, trust
and other business activities of Trustmark National Bank; and some of the
lawsuits allege substantial claims for damages. The cases are being vigorously
contested. In the regular course of business, Management evaluates estimated
losses or costs related to litigation, and provision is made for anticipated
losses whenever Management believes that such losses are probable and can be
reasonably estimated. At the present time, Management believes, based on the
advice of legal counsel, that the final resolution of pending legal proceedings
will not have a material impact on the Corporation's consolidated financial
position or results of operations.
STOCKHOLDERS' EQUITY
The regulatory capital ratios for the Corporation and the Bank are shown in
the table below compared to the minimum ratios that are currently required under
capital adequacy standards imposed by their regulators. At March 31, 1998, the
Corporation and the Bank meet all capital adequacy requirements to which they
are subject. The most recent notification from the Office of the Comptroller of
the Currency categorized the Bank as well capitalized. Actual and minimum,
regulatory capital amounts and ratios at March 31, 1998, for the Corporation and
the Bank are as follows ($ in thousands):
Actual Minimum Regulatory
Regulatory Capital Capital Required
------------------ ------------------
Amount Ratio Amount Ratio
-------- ------ -------- -----
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $636,776 19.43% $262,201 8.00%
Trustmark National Bank $620,263 18.99% $261,344 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $595,506 18.17% $131,100 4.00%
Trustmark National Bank $579,125 17.73% $130,672 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $595,506 10.70% $222,596 4.00%
Trustmark National Bank $579,125 10.43% $222,146 4.00%
At March 31, 1998, the Corporation had stockholders' equity of $623.3
million, which contained a net unrealized gain on securities available for sale,
net of taxes, of $11.1 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.
Based on a dividend payout ratio of 29.63%, the Corporation retained 70.37%
of its earnings during the first quarter of 1998, generating an internal capital
growth rate of 9.42%. Dividends for the first quarter of 1998 were $0.0825 per
share compared with $0.07 per share for the first quarter of 1997. Book value
for the Corporation's common stock was $8.48 at March 31, 1998, compared with
the closing market price of $22.88.
On February 10, 1998, the Corporation announced a two-for-one stock split.
The additional shares were
<PAGE>
issued on March 30, 1998 to shareholders of record on March 20, 1998. As a
result, the Corporation's current outstanding shares have increased to
73,466,088. All per share data and number of common shares have been restated to
reflect the effect of this stock split.
In connection with the SCB merger, the Corporation's Board of Directors has
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. The Corporation expects this program to be
completed in the near future.
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.
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 first quarter of 1998, the Corporation's level of NII increased by
$3.7 million, or 7.43%, 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 first quarter of 1998, average earning assets increased 6.1% when
compared to the same period in 1997. This was driven by an 12.7% 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 $7.1 million, or 7.7%, when comparing the
first quarter of 1998 with 1997.
Average interest-bearing liabilities grew by 5.3% during the first quarter
of 1998. Interest-bearing deposits experienced growth of 2.7% during that time
period while average funds purchased and securities sold under repurchase
agreements increased 3.5%. In addition, the Corporation's increased utilization
of other short term borrowings during the first quarter 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 $3.3 million when comparing
the first quarter 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:
Three Months Ended
March 31,
-----------------
1998 1997
----- -----
Yield on interest-earning assets-FTE 7.98% 7.87%
Rate on interest-bearing liabilities 3.57% 3.51%
----- -----
Net interest margin-FTE 4.41% 4.36%
===== =====
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
<PAGE>
losses to absorb potential write-offs in the loan portfolio. Factors considered
in the assessment include growth and composition of the loan portfolio,
historical credit loss experience, current and anticipated economic conditions
and changes in borrowers' financial positions. During the first quarter of 1998,
the Corporation's provision for loan losses was $799 thousand compared with $908
thousand 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
quarter of 1998, as noninterest income, excluding securities gains, increased
$2.3 million, or 13.1%, when compared with the first quarter of 1997.
The largest single category of noninterest income, service charges on
deposit accounts, grew by $953 thousand, or 15.9%, when the first quarter of
1998 is compared with 1997. This increase can be attributed to a reduction in
the amount of waived service charges and a higher volume of consumer account
activity.
Other account charges, fees and commissions, increased $1.0 million, or
21.7%, when the first quarter 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 quarter of
1998 with 1997 as the amount of mortgages serviced increased 7.4%. At March 31,
1998, the Corporation serviced approximately $3.1 billion in mortgages.
Trust service income increased by 9.1% when the first quarter of 1998 is
compared with 1997 as the Bank continued to be one of the largest providers of
asset management services in Mississippi. At March 31, 1998, the Bank had trust
accounts with assets under management with fair values of approximately $5.8
billion.
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 56.6% for the first quarter of 1998 compared
with 57.9% for the first quarter of 1997. Total noninterest expense increased
$2.6 million, or 6.4%, when comparing the first quarter of 1998 with the same
time period in 1997.
Salaries and employee benefits continue to comprise the largest portion of
noninterest expenses and increased $1.3 million, or 6.3%, when comparing the
first quarter of 1998 with 1997. The number of full-time equivalent employees
totaled 2,284 at March 31, 1998, 2,309 at December 31, 1997 and 2,306 at March
31, 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 quarter of 1998 to the first quarter of 1997. These
decreases were achieved in spite of the Corporation completing three business
combinations since the beginning of 1997.
Services and fees increased $966 thousand when comparing the first quarter
of 1998 with the same time period in 1997. Increased costs for legal fees and
communications expense 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 three months ended March 31, 1998, the Corporation's combined
effective tax rate was 35.9% compared with 34.5% for the first three months of
1997. The increase in the Corporation's effective tax rate is
<PAGE>
due primarily to a decrease in tax-exempt income as a percentage of pre-tax
income.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement is effective for fiscal years beginning after December
15, 1997. Management intends to comply with this standard in 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The statement standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable. In addition, the new statement requires additional
information on changes in benefit obligations and fair value of plans assets and
eliminates certain disclosures that are no longer useful. This statement is
effective for fiscal years beginning after December 15, 1997. Management intends
to comply with this statement in 1998.
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 March 31, 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 March 31,
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: April 30, 1998 DATE: April 30, 1998
BY: /s/ Gerard R. Host
-----------------------------
Gerard R. Host
Treasurer
(Chief Financial and
Accounting Officer)
DATE: April 30, 1998
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 297,262
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 88,303
<TRADING-ASSETS> 517
<INVESTMENTS-HELD-FOR-SALE> 708,753
<INVESTMENTS-CARRYING> 1,349,862
<INVESTMENTS-MARKET> 1,361,513
<LOANS> 3,141,928
<ALLOWANCE> 65,400
<TOTAL-ASSETS> 5,783,831
<DEPOSITS> 4,001,240
<SHORT-TERM> 1,101,511
<LIABILITIES-OTHER> 57,805
<LONG-TERM> 0
0
0
<COMMON> 15,305
<OTHER-SE> 607,970
<TOTAL-LIABILITIES-AND-EQUITY> 5,783,831
<INTEREST-LOAN> 66,477
<INTEREST-INVEST> 31,560
<INTEREST-OTHER> 828
<INTEREST-TOTAL> 98,865
<INTEREST-DEPOSIT> 31,025
<INTEREST-EXPENSE> 44,864
<INTEREST-INCOME-NET> 54,001
<LOAN-LOSSES> 799
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 42,906
<INCOME-PRETAX> 30,605
<INCOME-PRE-EXTRAORDINARY> 30,605
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,625
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 4.41
<LOANS-NON> 14,367
<LOANS-PAST> 4,875
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 64,100
<CHARGE-OFFS> 2,334
<RECOVERIES> 1,535
<ALLOWANCE-CLOSE> 65,400
<ALLOWANCE-DOMESTIC> 48,825
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 16,575
</TABLE>
