<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 October 31, 1999.
Title Outstanding
Common stock, no par value 71,266,861
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands except share data)
<TABLE>
<CAPTION>
(Unaudited)
Sept. 30, Dec. 31,
1999 1998
---------- ----------
Assets
<S> <C> <C>
Cash and due from banks (noninterest-bearing) $ 298,355 $ 312,527
Federal funds sold and securities purchased
under reverse repurchase agreements 101,781 185,619
Trading account securities 1,053
Securities available for sale (at fair value) 740,073 774,996
Securities held to maturity (fair value: $1,333,749 - 1999;
$1,192,505-1998) 1,340,348 1,171,513
Loans 3,927,240 3,702,318
Less: Allowance for loan losses 65,850 66,150
---------- ----------
Net loans 3,861,390 3,636,168
Premises and equipment 79,888 70,750
Intangible assets 65,350 50,349
Other assets 169,776 152,215
---------- ----------
Total Assets $6,656,961 $6,355,190
========== ==========
Liabilities
Deposits:
Noninterest-bearing $ 875,757 $ 954,210
Interest-bearing 2,872,455 2,992,187
---------- ----------
Total deposits 3,748,212 3,946,397
Federal funds purchased 468,399 336,546
Securities sold under repurchase agreements 1,068,810 981,999
Short-term borrowings 650,361 389,543
Other liabilities 55,311 48,829
---------- ----------
Total Liabilities 5,991,093 5,703,314
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 71,408,561 shares - 1999;
72,531,636 - 1998 14,877 15,111
Surplus 215,690 241,155
Retained earnings 429,855 378,567
Accumulated other comprehensive income, net of tax 5,446 17,043
---------- ----------
Total Shareholders' Equity 665,868 651,876
---------- ----------
Total Liabilities and Shareholders' Equity $6,656,961 $6,355,190
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Interest Income
<S> <C> <C> <C> <C>
Interest and fees on loans $ 79,083 $ 74,964 $ 231,882 $ 212,947
Interest on securities:
Taxable interest income 30,668 29,158 88,517 89,233
Interest income exempt from federal income taxes 1,584 1,573 4,820 4,506
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 1,175 1,484 6,893 2,919
--------- --------- --------- ---------
Total Interest Income 112,510 107,179 332,112 309,605
Interest Expense
Interest on deposits 25,742 31,483 79,985 94,394
Interest on federal funds purchased and securities
sold under repurchase agreements 18,684 17,546 51,326 42,688
Other interest expense 7,202 1,131 17,774 4,787
--------- --------- --------- ---------
Total Interest Expense 51,628 50,160 149,085 141,869
--------- --------- --------- ---------
Net Interest Income 60,882 57,019 183,027 167,736
Provision for loan losses 1,593 2,221 6,062 5,188
--------- --------- --------- ---------
Net Interest Income After
Provision for Loan Losses 59,289 54,798 176,965 162,548
Noninterest Income
Service charges on deposit accounts 9,650 7,816 28,200 22,203
Other account charges, fees and commissions 8,806 5,899 23,974 17,082
Mortgage servicing fees 3,613 3,343 10,660 10,165
Trust service income 3,598 3,515 10,703 10,237
Securities (losses) gains (1,398) 10 (1,398) 40
Other income 1,466 1,290 3,880 3,608
--------- --------- --------- ---------
Total Noninterest Income 25,735 21,873 76,019 63,335
Noninterest Expenses
Salaries and employee benefits 24,813 22,388 74,096 66,757
Net occupancy - premises 2,708 2,692 7,717 7,468
Equipment expenses 3,914 2,982 10,893 9,305
Services and fees 6,639 6,690 19,374 20,185
Amortization of intangible assets 2,630 2,635 7,880 7,584
Other expense 6,939 6,606 20,156 19,104
--------- --------- --------- ---------
Total Noninterest Expenses 47,643 43,993 140,116 130,403
--------- --------- --------- ---------
Income Before Income Taxes 37,381 32,678 112,868 95,480
Income taxes 12,439 11,501 38,877 34,172
--------- --------- --------- ---------
Net Income $ 24,942 $ 21,177 $ 73,991 $ 61,308
========= ========= ========= =========
Earnings Per Share
Basic and Diluted $ 0.35 $ 0.29 $ 1.03 $ 0.84
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
--------- ---------
Operating Activities
<S> <C> <C>
Net income $ 73,991 $ 61,308
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 6,062 5,188
Depreciation and amortization 15,820 14,711
Net amortization (accretion) of securities 681 (540)
Securities losses (gains) 1,398 (40)
Net increase in intangible assets (9,422) (10,056)
Net (increase) decrease in deferred income taxes (36) 1,483
Net increase in other assets (8,715) (8,793)
Net increase in other liabilities 1,832 4,945
Other operating activities, net (1,908) (2,443)
--------- ---------
Net cash provided by operating activities 79,703 65,763
--------- ---------
Investing Activities
Proceeds from calls and maturities of securities available for sale 73,272 50,508
Proceeds from calls and maturities of securities held to maturity 314,069 288,954
Proceeds from sales of securities available for sale 49,014 174,440
Purchases of securities available for sale (107,678) (224,155)
Purchases of securities held to maturity (483,448) (109,346)
Net decrease (increase) in federal funds sold and securities
purchased under reverse repurchase agreements 83,838 (202,870)
Net increase in loans (229,321) (552,977)
Purchases of premises and equipment (15,687) (6,662)
Proceeds from sales of premises and equipment 31 94
Proceeds from sales of other real estate 1,701 2,339
Cash received in business combinations 6,358 13,035
--------- ---------
Net cash used by investing activities (307,851) (566,640)
--------- ---------
Financing Activities
Net decrease in deposits (198,185) (25,153)
Net increase in federal funds purchased and
securities sold under repurchase agreements 218,664 595,685
Net increase (decrease) in short-term borrowings 260,818 (28,312)
Common stock purchased and retired (44,618) (16,040)
Cash dividends (22,703) (18,009)
--------- ---------
Net cash provided by financing activities 213,976 508,171
--------- ---------
(Decrease ) increase in cash and cash equivalents (14,172) 7,294
Cash and cash equivalents at beginning of year 312,527 292,555
--------- ---------
Cash and cash equivalents at end of period $ 298,355 $ 299,849
========= =========
</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 (Trustmark) 1998 annual report on Form 10-K.
The consolidated financial statements include the accounts of Trustmark,
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 April 9, 1999, Trustmark completed its acquisition of the Dan
Bottrell Agency, Inc. (Bottrell), an independent insurance agency with
approximately $9 million in total assets located in Jackson, Mississippi.
Trustmark issued approximately 872 thousand shares of common stock in exchange
for all of the issued and outstanding common stock of Bottrell. This transaction
has been accounted for as a purchase business combination.
NOTE 3 - LOANS
The following table summarizes the activity in the allowance for loan
losses for the nine month periods ended September 30, 1999 and 1998 ($ in
thousands):
1999 1998
-------- --------
Balance at beginning of year $ 66,150 $ 64,100
Provision charged to expense 6,062 5,188
Loans charged off (10,523) (8,502)
Recoveries 4,161 4,064
Allowance applicable to loans of acquired bank 1,300
-------- --------
Balance at end of period $ 65,850 $ 66,150
======== ========
At September 30, 1999 and 1998, the carrying amounts of nonaccrual
loans were $16.2 million and $12.9 million, respectively. Included in these
nonaccrual loans at September 30, 1999 and 1998, are loans that are considered
to be impaired and totaled $12.6 million and $10.0 million, respectively. As a
result of direct write-downs, the specific allowance related to these impaired
loans was not material. The average carrying amounts of impaired loans during
the third quarter of 1999 and 1998 were $11.0 million and $11.6 million,
respectively. No material amounts of interest income were recognized on impaired
loans or nonaccrual loans for the third quarter of 1999 or 1998.
NOTE 4 - CONTINGENCIES
Trustmark 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; 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
Trustmark's consolidated financial position or results of operations.
<PAGE>
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average shares of common stock outstanding. Diluted EPS is computed by
dividing net income by the weighted average shares of common stock outstanding,
adjusted for the effect of stock options outstanding during the period. The
following table reflects weighted average shares used to calculate Basic and
Diluted EPS for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
Weighted Average Shares Outstanding: 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 71,852,672 72,773,616 72,172,543 72,935,602
Diluted 71,905,462 72,829,648 72,217,268 73,002,104
</TABLE>
NOTE 6 - STATEMENTS OF CASH FLOWS
During the nine months ended September 30, 1999 and 1998, Trustmark paid
approximately $41.0 and $36.1 million, respectively, in income taxes. During the
nine months ended September 30, 1999 and 1998, Trustmark paid $152.1 million and
$145.2 million, respectively, in interest on deposit liabilities and other
borrowings. For the nine months ended September 30, 1999 and 1998, noncash
transfers from loans to foreclosed properties were $1.7 million and $1.1
million, respectively.
NOTE 7 - RECENT PRONOUNCEMENTS
Recently, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an Amendment of FASB Statement No. 133." This
statement amends the effective date for SFAS No. 133 which establishes
accounting and reporting standards for derivative instruments and hedging
activities. The FASB concluded that it is appropriate to defer the effective
date of SFAS No. 133 one year, from fiscal years beginning after June 15, 1999,
to fiscal years beginning after June 15, 2000. The FASB continues to encourage
early application of SFAS No. 133. The adoption of this statement will not have
a material impact on Trustmark's consolidated financial statements.
NOTE 8 - COMPREHENSIVE INCOME
Comprehensive income is the change in equity during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. For Trustmark, changes in
comprehensive income consist entirely of changes in unrealized holding gains and
losses on securities available for sale.
<PAGE>
The following table reflects the calculation of comprehensive income for
Trustmark for the three months and nine months ended September 30, 1999 and
1998, respectively ($ in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 24,942 $ 21,177 $ 73,991 $ 61,308
Unrealized holding (losses)/gains
arising during the period on
securities available for sale, net of tax (1,005) 6,493 (11,597) 8,776
======== ======== ======== ========
Comprehensive Income $ 23,937 $ 27,670 $ 62,394 $ 70,084
======== ======== ======== ========
</TABLE>
<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 Trustmark Corporation's (Trustmark) 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 Private 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. 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 Trustmark's financial condition,
results of operations and liquidity; Year 2000 compliance issues and market risk
disclosures. Although Management of Trustmark 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 reported earnings of $24.9 million for the third quarter of
1999, compared with $21.2 million for the third quarter of 1998, an increase of
17.8%. Basic and diluted earnings per share were $0.35 for the third quarter of
1999, compared with $0.29 for the third quarter of 1998.
Three financial ratios used to measure performance are return on
average assets, return on average equity and the efficiency ratio. The return on
average assets for the third quarter of 1999 was 1.51% compared with 1.40% for
the same period in 1998. The return on average equity reached 14.90% for the
quarter ended September 30, 1999, compared with 13.55% for the same period in
1998. Trustmark's efficiency ratio for the third quarter of 1999 improved to
53.04% from 54.56% in the third quarter of 1998.
Trustmark's net income increased 20.7% to $74.0 million for the first
nine months of 1999 compared with $61.3 million in the same period in 1998.
Basic and diluted earnings per share for the first nine months of 1999 were
$1.03 compared with $0.84 for the first nine months of 1998. Diversified loan
growth along with growth in noninterest income produced increased earnings
during the first nine months of 1999.
For the nine month period ended September 30, 1999, Trustmark recorded
a return on average assets of 1.51%, a return on average equity of 15.11% and an
efficiency ratio of 52.69%. These compared with ratios for the first nine months
in 1998 of 1.42% for return on average assets, 13.44% for return on average
equity and 55.28% for the efficiency ratio.
At September 30, 1999, total loans were $3.93 billion, an increase of
6.1% from year end 1998. Total assets were $6.66 billion at September 30, 1999,
a 4.8% increase from December 31, 1998. Total deposits at September 30, 1999,
were $3.75 billion, a 5.0% decrease from year end 1998. Shareholders' equity was
$666 million at September 30, 1999, a 2.2% increase from December 31, 1998.
BUSINESS COMBINATIONS
Management is continually evaluating new markets in which to expand and
provide its financial services. On April 9, 1999, Trustmark completed its
acquisition of the Dan Bottrell Agency, Inc. (Bottrell), an independent
insurance agency with approximately $9 million in total assets located in
Jackson, Mississippi. Trustmark issued approximately 872 thousand shares of
common stock in exchange for all of the issued and outstanding common stock of
Bottrell. This transaction has been accounted for as a purchase business
combination.
<PAGE>
ASSET/LIABILITY MANAGEMENT
Overview
Market risk is the risk of loss arising from adverse changes in market
prices and rates. Trustmark has risk management policies to monitor and limit
exposure to market risk. Trustmark'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. The Asset/Liability Committee 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. A key
objective of the 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 primary purpose in managing interest rate risk is to effectively
invest capital and to manage and preserve the value created by Trustmark's core
banking business. Trustmark 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 monthly in order to
provide information used to evaluate exposure to interest rate risk, to project
earnings and manage balance sheet growth. This modeling system utilizes the
following scenarios in order to give Management a method of evaluating
Trustmark's interest rate, basis and prepayment risk under different conditions:
- Rate shocked scenarios of up-and-down 100, 200 and 300 basis points.
- Yield curve twist of +/- 2 standard deviations of the change in spread of
the three-month treasury bill and the 10-year treasury note yields.
- Basis risk scenarios where federal funds/prime spread widens and tightens
50 and 100 basis points.
- Prepayment risk scenarios, where projected prepayment speeds in an up-and-
down 200 basis point rate scenario, are compared to current projected
prepayment speeds.
Static gap analysis is a relatively straightforward tool for interest
rate risk measurement used 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 Trustmark's rate sensitivity static gap analysis at September 30, 1999
($ in thousands):
Interest Sensitive Within
--------------------------
90 days One Year
----------- -----------
Total rate sensitive assets $ 1,618,960 $ 2,554,759
Total rate sensitive liabilities 2,562,400 3,557,066
----------- -----------
Net gap ($ 943,440) ($1,002,307)
=========== ===========
The analysis indicates a negative gap position over the next three- and
twelve-month periods which indicates that Trustmark would benefit somewhat from
a decrease in market interest rates. Although interest rates have increased,
Management believes there is adequate flexibility to alter the overall rate
sensitivity structure as necessary to minimize exposure to these changes.
Derivative Financial Instruments
Derivatives are used to hedge interest rate exposures by modifying the
interest rate characteristics of specific balance sheet instruments. Trustmark
regularly enters into certain derivative financial instruments in the form of
forward interest rate contracts, as part of its normal asset/liability
<PAGE>
management strategies. Trustmark'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 in order
to fix the interest rate at which Trustmark can offer mortgage loans to its
customers or purchase mortgage loans from other financial institutions. Any
decline in market value below the cost basis of mortgages held for sale by
Trustmark at the end of a financial reporting period is recognized at that time.
At September 30, 1999, Trustmark's exposure under commitments to sell mortgages
is immaterial.
Liquidity
Trustmark's goal is to maintain an adequate liquidity position to
compensate for balance sheet fluctuations and to provide funds for growth. The
Asset/Liability Committee establishes guidelines by which the current liquidity
position is monitored 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 Trustmark's liquidity.
EARNING ASSETS
The percentage of earning assets to total assets measures the
effectiveness of Management's efforts to invest available funds into the most
efficient and profitable uses. Earning assets at September 30, 1999, were $6.109
billion, or 91.78% of total assets, compared with $5.835 billion, or 91.82% of
total assets for December 31, 1998, an increase of $274 million, or 4.7%, and
results from growth in the loan and securities portfolios offset by a decrease
in federal funds sold and securities purchased under reverse repurchase
agreements.
Loans
Loans, the largest category of earning assets for Trustmark, produce
the highest level of interest income. At September 30, 1999, total loans were
$3.927 billion, an increase of $224.9 million, or 6.1%, from the $3.702 billion
reported at December 31, 1998. At September 30, 1999, loans were 64.3% of
Trustmark's earning assets compared with 63.4% at December 31, 1998. Loan growth
remained well diversified.
Trustmark's lending policies have produced consistently strong asset
quality. Asset quality in the financial services industry is measured by the
level of nonperforming assets which include nonperforming loans, consisting of
nonaccrual and restructured loans, and other real estate. Trustmark's
nonperforming assets at September 30, 1999 and December 31, 1998, are shown in
the following table ($ in thousands):
Sept. 30, Dec. 31,
1999 1998
--------- --------
Nonaccrual and restructured loans $ 16,171 $ 13,253
Other real estate (ORE) 1,984 1,859
======== ========
Total nonperforming assets $ 18,155 $ 15,112
======== ========
Accruing loans past due 90 days or more $ 1,872 $ 2,431
======== ========
Nonperforming assets/total loans and ORE 0.46% 0.41%
======== ========
While the volume of nonperforming assets at September 30, 1999, reflects
a slight increase from year end 1998, as indicated in the preceding table above,
it remains at a manageable level. This level of nonperforming assets continues
to compare favorably to those of peer banks as a result of sound lending
practices and consistent collection efforts. 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.
<PAGE>
The allowance for loan losses is maintained at a level that Management
and the Board of Directors believe is adequate to absorb probable losses within
the loan portfolio, plus losses associated with off-balance sheet credit
instruments such as letters of credit and unfunded lines of credit. A formal
analysis is prepared quarterly to assess the risk in the loan portfolio and to
determine the adequacy of the allowance for loan losses. Specifically, the
analysis is based on factors such as historical loss experience based on volume
and types of loans, volume and trends in delinquencies and nonaccruals, national
and local economic conditions and other pertinent information. This analysis is
presented to the Credit Policy Committee with subsequent review and approval by
the Board of Directors. At September 30, 1999, the allowance for loan losses was
$65.9 million, representing 1.68% of total loans outstanding, compared with an
allowance for loan losses of $66.2 million at December 31, 1998, representing
1.79% of total loans outstanding.
Net charge-offs were $6.4 million or 0.22% of average loans for the nine
months ended September 30, 1999, compared with $4.4 million or 0.18% of average
loans for first nine months of 1998. Trustmark's level of net charge-offs to
average loans continues to compare favorably to its peer group.
Securities
The securities portfolio is utilized to provide an investment
alternative for available funds, a stable source of interest income and serves
as collateral for pledges for public deposits and securities sold under
agreements to repurchase. At September 30, 1999, securities available for sale
(AFS), with a carrying value of $740.1 million, and securities held to maturity
(HTM), with a carrying value of $1.340 billion, combined to create a securities
portfolio totaling $2.080 billion, an increase of $133.9 million or 6.9% from
December 31, 1998. As a percentage of earning assets, the securities portfolio
increased from 33.4% at December 31, 1998 to 34.1% at September 30, 1999.
Asset quality of the securities portfolio is strong as evidenced by the
investment of over 85% of the portfolio in U. S. Treasury and U. S. Government
agency obligations. The REMIC and CMO issues held in the securities portfolio
are entirely U. S. Government agency issues. In order to avoid excessive yield
volatility from unexpected prepayments, Trustmark's normal practice is to
purchase investment securities at or near par value to reduce the risk of
premium write-offs.
At September 30, 1999, securities AFS had a carrying value of $740.1
million and an amortized cost of $731.3 million. This compares with a carrying
value of $775.0 million and an amortized cost of $747.4 million at December 31,
1998. At September 30, 1999, gross unrealized gains were $16.2 million on
securities AFS while gross unrealized losses were $7.3 million. Net unrealized
gains are shown in shareholders' equity as accumulated other comprehensive
income, net of taxes and equaled $5.4 million at September 30, 1999.
The carrying value of securities HTM was $1.340 billion at September 30,
1999, compared with $1.172 billion at year end 1998. The fair value of HTM
securities at September 30, 1999, was $1.334 billion compared with $1.193
billion at year end 1998. As a percentage of the securities portfolio,
securities HTM increased from 60.2% at December 31, 1998, to 64.4% at September
30, 1999, as Trustmark chose to invest in U.S. Treasury and Agency securities
instead of reverse repurchase transactions, due to market conditions. Gross
unrealized gains were $6.1 million and gross unrealized losses were $12.7
million on securities HTM at September 30, 1999.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase
agreements were $101.8 million at September 30, 1999, a decrease of $83.8
million when compared with year end 1998. Trustmark utilizes these products as a
short-term investment alternative whenever it has excess liquidity.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Trustmark's deposit base is its primary source of funding and consists
of core deposits from the communities served by Trustmark. Total deposits were
$3.748 billion at September 30, 1999, a decrease of $198.2 million over year end
1998. This decline was distributed between noninterest bearing and
interest-bearing deposits. During the third quarter of 1999, Trustmark began the
use of brokered CDs as an alternate source of funding. At September 30, 1999,
brokered CDs totaled $25 million.
<PAGE>
In order to provide additional liquidity for the growth of earning
assets, Trustmark continues to rely on short-term borrowings as an alternate
funding source. During the third quarter of 1999, Trustmark increased its
advances from the Federal Home Loan Bank (FHLB) by $100 million, bringing the
balance in advances outstanding to $490 million. Other short-term borrowings
include federal funds purchased and securities sold under repurchase agreements.
During the first nine months of 1999, these borrowings increased $218.7 million.
At September 30, 1999, the balance of the treasury tax and loan note option
account was $91.9 million compared with $33.1 million at December 31, 1998.
CONTINGENCIES
Trustmark 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; 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
Trustmark's consolidated financial position or results of operations.
SHAREHOLDERS' EQUITY
At September 30, 1999, Trustmark had shareholders' equity of $665.9
million an increase of $14.0 million when compared with year end 1998. The
shareholders' equity to assets ratio was 10.0% at September 30, 1999, compared
with 10.26% at December 31, 1998.
In November 1998, Trustmark implemented a capital management plan which
authorized the repurchase of up to 7.5%, or 5.46 million shares of common stock.
Since implementation of the plan, Trustmark has purchased approximately 2.240
million shares. The repurchase program, which is subject to market conditions
and management discretion, has been implemented through open market purchases or
privately negotiated transactions.
Cash dividends paid during the first nine months of 1999, totaled $22.7
million, an increase of $4.7 million or 26.1% from $18.0 million paid during the
same period in 1998. The payout ratio of dividends per share to earnings per
share was 30.58% in the first nine months of 1999 and 29.46% in the first nine
months of 1998. Dividends paid per share for the first nine months of 1999, was
$0.3150 or 27.3% higher than the $0.2475 per share paid in the first nine months
of 1998. Trustmark's book value at September 30, 1999, was $9.32 per share, an
increase of 5.1% from $8.87 per share one year earlier.
Regulatory - Risk Based Capital
Trustmark and Trustmark National Bank (the Bank) are subject to minimum
capital requirements which are administered by various Federal regulatory
agencies. These capital requirements, as defined by Federal guidelines, involve
quantitative and qualitative measures of assets, liabilities and certain
off-balance sheet instruments. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements of both Trustmark and the Bank.
Management believes, as of September 30, 1999, that Trustmark and the
Bank meet all capital adequacy requirements to which they are subject. At
September 30, 1999, the most recent notification from the Office of the
Comptroller (OCC) categorized the Bank as well-capitalized. To be categorized in
this manner, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios (defined in applicable regulations) as set forth in
the table below. There are no significant conditions or events that have
occurred since the OCC's notification that Management believes have affected the
Bank's present classification.
<PAGE>
Actual and minimum regulatory capital amounts and ratios at September
30, 1999, for Trustmark and the Bank are as follows ($ 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 $689,196 17.14% $321,765 8.00%
Trustmark National Bank $671,127 16.74% $320,769 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $633,583 15.75% $160,883 4.00%
Trustmark National Bank $620,813 15.48% $160,384 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $633,583 9.68% $261,874 4.00%
Trustmark National Bank $620,813 9.49% $261,566 4.00%
</TABLE>
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 Trustmark'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.
During the first nine months of 1999, the level of NII grew by $15.3
million, or 9.1%, when compared with the first nine months of 1998. NII has been
positively impacted during 1999 by the growth in earning assets exceeding the
growth in interest-bearing liabilities.
Average earning assets increased 13.1% during the first nine months of
1999, primarily fueled by a 16.9% increase in average loans when compared with
the same period in the prior year. The combination of these factors resulted in
interest income increasing by $22.5 million, or 7.3%, during the first nine
months of 1999, when compared to the same period in 1998. The composition of
average interest-bearing liabilities has continued to change as Trustmark seeks
additional funding sources to support the growth of earning assets. Average
interest-bearing liabilities increased by 15.5% during the first nine months of
1999 over the same period in 1998, primarily from growth in federal funds
purchased, securities sold under repurchase agreements and short-term
borrowings. Interest expense for the first nine months of 1999 increased $7.2
million, or 5.1% over the same period in 1998, as a result of these factors.
The table below illustrates the changes in the net interest margin as a
percentage of average earning assets for the periods shown:
Nine Months Ended
September 30,
-----------------
1999 1998
------- ------
Yield on interest-earning assets-FTE 7.53% 7.93%
Rate on interest-bearing liabilities 3.33% 3.58%
======= =======
Net interest margin-FTE 4.20% 4.35%
======= =======
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.
Trustmark will continue to monitor its interest rate risk policies to manage
exposure to changes in interest rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects Management's assessment of the
adequacy of the allowance for loan losses to absorb probable 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
<PAGE>
positions. During the first nine months of 1999, Trustmark's provision for loan
losses was $6.1 million compared with $5.2 million for the same period in 1998.
The provision to average loans was 0.21% for the first nine months of 1999 and
1998. Trustmark's ratio of the provision for loan losses to average loans
continues to compare favorably to the peer group.
NONINTEREST INCOME
Trustmark stresses the importance of growth in noninterest income as one
of its key long-term strategies. This was accomplished during the first nine
months of 1999, as noninterest income, excluding security gains and losses,
increased $14.1 million, or 22.3%, when compared with the first nine months of
1998. The primary growth in noninterest income can be attributed to commissions
earned on insurance products, as well as fees earned from deposit products and
services.
The largest single category of noninterest income, service charges on
deposit accounts, grew by $6.0 million, or 27.0%, when the first nine months of
1999 is compared with the same period in 1998. Through the first nine months of
1999, Trustmark was continuing the implementation of its new customer-focused
sales process named Pinnacle. As a result of Pinnacle, growth in transaction
accounts has been positively impacted.
Other account charges, fees and commissions, increased $6.9 million, or
40.3%, when the first nine months of 1999 is compared with the same period in
1998. Of this increase, $4.8 million in net insurance commissions was the direct
result of the Bottrell acquisition and growth in revenues from annuity products.
Also contributing to the growth in this category during these periods were
revenues generated from cash management services, credit cards and a variety of
other products and services.
Mortgage servicing fees grew by $495 thousand during the first nine
months of 1999, when compared to the first nine months of 1998. At September 30,
1999, Trustmark serviced approximately $3.6 billion in mortgages.
Trust service income increased by $466 thousand, or 4.6%, during the
first nine months of 1999, when compared to the same period in 1998, as
Trustmark continues to be one of the largest providers of asset management
services in Mississippi. At September 30, 1999, Trustmark had trust accounts
with assets under administration with fair values of approximately $5.6 billion.
NONINTEREST EXPENSE
Trustmark continues to provide quality service to customers within the
context of economic discipline. Total noninterest expense increased $9.7
million, or 7.5%, during the first nine months of 1999, compared with the first
nine months of 1998. Included in this increase, is $3.0 million attributable to
the Bottrell business combination. When these expenses are excluded, the growth
in noninterest expenses is reduced to $6.7 million, or 5.1%
Salaries and employee benefits continue to comprise the largest portion
of noninterest expenses and increased $7.3 million, or 11.0%, when comparing the
first nine months of 1999 with the first nine months of 1998. Included in this
increase is $2.0 million attributable to the Bottrell business combination. When
these expenses are excluded, the growth in salaries and employee benefits is
reduced to $5.3 million, or 8.0%. The number of full-time equivalent employees
totaled 2,311 at September 30, 1999, and 2,199 at September 30, 1998.
Occupancy expense increased $249 thousand, or 3.3% in the first nine
months of 1999, when compared to the same period in 1998. Equipment expenses
increased $1.6 million in the first nine months of 1999, compared to the same
period in 1998. Trustmark has incurred additional costs during 1999 as it sought
to improve technology and enhance premises and equipment.
Services and fees decreased $811 thousand, or 4.0%, when comparing the
first nine months of 1999 to the same period in 1998. This decrease is primarily
the result of a decline in legal and professional fees, which more than offset
an increase in operational expenses.
<PAGE>
The amortization of intangible assets increased $296 thousand, or 3.9%,
when comparing the first nine months of 1999 with the first nine months of 1998.
Growth in the mortgage servicing portfolio was 8.4% during the first nine months
of 1999, compared with the same period in 1998, and has provided a larger base
of mortgage servicing rights that began amortizing.
Various minor changes in a large number of operational expense
categories contributed to the $1.1 million increase in other expenses when
comparing the first nine months of 1999 to the same time period in 1998.
Management will continue to monitor closely the level of noninterest
expenses as part of its effort to further enhance profitability and the
efficiency ratio.
INCOME TAXES
For the nine months ended September 30, 1999, Trustmark's combined
effective tax rate was 34.4%, compared with 35.8% for the same period in 1998.
The decrease in Trustmark's effective rate is due primarily to a relatively
small change in various permanent differences as a percentage of pre-tax income.
RECENT PRONOUNCEMENTS
Recently, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an Amendment of FASB Statement No. 133." This
statement amends the effective date for SFAS No. 133 which establishes
accounting and reporting standards for derivative instruments and hedging
activities. The FASB concluded that it is appropriate to defer the effective
date of SFAS No. 133 one year, from fiscal years beginning after June 15, 1999,
to fiscal years beginning after June 15, 2000. The FASB continues to encourage
early application of SFAS No. 133. The adoption of this statement will not have
a material impact on the Corporation's consolidated financial statements.
YEAR 2000 COMPLIANCE
Trustmark has completed the renovation, validation and implementation
phase of its Year 2000 readiness program within regulatory guidelines. All
systems and services, which include Trustmark's mission-critical core banking
systems and non-critical systems, have been placed in production as Year 2000
ready. These upgrades will ensure that our customers' financial transactions and
account information will be processed in a timely and accurate manner. The
development and validation of a contingency plan that includes all
mission-critical business functions has also been completed. This contingency
plan is designed to support the continued operation of key areas of the bank in
the unlikely event that a Year 2000 problem should occur.
To date, Trustmark has incurred and expensed approximately $7.5 million
related to the assessment and implementation of the Year 2000 compliance plan.
The total remaining cost of the Year 2000 compliance plan will be expensed as
incurred during 1999 and is not expected to have a material adverse effect on
Trustmark's results of operations.
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments for the quarter ended September 30,
1999, 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
2. On July 14, 1999, Trustmark filed a Form 8-K disclosing that through
June 30, 1999, Trustmark had purchased approximately 1,465,000 shares
of Trustmark Corporation common stock, including approximately 590,000
during the second quarter of 1999 and 1,223,000 shares year to date.
This repurchase program was authorized by the Board of Directors on
November 10, 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/ Richard G. Hickson BY: /s/ Zach L. Wasson
---------------------- ------------------
Richard G. Hickson Zach L. Wasson
President & Chief Chief Financial and
Executive Officer Accounting Officer
DATE: November 9, 1999 DATE: November 9, 1999
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S.Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 298,355
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 101,781
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 740,073
<INVESTMENTS-CARRYING> 1,340,348
<INVESTMENTS-MARKET> 1,333,749
<LOANS> 3,927,240
<ALLOWANCE> 65,850
<TOTAL-ASSETS> 6,656,961
<DEPOSITS> 3,748,212
<SHORT-TERM> 2,187,570
<LIABILITIES-OTHER> 55,311
<LONG-TERM> 0
0
0
<COMMON> 14,877
<OTHER-SE> 650,991
<TOTAL-LIABILITIES-AND-EQUITY> 6,656,961
<INTEREST-LOAN> 231,882
<INTEREST-INVEST> 93,337
<INTEREST-OTHER> 6,893
<INTEREST-TOTAL> 332,112
<INTEREST-DEPOSIT> 79,985
<INTEREST-EXPENSE> 149,085
<INTEREST-INCOME-NET> 183,027
<LOAN-LOSSES> 6,062
<SECURITIES-GAINS> (1,398)
<EXPENSE-OTHER> 140,116
<INCOME-PRETAX> 112,868
<INCOME-PRE-EXTRAORDINARY> 112,868
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73,991
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 4.20
<LOANS-NON> 16,171
<LOANS-PAST> 1,872
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 66,150
<CHARGE-OFFS> 10,523
<RECOVERIES> 4,161
<ALLOWANCE-CLOSE> 65,850
<ALLOWANCE-DOMESTIC> 56,062
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,788
</TABLE>
