<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, 2000
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 30, 2000.
Title Outstanding
Common stock, no par value 68,977,793
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
----------- -----------
Assets
<S> <C> <C>
Cash and due from banks (noninterest-bearing) $ 262,926 $ 279,957
Federal funds sold and securities purchased
under reverse repurchase agreements 29,858 29,599
Securities available for sale (at fair value) 1,140,477 783,220
Securities held to maturity (fair value: $970,278 - 2000;
$1,374,631 - 1999) 986,938 1,390,981
Loans 4,063,236 4,014,935
Less allowance for loan losses 65,850 65,850
----------- -----------
Net loans 3,997,386 3,949,085
Premises and equipment 81,112 80,575
Intangible assets 64,595 65,063
Other assets 177,929 164,924
----------- -----------
Total Assets $ 6,741,221 $ 6,743,404
=========== ===========
Liabilities
Deposits:
Noninterest-bearing $ 893,951 $ 860,650
Interest-bearing 2,988,557 3,064,146
----------- -----------
Total deposits 3,882,508 3,924,796
Federal funds purchased 444,372 287,163
Securities sold under repurchase agreements 875,449 1,090,257
Short-term borrowings 833,637 733,024
Other liabilities 61,374 52,408
----------- -----------
Total Liabilities 6,097,340 6,087,648
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 69,163,393 shares - 2000;
70,423,993 shares - 1999 14,409 14,672
Surplus 171,460 193,721
Retained earnings 462,004 444,999
Accumulated other comprehensive (loss) income, net of tax (3,992) 2,364
----------- -----------
Total Shareholders' Equity 643,881 655,756
----------- -----------
Total Liabilities and Shareholders' Equity $ 6,741,221 $ 6,743,404
=========== ===========
</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 March 31,
----------------------------
2000 1999
--------- ---------
Interest Income
<S> <C> <C>
Interest and fees on loans $ 82,742 $ 76,035
Interest on securities:
Taxable interest income 33,105 28,220
Interest income exempt from federal income taxes 1,824 1,622
Interest on federal funds sold and securities purchased
under reverse repurchase agreements 375 3,585
--------- ---------
Total Interest Income 118,046 109,462
Interest Expense
Interest on deposits 28,083 27,642
Interest on federal funds purchased and securities
sold under repurchase agreements 18,852 15,984
Other interest expense 11,200 4,843
--------- ---------
Total Interest Expense 58,135 48,469
--------- ---------
Net Interest Income 59,911 60,993
Provision for loan losses 2,118 1,966
--------- ---------
Net Interest Income After Provision
for Loan Losses 57,793 59,027
Noninterest Income
Service charges on deposit accounts 9,882 8,870
Other account charges, fees and commissions 9,212 6,427
Mortgage servicing fees 3,674 3,500
Trust service income 3,468 3,619
Securities gains 4,641
Other income 1,174 1,308
--------- ---------
Total Noninterest Income 32,051 23,724
Noninterest Expenses
Salaries and employee benefits 25,446 24,106
Net occupancy - premises 2,580 2,469
Equipment expenses 3,730 3,315
Services and fees 6,714 6,402
Amortization of intangible assets 2,252 2,544
Other expenses 6,704 6,473
--------- ---------
Total Noninterest Expenses 47,426 45,309
--------- ---------
Income Before Income Taxes and Cumulative Effect of
Change in Accounting Principle 42,418 37,442
Income taxes 14,278 13,316
--------- ---------
Income Before Cumulative Effect of Change in Accounting Principle 28,140 24,126
Cumulative effect of change in accounting principle, net of tax (2,464)
--------- ---------
Net Income $ 25,676 $ 24,126
========= =========
Earnings Per Share
Basic and diluted earnings per share before cumulative effect
of change in accounting principle $ 0.40 $ 0.33
Cumulative effect of change in accounting principle, net of tax (0.03)
--------- ---------
Earnings per share - basic and diluted $ 0.37 $ 0.33
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ in thousands)
(Unaudited)
2000 1999
--------- ---------
Balance, January 1, $ 655,756 $ 651,876
Comprehensive income:
Net income per consolidated statements of income 25,676 24,126
Net change in unrealized gains on
securities available for sale, net of tax (6,356) (4,079)
--------- ---------
Comprehensive income 19,320 20,047
Cash dividends paid (8,671) (7,554)
Repurchase and retirement of common stock (22,524) (13,389)
--------- ---------
Balance, March 31, $ 643,881 $ 650,980
========= =========
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
--------- ---------
Operating Activities
<S> <C> <C>
Net income $ 25,676 $ 24,126
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 2,118 1,966
Depreciation and amortization 5,359 5,025
Net (accretion) amortization of securities (322) 55
Securities gains (4,641)
Cumulative effect of change in accounting principle 3,820
Net increase in intangible assets (1,794) (4,155)
Net decrease (increase) in deferred income taxes 3,151 (191)
Net increase in other assets (13,510) (11,014)
Net increase in other liabilities 8,966 12,068
Other operating activities, net 541 (1,254)
--------- ---------
Net cash provided by operating activities 29,364 26,626
Investing Activities
Proceeds from calls and maturities of securities available for sale 32,852 44,606
Proceeds from calls and maturities of securities held to maturity 50,878 126,006
Proceeds from sales of securities available for sale 6,332
Proceeds from sales of trading securities 130,575 757
Purchases of securities available for sale (157,630) (45,522)
Purchases of securities held to maturity (26,027) (198,418)
Net increase in federal funds sold and securities
purchased under reverse repurchase agreements (259) (81,591)
Net increase in loans (50,247) (36,119)
Purchases of premises and equipment (3,098) (3,460)
Proceeds from sales of premises and equipment 8
Proceeds from sales of other real estate 690 692
--------- ---------
Net cash used by investing activities (15,926) (193,049)
Financing Activities
Net (decrease) increase in deposits (42,288) 22,171
Net (decrease) increase in federal funds purchased and securities sold
under repurchase agreements (57,599) 131,152
Net increase in short-term borrowings 100,613 12,283
Cash dividends (8,671) (7,554)
Common stock transactions, net (22,524) (13,389)
--------- ---------
Net cash (used) provided by financing activities (30,469) 144,663
--------- ---------
Decrease in cash and cash equivalents (17,031) (21,760)
Cash and cash equivalents at beginning of period 279,957 312,527
--------- ---------
Cash and cash equivalents at end of period $ 262,926 $ 290,767
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
TRUSTMARK CORPORATION & SUBSIDIARIES
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) 1999 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. All intercompany accounts and transactions
have been eliminated in consolidation.
NOTE 2 - BUSINESS COMBINATIONS
On April 9, 1999, Trustmark completed its acquisition of the Dan
Bottrell Agency, Inc. (Bottrell), an independent insurance agency located in
Jackson, Mississippi, with approximately $9 million in total assets. This
transaction was accounted for as a purchase business combination. The results of
operations, which are not material, have been included in the financial
statements from the merger date.
NOTE 3 - LOANS
The following table summarizes the activity in the allowance for loan
losses for the three month periods ended March 31, 2000 and 1999 ($ in
thousands):
2000 1999
------- -------
Balance at beginning of year $65,850 $66,150
Provision charged to expense 2,118 1,966
Loans charged off (3,771) (3,548)
Recoveries 1,653 1,582
------- -------
Balance at end of period $65,850 $66,150
======= =======
At March 31, 2000 and 1999, the carrying amounts of nonaccrual loans
were $17.7 million and $13.7 million, respectively. Included in these nonaccrual
loans at March 31, 2000 and 1999, are loans that are considered to be impaired
and totaled $13.7 million and $9.8 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 first
quarter of 2000 and 1999 were $13.2 million and $10.6 million, respectively. No
material amounts of interest income were recognized on impaired loans or
nonaccrual loans for the first quarter of 2000 or 1999.
<PAGE>
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.
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:
Three Months Ended
March 31,
-------------------------
2000 1999
---------- ----------
Weighted Average Shares Outstanding
Basic 69,756,672 72,144,447
Diluted 69,785,096 72,208,999
NOTE 6 - STATEMENTS OF CASH FLOWS
Trustmark paid income taxes approximating $234 thousand and $2.7
million during the three months ended March 31, 2000 and 1999, respectively.
Interest paid on deposit liabilities and other borrowings approximated $57.3
million in the first quarter of 2000 and $48.9 million in the first quarter of
1999. For the three months ended March 31, 2000 and 1999, noncash transfers from
loans to foreclosed properties were $758 thousand and $726 thousand,
respectively.
NOTE 7 - RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. During 1999, the FASB issued 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," which concluded that it was appropriate to defer the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000.
<PAGE>
Trustmark uses derivatives designated as cash flow hedges to hedge
interest rate exposures by mitigating the interest rate risk of mortgage loans
held for sale and mortgage loans in process. Trustmark regularly enters into
derivative financial instruments in the form of forward contracts, as part of
its normal asset/liability management strategies. Trustmark's obligations under
forward contracts consist of commitments to deliver mortgage loans, originated
and/or purchased, in the secondary market at a future date into mortgage-backed
securities. Realized gains and losses on forward contracts and the sale of
mortgage loans in the secondary market are recorded upon the settlement of the
related forward contract and included in other income. During the first three
months of 2000, no recognized net gains or losses related to cash flow hedges
were deemed to be material.
On January 1, 2000, Trustmark adopted SFAS No. 133. As allowed by SFAS
No. 133, at the date of initial application of this statement, Trustmark
transferred held to maturity securities with an amortized cost of $237.5 million
and a market value of $237.8 million into the available for sale category. In
addition, Trustmark transferred held to maturity securities with an amortized
cost of $135.1 million and a market value of $131.2 million into the trading
category. The effect of adopting SFAS No. 133 is shown as a cumulative effect of
a change in accounting principle and reduced net income by $2.5 million (net of
taxes) during the first quarter of 2000. In order to offset the effect of
adopting SFAS No. 133, Trustmark sold available for sale equity securities which
resulted in realized gains of $4.6 million or an after tax gain of $2.9 million.
These separate transactions allowed Trustmark to reposition the investment
portfolio as well as provide additional liquidity for investment opportunities
in a potentially higher yielding market environment while having an
insignificant impact on consolidated net income for the first quarter of 2000.
NOTE 8 - SEGMENT INFORMATION
Trustmark has three reportable segments: Retail Banking, Commercial
Banking and Financial Services. Retail Banking delivers a full range of
financial products and services to individuals and small businesses through
Trustmark's extensive branch network. Commercial Banking provides various
financial products and services to corporate and middle market clients. Included
among these products and services are specialized services for commercial and
residential real estate development lending, indirect auto financing and other
specialized lending services. Financial Services includes trust and fiduciary
services, discount brokerage services, insurance services, as well as credit
card and mortgage services. Also included in this segment is a selection of
investment management services including Trustmark's proprietary mutual fund
family. Treasury & Other consists of asset/liability management activities that
include the investment portfolio and the related gains (losses) on sales of
securities. Treasury & Other also includes expenses such as corporate overhead
and amortization of intangible assets.
<PAGE>
The following table discloses financial information by segment for the
quarters ended March 31, 2000 and 1999 ($ in thousands):
<TABLE>
<CAPTION>
Retail Commercial Financial Treasury
Banking Banking Services & Other Total
----------- ----------- ----------- ----------- -----------
2000
- ----
<S> <C> <C> <C> <C> <C>
Net interest income from external customers $ 8,521 $ 30,429 $ 11,471 $ 9,490 $ 59,911
Internal funding 22,968 (21,388) (4,861) 3,281
----------- ----------- ----------- ----------- -----------
Net interest income 31,489 9,041 6,610 12,771 59,911
Provision for loan losses 1,154 497 467 2,118
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 30,335 8,544 6,143 12,771 57,793
Noninterest income 11,721 157 13,947 6,226 32,051
Noninterest expenses 28,775 3,827 11,907 2,917 47,426
----------- ----------- ----------- ----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 13,281 4,874 8,183 16,080 42,418
Income taxes 4,585 1,682 2,879 5,132 14,278
----------- ----------- ----------- ----------- -----------
Income before cumulative effect
of change in accounting principle 8,696 3,192 5,304 10,948 28,140
Cumulative effect of change
in accounting principle (2,464) (2,464)
----------- ----------- ----------- ----------- -----------
Segment net income $ 8,696 $ 3,192 $ 5,304 $ 8,484 $ 25,676
=========== =========== =========== =========== ===========
Selected Financial Information
Average assets $ 2,159,986 $ 1,469,323 $ 859,016 $ 2,286,754 $ 6,775,079
Depreciation and amortization $ 1,042 $ 54 $ 1,381 $ 2,882 $ 5,359
1999
- ----
Net interest income from external customers $ 6,784 $ 25,435 $ 3,689 $ 25,085 $ 60,993
Internal funding 25,168 (16,386) 4,041 (12,823)
----------- ----------- ----------- ----------- -----------
Net interest income 31,952 9,049 7,730 12,262 60,993
Provision for loan losses 1,213 312 441 1,966
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 30,739 8,737 7,289 12,262 59,027
Noninterest income 10,747 150 12,027 800 23,724
Noninterest expenses 27,989 3,513 10,712 3,095 45,309
----------- ----------- ----------- ----------- -----------
Income before income taxes 13,497 5,374 8,604 9,967 37,442
Income taxes 4,660 1,854 2,997 3,805 13,316
----------- ----------- ----------- ----------- -----------
Segment net income $ 8,837 $ 3,520 $ 5,607 $ 6,162 $ 24,126
=========== =========== =========== =========== ===========
Selected Financial Information
Average assets $ 2,024,601 $ 1,310,743 $ 793,836 $ 2,349,487 $ 6,478,667
Depreciation and amortization $ 933 $ 59 $ 1,704 $ 2,329 $ 5,025
</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; 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 significantly from those
anticipated, estimated, projected or expected.
FINANCIAL SUMMARY
For the quarter ended March 31, 2000, Trustmark's net income totaled
$25.7 million compared with $24.1 million for the first quarter of 1999. Basic
and diluted earnings per share were $0.37 for the first quarter of 2000,
compared with $0.33 for the first quarter of 1999, an increase of 12.1%.
Trustmark's performance for the quarter ended March 31, 2000, resulted in a
return on average assets of 1.52%, a return on average equity of 15.84% and an
efficiency ratio of 53.06%. These compared with 1999 ratios of 1.51% for return
on average assets, 15.36% for return on average equity and 52.34% for the
efficiency ratio.
At March 31, 2000, Trustmark reported total loans of $4.063 billion,
total assets of $6.741 billion, total deposits of $3.883 billion and
shareholders' equity of $644 million.
BUSINESS COMBINATIONS
Trustmark seeks to increase shareholder value and diversify products
and services through selective acquisitions of other financial services
companies, including banks, insurance agencies and asset management companies.
On April 9, 1999, Trustmark completed its acquisition of the Dan
Bottrell Agency, Inc. (Bottrell), an independent insurance agency located in
Jackson, Mississippi, with approximately $9 million in total assets. This
transaction was accounted for as a purchase business combination. The 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. 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 core banking activities. Management continually
develops and applies cost-effective strategies to manage these risks. The
Asset/Liability Committee sets the day-to-day operating guidelines, approves
strategies affecting net interest income and coordinates activities within
<PAGE>
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 preserve the value created by the 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 provides information used to evaluate exposure to
interest rate risk, 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 up-and-down
200 basis point rate scenarios 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 March 31, 2000 ($
in thousands):
Interest Sensitive Within
---------------------------
90 days One Year
----------- -----------
Total rate sensitive assets $ 1,634,901 $ 2,568,269
Total rate sensitive liabilities 2,717,402 3,671,377
----------- -----------
Net gap ($1,082,501) ($1,103,108)
=========== ===========
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 rates have increased, Management
believes there is adequate flexibility to alter the overall rate sensitivity
structure as necessary to minimize exposure to these changes.
<PAGE>
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
Earning assets are composed of loans, securities, federal funds sold,
securities purchased under resale agreements and trading account assets. These
assets are the primary revenue streams for Trustmark. 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. At March 31,
2000, earning assets were $6.221 billion, or 92.28% of total assets, compared
with $6.219 billion, or 92.22% of total assets at December 31, 1999.
Loans
Loans are the largest group of earning assets of Trustmark and
represented 65.3% of earning assets at March 31, 2000, compared with 64.6% at
December 31, 1999. At March 31, 2000, loans totaled $4.063 billion compared to
$4.015 billion at year end 1999, an increase of $48.3 million, or 1.2%. Loan
growth remained well diversified.
Trustmark's lending policies have produced consistently strong asset
quality. One measure of asset quality in the financial services industry is the
level of nonperforming assets. Trustmark's nonperforming assets at March 31,
2000 and December 31, 1999 are shown in the following table ($ in thousands):
Mar. 31, Dec. 31,
2000 1999
------- -------
Nonaccrual and restructured loans $17,731 $16,671
Other real estate (ORE) 2,051 1,987
------- -------
Total nonperforming assets $19,782 $18,658
======= =======
Accruing loans past due 90 days or more $ 2,399 $ 2,043
======= =======
Nonperforming assets/total loans and ORE 0.49% 0.46%
======= =======
While the volume of nonperforming assets at March 31, 2000, reflects a
slight increase from December 31, 1999, as indicated in the preceding table, 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 in relation to
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. The allowance for loan losses was $65.9
million at March 31, 2000 and December 31, 1999, representing 1.62% and 1.64%,
respectively, of total loans outstanding.
Net charge-offs were $2.1 million, or 0.21% of average loans, at March
31, 2000, compared with $2.0 million, or 0.21% of average loans, at March 31,
1999. Trustmark's level of net charge-offs to average loans continues to compare
favorably to those of peer banks.
Securities
The securities portfolio is utilized to provide a quality investment
alternative for available funds, a stable source of interest income and
collateral on pledges for public deposits and securities sold under agreements
to repurchase. At March 31, 2000, Trustmark's securities portfolio totaled
$2.127 billion, a decrease of $46.8 million or 2.2% from December 31, 1999. As a
percentage of earning assets, the securities portfolio decreased from 35.0% at
December 31, 1999 to 34.2% at March 31, 2000.
As seen in Note 7 of Notes to Consolidated Financial Statements, on
January 1, 2000, Trustmark adopted SFAS No. 133. As allowed by SFAS No. 133, at
the date of initial application of this statement, Trustmark transferred held to
maturity securities with an amortized cost of $237.5 million and a market value
of $237.8 million into the available for sale category. In addition, Trustmark
transferred held to maturity securities with an amortized cost of $135.1 million
and a market value of $131.2 million into the trading category. The effect of
adopting SFAS No. 133 is shown as a cumulative effect of a change in accounting
principle and reduced net income by $2.5 million (net of taxes) during the first
quarter of 2000. In order to offset the effect of adopting SFAS No. 133,
Trustmark sold available for sale equity securities which resulted in realized
gains of $4.6 million or an after tax gain of $2.9 million. These separate
transactions allowed Trustmark to reposition the investment portfolio as well as
provide additional liquidity for investment opportunities in a potentially
higher yielding market environment while having an insignificant impact on
consolidated net income for the first quarter of 2000.
Management continues to stress asset quality as one of the strategic
goals of the securities portfolio which is evidenced by the investment of over
84% 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.
Held to maturity (HTM) securities are carried at amortized cost and
represent those securities that Trustmark both positively intends and has the
ability to hold to maturity. At March 31, 2000, HTM securities totaled $987.0
million and represented 46.4% of the total portfolio, compared to a total of
$1.391 billion representing 64.0% of the total portfolio at the end of 1999.
<PAGE>
Available for sale (AFS) securities are reported at their estimated
fair value with unrealized gains or losses recognized, net of tax, in
accumulated other comprehensive income, a separate component of shareholders'
equity. At March 31, 2000, securities available for sale totaled $1.140 billion
which represented 53.6% of the securities portfolio, an increase from 36.0% at
year end 1999. The valuation adjustment to decrease fair value at March 31, 2000
was $6.5 million, compared to a valuation adjustment to increase fair value at
December 31, 1999 of $3.8 million.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase
agreements were $29.9 million at March 31, 2000, an increase of $259 thousand
when compared with year end 1999. 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 it serves. Growth in the customer base
continued during the first quarter of 2000, as reflected by increases in the
number of Umbrella and Prime of Life deposit accounts. Additional growth during
the first quarter was due to the introduction of Trustmark's Business Advantage,
a tailored package of financial and discounted business services, with a target
market of firms with annual sales up to $3 million.
Total deposits were $3.883 billion at March 31, 2000, compared to
$3.925 billion at December 31, 1999. Time deposits at December 31, 1999
contained a $100 million public CD that matured in January 2000. By excluding
this time deposit from the year end balance, growth in deposits would be
approximately $58 million for the first quarter of 2000. As a component of total
deposits, noninterest-bearing deposits increased to 23.0% at March 31, 2000,
compared with 21.9% at year end 1999. For the same time period, interest-bearing
demand deposits increased slightly to 17.7% of total deposits, savings deposits
increased to 17.1% from 16.2% and time deposits decreased to 42.2% at March 31,
2000, from 44.2% at the end of 1999.
Although the deposit base has remained relatively stable, Trustmark has
increased its reliance on short-term borrowings as funds used for earning assets
outpaced funds provided by core deposits. Short-term borrowings consist of
federal funds purchased, securities sold under repurchase agreements, Federal
Home Loan Bank (FHLB) borrowings and the treasury tax and loan note option
account. Short-term borrowings totaled $2.153 billion at March 31, 2000,
compared to $2.110 billion at December 31, 1999. Trustmark continues to search
for reasonably priced funding alternatives by evaluating new deposit products
and an additional brokered CD program. Significant funding remains available
through FHLB borrowings.
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
<PAGE>
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 March 31, 2000, Trustmark had shareholders' equity of $643.9
million, compared with $655.8 million at year end 1999, a decrease of $11.9
million or 1.8%. The decline is directly related to the common stock repurchase
program. The shareholders' equity to assets ratio was 9.55% at March 31, 2000,
compared with 9.72% at December 31, 1999. Trustmark's book value was $9.31 at
March 31, 2000 and December 31, 1999.
Regulatory Capital
Trustmark and Trustmark National Bank (the Bank) are subject to minimum
capital requirements, which are administered by various Federal regulatory
agencies. These capital requirements, as defined by Federal guidelines, involve
quantitative and qualitative measures of assets, liabilities and certain
off-balance sheet instruments. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements of both Trustmark and the Bank.
Management believes, as of March 31, 2000, that Trustmark and the Bank
meet all capital adequacy requirements to which they are subject. At March 31,
2000, the most recent notification from the Office of the Comptroller of the
Currency (OCC) categorized the Bank as well-capitalized. To be categorized in
this manner, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios (defined in the applicable regulations) as set forth
in the table below. There are no significant conditions or events that have
occurred since the OCC's notification that Management believes have affected the
Bank's present classification.
Actual and minimum regulatory capital amounts and ratios at March 31,
2000, for Trustmark and the Bank are as follows ($ 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 $676,364 16.45% $328,886 8.00%
Trustmark National Bank $668,298 16.28% $328,314 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $622,471 15.14% $164,443 4.00%
Trustmark National Bank $616,819 15.03% $164,157 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $622,471 9.22% $202.490 3.00%
Trustmark National Bank $616,819 9.15% $202,308 3.00%
</TABLE>
<PAGE>
Common Stock Repurchase Program
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 4.48
million shares of common stock in the open market, including 1.26 million during
the first quarter of 2000. This program has allowed Trustmark to increase the
return on equity to shareholders while maintaining sufficient capital levels and
related ratios to satisfy regulatory requirements.
Dividends
Cash dividends paid in the first quarter 2000 totaled $8.7 million, an
increase of $1.1 million or 14.8%, from $7.6 million paid during the same period
in 1999. The payout ratio of cash dividends paid to net income was 33.78% in the
first quarter of 2000 and 31.82% in the first quarter of 1999. Dividends per
share were $0.125 per share for the first quarter of 2000, 19.0% higher than the
$0.105 per share paid in the first quarter of 1999.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income (NII) is interest income generated by
interest-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 interest-earning assets and interest-bearing liabilities, and
their related yields and interest rates, can impact earnings. The net interest
margin (NIM) is computed by dividing fully taxable equivalent NII by average
interest-earning assets and measures how effectively Trustmark utilizes its
interest-earning assets in relationship to the interest cost of funding them.
The fully taxable equivalent (FTE) yield on tax-exempt income has been computed
based on a 35% federal marginal tax rate for the periods shown.
The table below illustrates the net interest margin as a percentage of
average interest-earning assets for the periods shown:
Quarter Ended March 31,
-----------------------
2000 1999
----- -----
Yield on interest-earning assets-FTE 7.76% 7.59%
Rate on interest-bearing liabilities 3.76% 3.30%
----- -----
Net interest margin-FTE 4.00% 4.29%
===== =====
For the quarter ended March 31, 2000, NII decreased $1.1 million, or
1.8%, when compared with the same period in 1999. Average interest-earning
assets for the first quarter of 2000 were $6.227 billion, compared to $5.951
billion for the first quarter of 1999, an increase of $276 million or 4.6%. The
average interest-earning asset growth is attributable to an 8.6% increase in
average loans and a 10.5% increase in average securities when comparing first
quarter 2000 to the same period in 1999. This combination resulted in growth in
interest income of $8.6 million, or 7.8%, when compared to the first quarter of
1999. However, the growth in interest income was offset by an increase in
funding costs that resulted from a change in the mix of interest-bearing
liabilities. While average interest-bearing deposits decreased 2.8% when
compared with the first quarter of 1999, average short-term borrowings increased
20.5%. When this growth is combined with a rising interest rate environment,
interest expense for the first quarter of 2000 increased $9.7 million, or 19.9%,
when compared to the same time period in 1999.
<PAGE>
Provision for Loan Losses
The provision for loan losses reflects Management's assessment of the
adequacy of the allowance for loan losses to absorb inherent 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 2000, Trustmark's provision for loan
losses was $2.1 million, compared with $2.0 million for the same period in 1999.
The provision to average loans was 0.21% for the first quarter of 2000 and 1999.
Trustmark's ratio of the provision for loan losses to average loans continues to
compare favorably with those of peer banks.
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
three months of 2000, as noninterest income, excluding securities gains/losses,
increased $3.7 million, or 15.5%, when compared with the first three months of
1999. The Bottrell business combination completed during 1999 contributed $2.3
million to the increase in noninterest income for the first quarter of 2000.
Other growth in noninterest income can be attributed to fees earned from deposit
products and services.
Service charges for deposit products and services has been the single
largest component of noninterest income and totaled $9.9 million in the first
three months of 2000, compared to $8.9 million for the same period in 1999. This
11.4% increase in service charges has been the result of Trustmark's expansion
of customer relationships, combined with new product offerings. Trustmark's
commercial customer base grew during the quarter due to the successful launch of
Trustmark's Business Banking initiative in January and the introduction of
Trustmark's Business Advantage account.
The second largest component of noninterest income has been other
account charges, fees and commissions, totaling $9.2 million in the first three
months of 2000, compared to $6.4 million in the same period in 1999. This 43.3%
increase is due to Trustmark's expansion of its insurance line of business by
acquiring Bottrell in 1999 and expanding the sales of annuity products. This
combination of new products and services contributed $2.5 million to the growth
of other account charges, fees and commissions during the first quarter of 2000.
The remaining growth came primarily from fees on various investment and cash
management services.
Mortgage servicing fees totaled $3.7 million and $3.5 for the first
three months of 2000 and 1999, respectively, representing an increase of $174
thousand, or 5.0%. At March 31, 2000, Trustmark serviced $3.7 billion in
mortgage loans.
Trust service income totaled $3.5 million in the first three months of
2000 and $3.6 million in the same period in 1999. Trustmark has maintained its
level of trust service income while providing a broader range of investment
alternatives at lower spreads than Trustmark's proprietary Performance Funds. At
March 31, 2000, Trustmark continues to be one of the largest providers of asset
management services in Mississippi, with assets held under administration of
$6.5 billion.
Other income totaled $1.2 million for the first quarter of 2000,
compared to $1.3 million for the same period in 1999. Contributing to the change
in other income was $1.3 million in nontaxable benefits received on a key man
life insurance policy, which offset a market write-down of $655 thousand on
trading account securities and a reduction in gain on sale of loans of $966
thousand. The decrease in gain on sale of loans can be attributed to a higher
interest rate environment, which impaired the sale of mortgage loans.
<PAGE>
Gross securities gains of $4.6 million were realized during the first
quarter of 2000 from sales of AFS equity securities resulting in an after tax
gain of $2.9 million. As a result of adopting SFAS No. 133, Trustmark recognized
a loss of $3.8 million on the transfer of HTM securities into the trading
security category. This loss is seen as the primary component of the cumulative
effect of a change in accounting principle and reduced net income by $2.5
million, net of taxes. The net effect of these separate transactions primarily
created an insignificant impact on consolidated net income for the first quarter
of 2000. During the first quarter of 2000, there were no sales of securities
held to maturity.
Noninterest Expenses
Total noninterest expenses increased $2.1 million, or 4.7%, in the
first quarter of 2000, when compared to the same period in 1999. Total
noninterest expenses were $47.4 million in the first three months of 2000,
compared with $45.3 million during the same period in 1999. The Bottrell
business combination completed during 1999 contributed $1.7 million to the
increase in noninterest expenses for the first quarter of 2000.
The efficiency ratio, which is total noninterest expenses as a
percentage of tax equivalent net interest income plus noninterest income, is a
primary measure of the effectiveness of noninterest expense control. During
2000, Trustmark continues to exceed its corporate goal of an efficiency ratio of
55% or less with an efficiency ratio of 53.06%. This compared with an efficiency
ratio of 52.34% for the first quarter of 1999.
Salaries and employee benefits, which represent the largest category of
noninterest expenses, were $25.4 million in the first three months of 2000, an
increase of $1.3 million, or 5.6%, when compared to the first three months of
1999. The Bottrell acquisition contributed $1.1 million to the increase in
salaries and employee benefits. At March 31, 2000, Trustmark had 2,299 full-time
equivalent employees, compared to 2,255 at March 31, 1999.
All other expense categories remained well controlled for the first
quarter of 2000, as evidenced by an increase of $777 thousand, or 3.7%, when
compared to the same time period in 1999. Management will continue to closely
monitor the level of noninterest expenses as part of its strategic plan to
improve the profitability of Trustmark.
Income Taxes
For the three months ended March 31, 2000, Trustmark's combined
effective tax rate was 33.7%, compared with 35.6% for the first three months of
1999. The reduction in Trustmark's effective tax rate is due primarily to the
receipt of nontaxable benefits received on a key man life insurance policy in
the first quarter of 2000.
RECENT PRONOUNCEMENTS - DERIVATIVES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. During 1999, the FASB issued 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," which deferred
the effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000.
<PAGE>
On January 1, 2000, Trustmark adopted SFAS No. 133. As allowed by SFAS
No. 133, at the date of initial application of this statement, Trustmark
transferred held to maturity securities with an amortized cost of $237.5 million
and a market value of $237.8 million into the available for sale category. In
addition, Trustmark transferred held to maturity securities with an amortized
cost of $135.1 million and a market value of $131.2 million into the trading
category. The effect of adopting SFAS No. 133 is shown as a cumulative effect of
a change in accounting principle and reduced net income by $2.5 million (net of
taxes) during the first quarter of 2000. In order to offset the effect of
adopting SFAS No. 133, Trustmark sold available for sale equity securities,
which resulted in realized gains of $4.6 million or an after tax gain of $2.9
million. These separate transactions allowed Trustmark to reposition the
investment portfolio as well as provide additional liquidity for investment
opportunities in a potentially higher yielding market environment, while having
an insignificant impact on consolidated net income for the first quarter of
2000.
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments for the quarter ended March 31,
2000, 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. There were no reports on Form 8-K filed during the first quarter of
2000.
<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/ Gerard R. Host
---------------------- -------------------
Richard G. Hickson Gerard R. Host
President & Chief Treasurer (Principal
Executive Officer Financial Officer)
DATE: May 11, 2000 DATE: May 11, 2000
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 262,926
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 29,858
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,140,477
<INVESTMENTS-CARRYING> 986,938
<INVESTMENTS-MARKET> 970,277
<LOANS> 4,063,236
<ALLOWANCE> 65,850
<TOTAL-ASSETS> 6,741,221
<DEPOSITS> 3,882,508
<SHORT-TERM> 2,153,458
<LIABILITIES-OTHER> 61,374
<LONG-TERM> 0
0
0
<COMMON> 14,409
<OTHER-SE> 629,472
<TOTAL-LIABILITIES-AND-EQUITY> 6,741,221
<INTEREST-LOAN> 82,742
<INTEREST-INVEST> 34,929
<INTEREST-OTHER> 375
<INTEREST-TOTAL> 118,046
<INTEREST-DEPOSIT> 28,083
<INTEREST-EXPENSE> 58,135
<INTEREST-INCOME-NET> 59,911
<LOAN-LOSSES> 2,118
<SECURITIES-GAINS> 4,641
<EXPENSE-OTHER> 47,426
<INCOME-PRETAX> 42,418
<INCOME-PRE-EXTRAORDINARY> 28,140
<EXTRAORDINARY> 0
<CHANGES> (2,464)
<NET-INCOME> 25,676
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 4.00
<LOANS-NON> 17,731
<LOANS-PAST> 2,399
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 65,850
<CHARGE-OFFS> (3,771)
<RECOVERIES> 1,653
<ALLOWANCE-CLOSE> 65,850
<ALLOWANCE-DOMESTIC> 60,295
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,555
</TABLE>
