ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following provides a narrative discussion and analysis of Trustmark Corporation’s (Trustmark) financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements and the supplemental financial data included elsewhere in this report.
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future” or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements include, but are not limited to, statements relating to anticipated future operating and financial performance measures, including net interest margin, credit quality, business initiatives, growth opportunities and growth rates, among other things, and encompass any estimate, prediction, expectation, projection, opinion, anticipation, outlook or statement of belief included therein as well as the management assumptions underlying these forward-looking statements. You should be aware that the occurrence of the events described under the caption Item 1A. Risk Factors, in this report could have an adverse effect on our business, results of operations and financial condition. 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.
Risks that could cause actual results to differ materially from current expectations of Management include, but are not limited to, changes in the level of nonperforming assets and charge-offs, local, state and national economic and market conditions, including the extent and duration of the current volatility in the credit and financial markets, changes in our ability to measure the fair value of assets in our portfolio, material changes in the level and/or volatility of market interest rates, the performance and demand for the products and services we offer, including the level and timing of withdrawals from our deposit accounts, the costs and effects of litigation and of unexpected or adverse outcomes in such litigation, our ability to attract noninterest-bearing deposits and other low-cost funds, competition in loan and deposit pri cing, as well as the entry of new competitors into our markets through de novo expansion and acquisitions, economic conditions and monetary and other governmental actions designed to address the level and volatility of interest rates and the volatility of securities, currency and other markets, the enactment of legislation and changes in existing regulations, or enforcement practices, or the adoption of new regulations, changes in accounting standards and practices, including changes in the interpretation of existing standards, that affect our consolidated financial statements, changes in consumer spending, borrowings and savings habits, technological changes, changes in the financial performance or condition of our borrowers, changes in our ability to control expenses, changes in our compensation and benefit plans, greater than expected costs or difficulties related to the integration of new products and lines of business, natural disasters, environmental disasters, acts of war or terrorism and other risks described in our filings with the Securities and Exchange Commission.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Except as required by law, we undertake no obligation to update or revise any of this information, whether as the result of new information, future events or developments or otherwise.
Executive Overview
During 2010, there have been many signs that the economy is recovering; however, the recovery remains fragile and is still threatened by weak labor markets, household and business uncertainty and tight credit conditions. The effects of the financial crisis and recession are expected to persist for some time, especially as the magnitude of economic distress facing local markets places continued pressure on asset quality and earnings, with the potential for undermining the stability of the banking organizations that serve these markets.
Management has continued to carefully monitor the impact of illiquidity in the financial markets, values of securities and other assets, loan performance, default rates and other financial and macro-economic indicators, in order to navigate the challenging economic environment. In order to reduce exposure to certain loan categories, Management has continued to reduce certain loan classifications, including construction, land development and other land loans and indirect auto loans. During 2010 and 2009, Trustmark and TNB’s capital ratios exceeded the minimum levels required to be ranked well-capitalized.
TNB did not make significant changes to its loan underwriting standards during 2010. TNB’s willingness to make loans to qualified applicants that meet its traditional, prudent lending standards has not changed. However, TNB has revised its concentration limits of commercial real estate loans, which adhere to the most recent interagency guidelines. As a result, TNB has been cautious in granting credit involving certain categories of real estate, particularly in Florida. Furthermore, in the current economic downturn, TNB makes fewer exceptions to its loan policy as compared to prior periods.
Management has continued its practice of maintaining excess funding capacity to provide Trustmark with adequate liquidity for its ongoing operations. In this regard, Trustmark benefits from its strong deposit base, its highly liquid investment portfolio and its access to funding from a variety of external funding sources such as upstream Federal funds lines, Federal Reserve Discount Window, FHLB advances, and brokered deposits.
Critical Accounting Policies
Trustmark’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and follow general practices within the financial services industry. Application of these accounting principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual financial results could differ from those estimates.
Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. These critical accounting policies are described in detail below.
For additional information regarding the accounting policies discussed below, please see the notes to Trustmark’s Consolidated Financial Statements set forth in Item 8 – Financial Statements and Supplementary Data.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for estimated loan losses charged against net income. The allowance for loan losses is maintained at a level believed adequate by management, based on estimated probable losses within the existing loan portfolio. Each such evaluation is inherently subjective, as it requires a range of estimates, assumptions and judgments as to the facts and circumstances of the particular situation, including the amounts and timings of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
Trustmark’s allowance for probable loan loss methodology is based on guidance provided in SEC Staff Accounting Bulletin (SAB) No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues,” as well as on other regulatory guidance. The allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 310 “Receivables,” based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with FASB ASC Topic 450, “Contingencies,” based on historical loan loss experience for similar loans with similar characteristics and trends; and (iii) qualitative risk valuation allowances determined in accordan ce with FASB ASC Topic 450 based on general economic conditions and other qualitative risk factors, both internal and external, to Trustmark. Each of these elements calls for estimates, assumptions and judgments, as described below.
Loans-Specific Valuation Allowances
Valuation allowances for probable losses on specific commercial loans are based on an ongoing analysis and evaluation of classified loans. Loans are classified based on Trustmark’s internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability and willingness to repay; (ii) the value of any underlying collateral; (iii) the ability of any guarantor to perform its payment obligation, and (iv) the economic environment and industry in which the borrower operates. Once a loan is classified, it is subject to periodic review to determine whether or not the loan is impaired. If determined to be impaired, the loan is evaluated using one of the valuation criteria permitted under FASB ASC Topic 310. The amount of impairment, if any, becomes a specific allo cated portion of the allowance for loan losses and segregated from any pool of loans. Specific valuation allowances are determined based upon analysis of the factors identified above, among other things. If, after review, a specific valuation allowance is not assigned to the loan and the loan is not considered to be impaired, the loan remains with a pool of similar risk-rated loans that is assigned a valuation allowance appropriate for non-impaired classified loans, based on Trustmark’s internal loan grading system.
Historical Valuation Allowances
Historical valuation allowances are calculated for pools of loans based on the historical loss experience of specific types of loans. Trustmark calculates historical net charge-off ratios for pools of loans with similar characteristics based on the proportion of actual charge-offs and recoveries experienced to the total population of loans in the pool. The historical net loss ratios are periodically updated based on subsequent net charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. Trustmark’s pools of similar loans include commercial and industrial loans, commercial loans secured by real estate, consumer loans and 1-4 family residen tial mortgages.
Qualitative Risk Valuation Allowances
These allowances are based on general economic conditions and other qualitative factors, both internal and external to the bank. These allowances are determined by evaluating a range of potential factors, which may include one or more of the following: (i) the experience, ability and effectiveness of the bank’s lending management and staff assigned to the loan; (ii) adherence to Trustmark’s loan policies, procedures and internal controls; (iii) impact of recent performance trends by region; (iv) national and regional economic trends and conditions; (v) concentrations of commercial and consumer credits in Trustmark’s loan portfolio by region; (vi) collateral, financial and underwriting exception trends by region; (vii) the impact of recent significant natural disasters or catastrophes and (viii) the impact o f recent acquisitions.
Management evaluates the degree of risk that these components have on the quality of the loan portfolio not less frequently than quarterly. The results are then input into a “qualitative factor allocation matrix” to determine an appropriate qualitative risk allowance.
A significant shift in one or more factors identified above could result in a material change to Trustmark’s allowance for loan losses. For example, if there were changes in one or more of these estimates, assumptions or judgments as they relate to a portfolio of commercial loans, Trustmark could find that it needs to increase the level of future provisions for possible loan losses in respect of that portfolio. Additionally, credit deterioration of specific borrowers due to changes in these factors could cause the risk rating of those borrowers’ commercial loans on Trustmark’s internal loan grading system to shift to a more severe risk rating. As a result, Trustmark could find that it needs to increase the level of future provisions for possible loan losses in respect of these loans.&# 160; Given the interdependent and highly factual nature of many of these estimates, assumptions and judgments, it is not possible to provide meaningful quantitative estimates of the impact of any such potential shifts.
Mortgage Servicing Rights
Trustmark recognizes as an asset the rights to service mortgage loans for others (mortgage servicing rights, or MSR) with respect to loans originated by Trustmark or acquired through its wholesale network. Trustmark carries MSR on its balance sheet at fair value.
Trustmark determines the fair value of MSR using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, ancillary income and late fees.
To reduce the sensitivity of earnings to interest rate fluctuations, Trustmark utilizes exchange-traded derivative instruments such as Treasury note futures contracts and exchange-traded options to achieve a fair value return that offsets the changes in fair value of MSR attributable to interest rates, depending on the amount of MSR hedged. Trustmark may choose not to fully hedge the MSR, partly because origination volume tends to act as a natural hedge. For example, as interest rates decline, the fair value of the MSR generally decreases and fees from new originations tend to increase. Conversely, as interest rates increase, the fair value of the MSR generally increases, while fees from new originations tend to decline.
Trustmark utilizes a dynamic and sophisticated model, administered by a third party, to estimate the fair value of its MSR. Management reviews all significant assumptions quarterly. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.
By way of example, an increase in either the prepayment speed or discount rate assumption will result in a decrease in the fair value of the MSR, while a decrease in either assumption will result in an increase in the fair value of the MSR. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and discount rates. These fluctuations can be rapid and may continue to be significant. Therefore, estimating prepayment speed and/or discount rates within ranges that market participants would use in determining the fair value of MSR requires significant management judgment.
At December 31, 2010, the MSR fair value was approximately $51.2 million. The impact on the MSR fair value of a 10% adverse change in prepayment speed or a 100 basis point increase in discount rate at December 31, 2010, would be a decline in fair value of approximately $2.1 million and $1.6 million, respectively. Changes of equal magnitude in the opposite direction would produce increases in fair value in the same respective amounts.
Goodwill and Identifiable Intangible Assets
Trustmark records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value as required by FASB ASC Topic 805, “Business Combinations.” The carrying amount of goodwill at December 31, 2010 totals $246.7 million for the General Banking segment and $44.4 million for the Insurance segment, a consolidated total of $291.1 million. Trustmark’s goodwill is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate it may be impaired. Trustmark’s identifiable intangible assets, which totaled $16.3 million at December 31, 2010, are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the car rying amount.
The initial recording and subsequent impairment testing of goodwill requires subjective judgments concerning estimates of the fair value of the acquired assets. The goodwill impairment test is performed in two phases. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure, or a second step, compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of go odwill exceeds its implied fair value. Trustmark performed an annual impairment test of goodwill for reporting units contained in both the General Banking and Insurance segments as of October 1, 2010, 2009 and 2008, respectively, which indicated that no impairment charge was required. The impairment test for the General Banking reporting unit utilized valuations based on comparable deal values for financial institutions while the test for the Insurance reporting unit utilizes varying valuation scenarios for the multiple of earnings before interest, income taxes, depreciation and amortization (EBITDA) method based on recent acquisition activity. At December 31, 2010, Trustmark also performed an additional impairment analysis on reporting units in both the General Banking and Insurance segments due to market conditions and concluded that no impairment charge was required. The analysis indicated that the Insurance Division’s fair value has increased to 104.9% of book value at December 31, 2010, compared with 104.6% reported at September 30, 2010 and 102.1% reported at June 30, 2010. Significant changes in future profitability and value of our reporting units could affect Trustmark’s impairment evaluation.
The carrying amount of Trustmark’s identifiable intangible assets subject to amortization is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition. That assessment shall be based on the carrying amount of the intangible assets subject to amortization at the date it is tested for recoverability. Intangible assets subject to amortization shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
Fair value may be determined using market prices, comparison to similar assets, market multiples and other determinants. Factors that may significantly affect the estimates include, among others, competitive forces, customer behavior and attrition, changes in revenue growth trends and specific industry or market sector conditions. Other key judgments in accounting for intangibles include determining the useful life of the particular asset and classifying assets as either goodwill (which does not require amortization) or identifiable intangible assets (which does require amortization).
Other Real Estate Owned
Other real estate owned, consisting of assets that have been acquired through foreclosure, is recorded at the lower of cost or estimated fair value less the estimated cost of disposition. Fair value is based on independent appraisals and other relevant factors. Other real estate owned is revalued on an annual basis or more often if market conditions necessitate. Valuation adjustments required at foreclosure are charged to the allowance for loan losses. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged to net income as other expense. Significant judgments and complex estimates are required in estimating the fair value of other real estate, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatilit y, as experienced in recent years. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate.
Defined Benefit Plans
Trustmark’s plan assets, projected benefit liabilities and pension cost are determined utilizing actuarially-determined present value calculations. The valuation of the projected benefit obligation and net periodic pension expense for Trustmark’s plans (Capital Accumulation Plan and Supplemental Retirement Plan) requires management to make estimates regarding the amount and timing of expected cash outflows. Several variables affect these calculations, including (i) size and characteristics of the associate population, (ii) discount rate, (iii) expected long-term rate of return on plan assets and (iv) recognition of actual returns on plan assets. Below is a brief description of these variables and the effect they have on pension cost.
| · | Population and Characteristics of Associates. Pension cost is directly related to the number of associates covered by the plan and characteristics such as salary, age, years of service and benefit terms. In an effort to control expenses, the Board voted to freeze plan benefits effective May 15, 2009. Individuals will not earn additional benefits, except for interest as required by the IRS regulations, after the effective date. Associates will retain their previously earned pension benefits. At December 31, 2010, the pension plan census totaled 2,814 associates. |
| · | Discount Rate. The discount rate utilized in determining the present value of the future benefit obligation is currently 5.00%. The discount rate for each plan is determined by matching the expected cash flows of each plan to a yield curve based on long term, high quality fixed income debt instruments available as of the measurement date (December 31, 2010). The discount rate is reset annually on the measurement date to reflect current economic conditions. |
If Trustmark assumes a 1.00% increase or decrease in the discount rate for Trustmark’s defined benefit plans and kept all other assumptions constant, the benefit cost associated with these plans would decrease or increase by approximately $667 thousand and $769 thousand, respectively.
| · | Expected Long-Term Rate of Return on Plan Assets. Based on historical experience and market projection of the target asset allocation set forth in the investment policy for the Capital Accumulation Plan, the current pre-tax expected rate of return on the plan assets is 8%. This expected rate of return is dependent upon the asset allocation decisions made with respect to plan assets. |
Annual differences, if any, between expected and actual return are included in the unrecognized net actuarial gain or loss amount. Trustmark generally amortizes any cumulative unrecognized net actuarial gain or loss in excess of 10% of the greater of the projected benefit obligation or the fair value of the plan assets.
If Trustmark assumes a 1.00% increase or decrease in the expected long-term rate of return for the Capital Accumulation Plan, holding all other actuarial assumptions constant, the pension cost would decrease or increase by approximately $742 thousand.
| · | Recognition of Actual Asset Returns. Trustmark utilizes the provision of FASB ASC Topic 715, which allow for the use of asset values that smoothes investment gains and losses over a period of up to five years. This could partially mitigate the impact of short-term gains or losses on reported net income. |
| · | Other Actuarial Assumptions. To estimate the projected benefit obligation, actuarial assumptions are required to be made by management, including mortality rate, retirement rate, disability rate and the rate of compensation increases. These factors do not change significantly over time, so the range of assumptions and their impact on net periodic pension expense is generally limited. |
Contingent Liabilities
Trustmark estimates contingent liabilities based on management’s evaluation of the probability of outcomes and their ability to estimate the range of exposure. As stated in FASB ASC Topic 450, a liability is contingent if the amount is not presently known but may become known in the future as a result of the occurrence of some uncertain future event. Accounting standards require that a liability be recorded if management determines that it is probable that a loss has occurred, and the loss can be reasonably estimated. It is implicit in this standard that it must be probable that the loss will be confirmed by some future event. As part of the estimation process, management is required to make assumptions about matters that are, by their nature, highly uncertain. The assessment of contingent liabilities, including legal contingencies and income tax liabilities, involves the use of critical estimates, assumptions and judgments. Management’s estimates are based on their belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures. However, there can be no assurance that future events, such as court decisions or Internal Revenue Service positions, will not differ from management’s assessments. Whenever practicable, management consults with outside experts (attorneys, consultants, claims administrators, etc.) to assist with the gathering and evaluation of information related to contingent liabilities.
Recent Legislative Developments
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) into law. The Dodd-Frank Act represents very broad and complex legislation that enacts sweeping changes to the financial services industry that will have significant regulatory and legal consequences for banks now and for years to come. The more significant provisions of the Dodd-Frank Act include the following:
| · | Creates the Financial Stability Oversight Council, which will identify, monitor and address systemic risks posed by large and complex banks and nonbank entities as well as certain products and services. |
| · | Requires application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. |
| · | Changes the assessment base for federal deposit insurance from the amount of insured deposits to average consolidated assets less average tangible equity. The Dodd-Frank Act increases the minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35% of estimated insurable deposits, or the comparable percentage of the assessment base by September 30, 2020. The FDIC must offset the effect of the increase in the minimum reserve ratio on insured depository institutions with total consolidated assets of less than $10 billion. |
| · | Makes permanent the $250,000 limit for federal deposit insurance and provides unlimited federal deposit insurance until December 31, 2012 for noninterest-bearing demand transaction accounts at all insured depository institutions. |
| · | Directs the Federal banking regulatory agencies to make capital requirements countercyclical – meaning that additional capital will be required in times of economic expansion, but less capital will be required during periods of economic downturn. |
| · | Requires a bank holding company to be well-capitalized and well-managed in order to be approved for an interstate bank acquisition. In addition, the appropriate federal banking agency must determine that the resulting bank will continued to be well-capitalized and well-managed after the transaction. |
| · | Repeals the prohibition on payments of interest by banks on demand deposit accounts held by businesses, beginning July 21, 2011. |
| · | Imposes comprehensive regulation of the over-the-counter derivatives market, which includes certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself. |
| · | Implements structural changes in the issuance of certain asset-backed securities to require risk retention by securitizers and originators at a default level of up to 5% to promote the credit quality of the assets being securitized. |
| · | Implements corporate governance revisions intended to enhance shareholder understanding of executive compensation, to comprise independence standards upon outside compensation consultants and to increase shareholder involvement in the compensation process. Also provides that federal bank regulators shall issue enhanced reporting requirements for incentive-based compensation of any “covered financial institution,” and that federal bank regulators shall prescribe regulations prohibiting any incentive-based payment arrangement that encourages inappropriate risk-taking by the covered financial institution by paying any executive officer, employee, director or principal shareholder of the covered financial institution “excessive compensation, fees, or benefits” or that “could lead to material loss to the covered financial inst itution.” |
| · | Centralizes responsibility for consumer financial protection by creation of the Consumer Financial Protection Bureau (CFPB), which will be responsible for issuing rules, orders and guidance implementing federal consumer financial laws. If and when the bank’s consolidated assets exceed $10 billion, the CFPB will become the exclusive regulator of the bank and all of its affiliates for consumer protection purposes. Until that time, the CFPB has limited jurisdiction over the bank and its affiliate’s operations, with the exclusive enforcement authority resting with the bank’s primary federal banking regulator, and the CFPB’s role limited to requiring reports and participating in examinations with the primary federal banking regulator. |
| · | Amends the Electronic Fund Transfer Act to authorize the Federal Reserve to issue regulations regarding any interchange fee that an issuer may receive or charge for an electronic debit card transaction. Requires that fees must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. |
| · | Increases the potential for state intervention in the operations of federally chartered depository institutions by narrowing the circumstances in which preemption of state law may apply and by providing statutory recognition of a role for state law enforcement authorities in regard to federally chartered depository institutions. |
| · | Implements mortgage reforms by including provisions, which require mortgage originators to act in the best interests of consumers and to take steps to seek to ensure that consumers will have the capability to repay loans that they obtain. Also creates incentives for lenders to offer loans that better protect the interests of consumers and provide additional protection for borrowers under high cost loans. |
As the details of the Dodd-Frank Act turn into specific regulatory requirements, there will be business impacts across a myriad of industries, not just banking. Some of those impacts are readily anticipated such as the change to interchange fees, which can be found in the Bank Card and Other Fees section of Noninterest Income found later in Item 7. However, other impacts are subtle and do not stem directly from language in the new law. Many of these more subtle impacts will likely only emerge after months and perhaps years of further analysis and evaluation. In addition, certain provisions that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Finally, implementation of certain significant provisions of the Dodd-Frank Act will occur over a two-to-three year period. Because many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years, it is difficult to anticipate the potential impact on Trustmark and its customers. It is clear, however, that the implementation of the Dodd-Frank Act will require Management to invest significant time and resources to evaluate the potential impact of this Act. Management will continue to evaluate this impact as more details regarding the implementation of these provisions become available.
Financial Highlights
Net income available to common shareholders totaled $100.6 million for the year ended December 31, 2010, compared with $73.0 million for 2009 and $91.1 million for 2008. For 2010, Trustmark’s basic earnings per common share were $1.58 compared with $1.26 for 2009 and $1.59 for 2008. Diluted earnings per share were $1.57 for 2010, $1.26 for 2009 and $1.59 for 2008. At December 31, 2010, Trustmark reported gross loans, including loans held for sale, of $6.213 billion, total assets of $9.554 billion, total deposits of $7.045 billion and total shareholders’ equity of $1.149 billion. Trustmark’s financial performance for 2010 resulted in a return on average tangible common shareholders’ equity of 12.31%, a return on common equity of 8.79% and a return on assets of 1.08%. Th ese compared with 2009 ratios of 10.80% for return on average tangible common shareholders’ equity, 7.22% for return on common equity and 0.98% for return on assets, while in 2008 the return on average tangible common shareholders’ equity was 14.88%, the return on common equity was 9.62% and the return on assets was 1.01%.
Net income available to common shareholders for 2010 increased $27.6 million, or 37.8%, compared to 2009. The increase was primarily the result of a decline in the loan loss provision of $27.6 million and the elimination of preferred stock dividends and the accretion of preferred stock discount during 2010, which increased net income available to common shareholders by approximately $20.0 million. These increases in net income available to common shareholders were partially offset by growth in noninterest expense of $17.4 million primarily resulting from increased real estate/foreclosure expenses of $11.6 million. For additional information on the changes in noninterest income and noninterest expense, please see accompanying sections included in Results of Operations.
Trustmark’s 2010 provision for loan losses totaled $49.5 million, a decrease of $27.6 million when compared to 2009, while total charge-offs decreased to $71.9 million during 2010, compared to $80.7 million for 2009 and $71.8 million for 2008. Total nonperforming assets were $229.6 million at December 31, 2010, a decrease of $1.6 million compared to December 31, 2009. In addition, the percentage of loans that are 30 days or more past due and nonaccrual loans fell in 2010 to 3.46% compared to 4.49% in 2009 while continuing to be slightly higher than 3.20% for 2008. The decline in 2010 exhibits the improvement in Trustmark’s credit quality as significant progress was made in the resolution of credit issues in the Florida market.
An acceleration or significantly extended deterioration in loan performance and default levels, a significant increase in foreclosure activity, a material decline in the value of Trustmark’s assets (including loans and investment securities), or any combination of more than one of these trends could have a material adverse effect on Trustmark’s financial condition or results of operations.
Significant Nonrecurring Transactions
Presented below are adjustments to net income as reported in accordance with U.S. GAAP resulting from significant nonrecurring items occurring during the periods presented. Management believes this information will help readers compare Trustmark’s current results to those of prior periods as presented in the accompanying selected financial data table ($ in thousands, except for per share amounts) and the audited consolidated financial statements. Readers are cautioned that these adjustments are not permitted under GAAP. Trustmark encourages readers to consider its audited consolidated financial statements and the notes related thereto in their entirety, and not to rely on any single financial measure. For more information on Financial Statements and Supplementary Data, please refer to I tem 8 of this report.
| | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | Amount | | | Basic EPS | | | Amount | | | Basic EPS | | | Amount | | | Basic EPS | |
| | | | | | | | | | | | | | | | | | | |
| Net Income available to common shareholders (GAAP) | | $ | 100,636 | | | $ | 1.576 | | | $ | 73,049 | | | $ | 1.263 | | | $ | 91,064 | | | $ | 1.589 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Significant nonrecurring transactions (net of taxes): | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition termination fee, net of expenses | | | (811 | ) | | | (0.013 | ) | | | - | | | | - | | | | - | | | | - | |
| Accelerated preferred stock accretion | | | - | | | | - | | | | 8,234 | | | | 0.142 | | | | - | | | | - | |
| FDIC special assessment | | | - | | | | - | | | | 2,700 | | | | 0.047 | | | | - | | | | - | |
| Capital accumulation plan curtailment gain | | | - | | | | - | | | | (1,169 | ) | | | (0.020 | ) | | | - | | | | - | |
| MasterCard Class A Common Stock sale | | | - | | | | - | | | | - | | | | - | | | | (3,308 | ) | | | (0.058 | ) |
| Visa litigation contingency | | | - | | | | - | | | | - | | | | - | | | | (936 | ) | | | (0.016 | ) |
| | | | (811 | ) | | | (0.013 | ) | | | 9,765 | | | | 0.169 | | | | (4,244 | ) | | | (0.074 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income available to common shareholders adjusted for significant nonrecurring transactions (Non-GAAP) | | $ | 99,825 | | | $ | 1.563 | | | $ | 82,814 | | | $ | 1.432 | | | $ | 86,820 | | | $ | 1.515 | |
Acquisition Termination Fee, Net of Expenses
On September 21, 2010, Trustmark and Cadence Financial Corporation, a Mississippi corporation (Cadence) with assets of $1.9 billion at June 30, 2010, entered into an Agreement and Plan of Reorganization (Agreement) pursuant to which Cadence agreed to merge with and into Trustmark (the Merger). The Agreement contemplated that Cadence’s wholly-owned banking subsidiary, Cadence Bank, N.A., would be merged with and into TNB immediately following the Merger. On October 6, 2010, Trustmark received notice that the board of directors of Cadence had accepted another acquisition proposal and terminated the Agreement and Plan of Reorganization with Trustmark dated September 21, 2010. This action triggered a termination fee of $2.0 million from Cadenc e, which was recognized in other noninterest income and was offset by direct expenses of $687 thousand included in other noninterest expense.
Accelerated Preferred Stock Accretion
On December 9, 2009, Trustmark completed the repurchase of its 215,000 shares of Senior Preferred Stock from the Treasury at a purchase price of $215.0 million plus a final accrued dividend of $716.7 thousand. The repurchase of the Senior Preferred Stock resulted in a one-time, non-cash charge of $8.2 million to net income available to common shareholders in Trustmark’s fourth quarter 2009 financial statements for the unaccreted discount recorded at the date of issuance of the Senior Preferred Stock.
FDIC Special Assessment
In May 2009, the FDIC adopted a final rule imposing a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. This special assessment was implemented in light of the FDIC’s projections of a substantially higher rate of institution failures during 2009 and in the next few years, which would create a significant decrease in the reserve ratio of the Deposit Insurance Fund. Trustmark’s special assessment resulted in an after-tax expense of $2.7 million.
Capital Accumulation Plan Curtailment Gain
In an effort to control expenses, Trustmark’s Board voted to freeze plan benefits of the Capital Accumulation Plan effective May 15, 2009. During the second quarter of 2009, Trustmark recorded an after-tax curtailment gain of $1.2 million as a result of the freeze in plan benefits due to the recognition of the prior service credits previously included in accumulated other comprehensive loss.
MasterCard Class A Common Stock Sale
During the second quarter of 2008, MasterCard offered Class B shareholders the right to convert their stock into marketable Class A shares. Trustmark exercised its right to convert its shares and sold them through a liquidation program. The conversion and sale resulted in an after-tax gain of $3.3 million.
Visa Litigation Contingency
In the first quarter of 2008, Trustmark recognized an after-tax gain of $936 thousand resulting from the Visa initial public offering. This gain more than offsets an after-tax accrual of $494 thousand that Trustmark recorded in the fourth quarter of 2007 for the Visa litigation contingency relating to the Visa USA Inc. antitrust lawsuit settlement with American Express and other pending Visa litigation (reflecting Trustmark’s share as a Visa member). At December 31, 2010 and 2009, Trustmark’s contingent obligation for the Visa litigation, net of Visa’s litigation escrow account, was $150 thousand and $225 thousand, respectively.
Government Programs
During 2009, Trustmark participated in two government programs. The first was the Trouble Assets Relief Program Capital Purchase Program sponsored by the Treasury, and the second was the Term Auction Facility (TAF) sponsored by the Federal Reserve Bank of New York. During the fourth quarter of 2009, Trustmark repurchased the Senior Preferred Stock and Warrant from the Treasury, which ended its involvement in the TARP CPP. In addition, at December 31, 2009, Trustmark no longer participated in TAF in favor of other funding sources and had no TAF borrowings outstanding. During 2010, the TAF program was terminated by the Federal Reserve Bank of New York.
Non-GAAP Financial Measures
In addition to capital ratios defined by GAAP and banking regulators, Trustmark utilizes various tangible common equity measures when evaluating capital utilization and adequacy. Tangible common equity, as defined by Trustmark, represents common equity less goodwill and identifiable intangible assets.
Trustmark believes these measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of Trustmark’s capitalization to other organizations. These ratios differ from capital measures defined by banking regulators principally in that the numerator excludes shareholders’ equity associated with preferred securities, the nature and extent of which varies across organizations.
These calculations are intended to complement the capital ratios defined by GAAP and banking regulators. Because GAAP does not include these capital ratio measures, Trustmark believes there are no comparable GAAP financial measures to these tangible common equity ratios. Despite the importance of these measures to Trustmark, there are no standardized definitions for them and, as a result, Trustmark’s calculations may not be comparable with other organizations. Also there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its audited consolidated financial statements and the notes related thereto in their entirety and not to rely on any single financial measure. The following table reconciles Trustmark’s calculation of these measure s to amounts reported under GAAP.
In addition, Trustmark presents in this report a table which illustrates the impact of significant nonrecurring transactions on net income available to common shareholders as reported under GAAP. For this table, please see Financial Highlights – Significant Nonrecurring Transactions shown above.
| Reconciliation of Non-GAAP Financial Measures | | | | | | | | | |
| ($ in thousands, except per share data) | | | | | | | | | | |
| | | | | Years Ended December 31, | |
| | | | | 2010 | | | 2009 | | | 2008 | |
| TANGIBLE COMMON EQUITY | | | | | | | | | | |
| AVERAGE BALANCES | | | | | | | | | | |
| Total shareholders' equity | | | $ | 1,144,481 | | | $ | 1,205,642 | | | $ | 970,061 | |
| Less: | Preferred stock | | | | - | | | | (193,616 | ) | | | (22,971 | ) |
| Total average common equity | | | | 1,144,481 | | | | 1,012,026 | | | | 947,090 | |
| Less: | Goodwill | | | | (291,104 | ) | | | (291,104 | ) | | | (291,153 | ) |
| | Identifiable intangible assets | | | | (18,149 | ) | | | (21,920 | ) | | | (26,069 | ) |
| Total average tangible common equity | | | $ | 835,228 | | | $ | 699,002 | | | $ | 629,868 | |
| | | | | | | | | | | | | | | |
| PERIOD END BALANCES | | | | | | | | | | | | | |
| Total shareholders' equity | | | $ | 1,149,484 | | | $ | 1,110,060 | | | $ | 1,178,466 | |
| Less: | Preferred stock | | | | - | | | | - | | | | (205,126 | ) |
| Total common equity | | | | 1,149,484 | | | | 1,110,060 | | | | 973,340 | |
| Less: | Goodwill | | | | (291,104 | ) | | | (291,104 | ) | | | (291,104 | ) |
| | Identifiable intangible assets | | | | (16,306 | ) | | | (19,825 | ) | | | (23,821 | ) |
| Total tangible common equity | (a) | | $ | 842,074 | | | $ | 799,131 | | | $ | 658,415 | |
| | | | | | | | | | | | | | | |
| TANGIBLE ASSETS | | | | | | | | | | | | | |
| Total assets | | | $ | 9,553,902 | | | $ | 9,526,018 | | | $ | 9,790,909 | |
| Less: | Goodwill | | | | (291,104 | ) | | | (291,104 | ) | | | (291,104 | ) |
| | Identifiable intangible assets | | | | (16,306 | ) | | | (19,825 | ) | | | (23,821 | ) |
| Total tangible assets | (b) | | $ | 9,246,492 | | | $ | 9,215,089 | | | $ | 9,475,984 | |
| | | | | | | | | | | | | | | |
| Risk-weighted assets | (c) | | $ | 6,672,174 | | | $ | 6,918,802 | | | $ | 7,294,633 | |
| | | | | | | | | | | | | | | |
| NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION | | | | | | | | | | | | |
| Net income available to common shareholders | | | $ | 100,636 | | | $ | 73,049 | | | $ | 91,064 | |
| Plus: | Intangible amortization net of tax | | | | 2,173 | | | | 2,469 | | | | 2,644 | |
| Net income adjusted for intangible amortization | | | $ | 102,809 | | | $ | 75,518 | | | $ | 93,708 | |
| | | | | | | | | | | | | | | |
| Period end common shares outstanding | (d) | | | 63,917,591 | | | | 63,673,839 | | | | 57,324,737 | |
| | | | | | | | | | | | | | | |
| TANGIBLE COMMON EQUITY MEASUREMENTS | | | | | | | | | | | | | |
Return on average tangible common equity 1 | | | | 12.31 | % | | | 10.80 | % | | | 14.88 | % |
| Tangible common equity/tangible assets | (a)/(b) | | | 9.11 | % | | | 8.67 | % | | | 6.95 | % |
| Tangible common equity/risk-weighted assets | (a)/(c) | | | 12.62 | % | | | 11.55 | % | | | 9.03 | % |
| Tangible common book value | (a)/(d)*1,000 | | $ | 13.17 | | | $ | 12.55 | | | $ | 11.49 | |
| | | | | | | | | | | | | | | |
| TIER 1 COMMON RISK-BASED CAPITAL | | | | | | | | | | | | |
| Total shareholders' equity | | | $ | 1,149,484 | | | $ | 1,110,060 | | | $ | 1,178,466 | |
| Eliminate qualifying AOCI | | | | 11,426 | | | | 1,624 | | | | 14,717 | |
| Qualifying tier 1 capital | | | | 60,000 | | | | 68,000 | | | | 68,000 | |
| Disallowed goodwill | | | | (291,104 | ) | | | (291,104 | ) | | | (291,104 | ) |
| Adj to goodwill allowed for deferred taxes | | | | 10,215 | | | | 8,805 | | | | 7,395 | |
| Other disallowed intangibles | | | | (16,306 | ) | | | (19,825 | ) | | | (23,821 | ) |
| Disallowed servicing intangible | | | | (5,115 | ) | | | (5,051 | ) | | | (4,288 | ) |
| Total tier 1 capital | | | $ | 918,600 | | | $ | 872,509 | | | $ | 949,365 | |
| Less: | Qualifying tier 1 capital | | | | (60,000 | ) | | | (68,000 | ) | | | (68,000 | ) |
| | Preferred stock | | | | - | | | | - | | | | (205,126 | ) |
| Total tier 1 common capital | (e) | | $ | 858,600 | | | $ | 804,509 | | | $ | 676,239 | |
| | | | | | | | | | | | | | | |
| Tier 1 common risk-based capital ratio | (e)/(c) | | | 12.87 | % | | | 11.63 | % | | | 9.27 | % |
| | | | | | | | | | | | | | | |
1 Calculation = net income adjusted for intangible amortization/total average tangible common equity | |
Results of Operations
Net Interest Income
Net interest income is the principal component of Trustmark’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The net interest margin (NIM) is computed by dividing fully taxable equivalent net interest income 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 accompanying Yield/Rate Analysis Table shows the average balances for all assets and liabilities of Trustmark and the interest income or expense ass ociated with earning assets and interest-bearing liabilities. The yields and rates have been computed based upon interest income and expense adjusted to a fully taxable equivalent (FTE) basis using a 35% federal marginal tax rate for all periods shown. Loans on nonaccrual have been included in the average loan balances, and interest collected prior to these loans having been placed on nonaccrual has been included in interest income. Loan fees included in interest associated with the average loan balances are immaterial.
Net interest income-FTE for 2010 remained relatively flat when compared with 2009. Lower average earning asset balances coupled with a gradual downward repricing of Trustmark’s long-term fixed rate assets were mostly offset by an effort to reduce higher cost certificates of deposit along with prudent loan pricing, including the use of interest rate floors in the pricing of commercial loans. The combination of these factors resulted in a NIM of 4.41% during 2010, a 16 basis point increase when compared with 2009.
Average interest-earning assets for 2010 were $8.287 billion, compared with $8.570 billion for 2009, a decrease of $282.9 million. This decline was primarily due to a decrease in average total loans of $488.3 million, or 7.2%, during 2010. This decrease reflects Trustmark’s on-going efforts to reduce exposure to construction and land development lending, the decision in prior years to discontinue indirect auto financing, as well as limited demand for loans. During 2010, interest and fees on loans-FTE decreased $26.8 million, or 7.4%, due to lower average loan balances while the yield on loans fell slightly to 5.32% compared to 5.33% during 2009. Average total securities increased $215.2 million, or 12.4%, during 2010 when compared with 2009. The overall yield on securities decreased 73 basis points whe n compared with 2009 due to the run-off of higher yielding securities replaced at lower yields. As a result of these factors, interest income-FTE decreased $30.1 million, or 6.7%, when 2010 is compared with 2009. The impact of these changes is also illustrated by the decline in the yield on total earning assets, which fell from 5.27% in 2009 to 5.09% in 2010, a decrease of 18 basis points.
Average interest-bearing liabilities for 2010 totaled $6.445 billion compared with $6.673 billion in 2009, a decrease of $228.1 million, or 3.4%. During 2010, average interest-bearing deposits increased $24.5 million, or 0.4%, while the combination of federal funds purchased, securities sold under repurchase agreements and other borrowings decreased by $252.7 million, or 21.3%, due to available liquidity resulting from the reduction in loans coupled with stable deposit funding. The overall yield on interest-bearing liabilities declined 45 basis points during 2010 when compared with 2009, primarily due to a reduction in the costs of certificates of deposit. As a result of these factors, total interest expense for 2010 decreased $31.7 million, or 36.0%, when compared with 2009.
Net interest income-FTE for 2009 increased $35.6 million, or 10.9%, when compared with 2008. Trustmark expanded its net interest margin during 2009 through diligent management of its assets and liabilities. The increase in the net interest margin was primarily due to three main factors: 1) disciplined deposit pricing afforded to Trustmark due to a strong liquidity position, 2) prudent loan pricing, including the use of minimum loan rates/floors and 3) the purchase of fixed rate securities in 2008, which were funded mostly with declining short-term floating rate liabilities. The combination of these factors resulted in a NIM of 4.25% during 2009, a 24 basis point increase when compared with 2008.
Average interest-earning assets for 2009 were $8.570 billion, compared with $8.179 billion for 2008, an increase of $391.1 million. This growth was primarily due to an increase in average total securities of $645.7 million, or 59.2% during 2009, as a result of management’s strategic focus on increasing its holding of certain investment securities in order to capitalize upon advantageous market conditions. During 2009, the overall yield on securities increased by 17 basis points when compared to 2008 due to purchases of securities in a higher rate environment and a slightly longer duration of the securities purchased. Average total loans decreased $249.0 million in 2009 when compared to 2008, which reflects Trustmark’s continued efforts to reduce exposure to construction and land development lending and the decisi on to discontinue indirect auto financing. Due to a decrease in interest rates during 2009, the yield on loans decreased 88 basis points when compared to 2008. As a result of these factors, interest income-FTE decreased $40.6 million, or 8.3%, when 2009 is compared with 2008. The impact of these changes is also illustrated by the decline in the yield on total earning assets, which fell from 6.02% in 2008 to 5.27% in 2009, a decrease of 75 basis points.
Average interest-bearing liabilities for 2009 totaled $6.673 billion compared with $6.614 billion for 2008, an increase of $59.1 million, or 0.9%. Management’s continued strategy of disciplined deposit pricing resulted in a modest 1.8% decrease in interest-bearing deposits during 2009 while the combination of federal funds purchased, securities sold under repurchase agreements and other borrowings increased by 15.6%. Due to decreased funding costs, as well as the continued availability of low-cost wholesale funding sources, the overall yield on liabilities declined 116 basis points in 2009 when compared with 2008. As a result of these factors, total interest expense for 2009 decreased $76.3 million, or 46.5%, when compared with 2008.
| Yield/Rate Analysis Table | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | �� | | | | |
| | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | Yield/ | | | Average | | | | | | Yield/ | | | Average | | | | | | Yield/ | |
| | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold and securities purchased under reverse repurchase agreements | | $ | 9,274 | | | $ | 36 | | | | 0.39 | % | | $ | 15,077 | | | $ | 66 | | | | 0.44 | % | | $ | 23,422 | | | $ | 502 | | | | 2.14 | % |
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | 1,643,995 | | | | 69,750 | | | | 4.24 | % | | | 1,411,275 | | | | 71,363 | | | | 5.06 | % | | | 794,443 | | | | 37,257 | | | | 4.69 | % |
| Nontaxable | | | 117,116 | | | | 5,796 | | | | 4.95 | % | | | 75,516 | | | | 3,982 | | | | 5.27 | % | | | 38,188 | | | | 2,218 | | | | 5.81 | % |
| Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | 151,361 | | | | 7,328 | | | | 4.84 | % | | | 191,732 | | | | 9,352 | | | | 4.88 | % | | | 182,373 | | | | 8,904 | | | | 4.88 | % |
| Nontaxable | | | 39,787 | | | | 2,784 | | | | 7.00 | % | | | 58,526 | | | | 4,247 | | | | 7.26 | % | | | 76,304 | | | | 5,648 | | | | 7.40 | % |
| Loans (including loans held for sale) | | | 6,285,443 | | | | 334,527 | | | | 5.32 | % | | | 6,773,768 | | | | 361,346 | | | | 5.33 | % | | | 7,022,747 | | | | 436,064 | | | | 6.21 | % |
| Other earning assets | | | 39,954 | | | | 1,409 | | | | 3.53 | % | | | 43,925 | | | | 1,414 | | | | 3.22 | % | | | 41,251 | | | | 1,822 | | | | 4.42 | % |
| Total interest-earning assets | | | 8,286,930 | | | | 421,630 | | | | 5.09 | % | | | 8,569,819 | | | | 451,770 | | | | 5.27 | % | | | 8,178,728 | | | | 492,415 | | | | 6.02 | % |
| Cash and due from banks | | | 211,632 | | | | | | | | | | | | 214,637 | | | | | | | | | | | | 245,748 | | | | | | | | | |
| Other assets | | | 895,764 | | | | | | | | | | | | 839,066 | | | | | | | | | | | | 792,835 | | | | | | | | | |
| Allowance for loan losses | | | (102,499 | ) | | | | | | | | | | | (103,080 | ) | | | | | | | | | | | (86,124 | ) | | | | | | | | |
| Total Assets | | $ | 9,291,827 | | | | | | | | | | | $ | 9,520,442 | | | | | | | | | | | $ | 9,131,187 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | $ | 1,322,382 | | | | 8,621 | | | | 0.65 | % | | $ | 1,133,498 | | | | 9,515 | | | | 0.84 | % | | $ | 1,215,668 | | | | 20,742 | | | | 1.71 | % |
| Savings deposits | | | 1,925,159 | | | | 8,479 | | | | 0.44 | % | | | 1,821,086 | | | | 10,613 | | | | 0.58 | % | | | 1,776,397 | | | | 23,032 | | | | 1.30 | % |
| Time deposits | | | 2,266,606 | | | | 31,557 | | | | 1.39 | % | | | 2,535,028 | | | | 58,758 | | | | 2.32 | % | | | 2,598,472 | | | | 96,148 | | | | 3.70 | % |
| Federal funds purchased and securities sold under repurchase agreements | | | 580,427 | | | | 1,183 | | | | 0.20 | % | | | 621,638 | | | | 1,133 | | | | 0.18 | % | | | 626,767 | | | | 10,393 | | | | 1.66 | % |
| Short-term borrowings | | | 209,550 | | | | 1,798 | | | | 0.86 | % | | | 371,173 | | | | 2,465 | | | | 0.66 | % | | | 276,974 | | | | 7,032 | | | | 2.54 | % |
| Long-term FHLB advances | | | 22,441 | | | | 133 | | | | 0.59 | % | | | 70,890 | | | | 494 | | | | 0.70 | % | | | - | | | | - | | | | - | |
| Subordinated notes | | | 49,789 | | | | 2,894 | | | | 5.81 | % | | | 49,756 | | | | 2,894 | | | | 5.82 | % | | | 49,724 | | | | 2,894 | | | | 5.82 | % |
| Junior subordinated debt securities | | | 68,703 | | | | 1,530 | | | | 2.23 | % | | | 70,104 | | | | 1,981 | | | | 2.83 | % | | | 70,104 | | | | 3,878 | | | | 5.53 | % |
| Total interest-bearing liabilities | | | 6,445,057 | | | | 56,195 | | | | 0.87 | % | | | 6,673,173 | | | | 87,853 | | | | 1.32 | % | | | 6,614,106 | | | | 164,119 | | | | 2.48 | % |
| Noninterest-bearing demand deposits | | | 1,602,187 | | | | | | | | | | | | 1,522,300 | | | | | | | | | | | | 1,412,312 | | | | | | | | | |
| Other liabilities | | | 100,102 | | | | | | | | | | | | 119,327 | | | | | | | | | | | | 134,708 | | | | | | | | | |
| Shareholders' equity | | | 1,144,481 | | | | | | | | | | | | 1,205,642 | | | | | | | | | | | | 970,061 | | | | | | | | | |
| Total Liabilities and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders' Equity | | $ | 9,291,827 | | | | | | | | | | | $ | 9,520,442 | | | | | | | | | | | $ | 9,131,187 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Interest Margin | | | | | | | 365,435 | | | | 4.41 | % | | | | | | | 363,917 | | | | 4.25 | % | | | | | | | 328,296 | | | | 4.01 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less tax equivalent adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments | | | | | | | 3,003 | | | | | | | | | | | | 2,880 | | | | | | | | | | | | 2,753 | | | | | |
| Loans | | | | | | | 10,409 | | | | | | | | | | | | 6,828 | | | | | | | | | | | | 6,383 | | | | | |
| Net Interest Margin per Income Statements | | | | | | $ | 352,023 | | | | | | | | | | | $ | 354,209 | | | | | | | | | | | $ | 319,160 | | | | | |
The table below shows the change from year to year for each component of the tax equivalent net interest margin in the amount generated by volume changes and the amount generated by changes in the yield or rate (tax equivalent basis):
| Volume/Rate Analysis Table | | 2010 Compared to 2009 | | | 2009 Compared to 2008 | |
| ($ in thousands) | | Increase (Decrease) Due To: | | | Increase (Decrease) Due To: | |
| | | | | | Yield/ | | | | | | | | | Yield/ | | | | |
| | | Volume | | | Rate | | | Net | | | Volume | | | Rate | | | Net | |
| Interest earned on: | | | | | | | | | | | | | | | | | | |
| Federal funds sold and securities purchased | | | | | | | | | | | | | | | | |
| under reverse repurchase agreements | | $ | (23 | ) | | $ | (7 | ) | | $ | (30 | ) | | $ | (135 | ) | | $ | (301 | ) | | $ | (436 | ) |
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | 10,860 | | | | (12,473 | ) | | | (1,613 | ) | | | 30,961 | | | | 3,145 | | | | 34,106 | |
| Nontaxable | | | 2,070 | | | | (256 | ) | | | 1,814 | | | | 1,988 | | | | (224 | ) | | | 1,764 | |
| Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | (1,948 | ) | | | (76 | ) | | | (2,024 | ) | | | 448 | | | | - | | | | 448 | |
| Nontaxable | | | (1,316 | ) | | | (147 | ) | | | (1,463 | ) | | | (1,296 | ) | | | (105 | ) | | | (1,401 | ) |
| Loans, net of unearned income | | | (26,139 | ) | | | (680 | ) | | | (26,819 | ) | | | (14,953 | ) | | | (59,765 | ) | | | (74,718 | ) |
| Other earning assets | | | (134 | ) | | | 129 | | | | (5 | ) | | | 112 | | | | (520 | ) | | | (408 | ) |
| Total interest-earning assets | | | (16,630 | ) | | | (13,510 | ) | | | (30,140 | ) | | | 17,125 | | | | (57,770 | ) | | | (40,645 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest paid on: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | | 1,448 | | | | (2,342 | ) | | | (894 | ) | | | (1,317 | ) | | | (9,910 | ) | | | (11,227 | ) |
| Savings deposits | | | 568 | | | | (2,702 | ) | | | (2,134 | ) | | | 572 | | | | (12,991 | ) | | | (12,419 | ) |
| Time deposits | | | (5,683 | ) | | | (21,518 | ) | | | (27,201 | ) | | | (2,297 | ) | | | (35,093 | ) | | | (37,390 | ) |
| Federal funds purchased and securities sold | | | | | | | | | | | | | | | | | | | | | | | | |
| under repurchase agreements | | | (74 | ) | | | 124 | | | | 50 | | | | (84 | ) | | | (9,176 | ) | | | (9,260 | ) |
| Short-term borrowings | | | (1,269 | ) | | | 602 | | | | (667 | ) | | | 1,841 | | | | (6,408 | ) | | | (4,567 | ) |
| Long-term FHLB advances | | | (361 | ) | | | - | | | | (361 | ) | | | 494 | | | | - | | | | 494 | |
| Subordinated notes | | | 3 | | | | (3 | ) | | | - | | | | - | | | | - | | | | - | |
| Junior subordinated debt securities | | | (39 | ) | | | (412 | ) | | | (451 | ) | | | - | | | | (1,897 | ) | | | (1,897 | ) |
| Total interest-bearing liabilities | | | (5,407 | ) | | | (26,251 | ) | | | (31,658 | ) | | | (791 | ) | | | (75,475 | ) | | | (76,266 | ) |
| Change in net interest income on a | | | | | | | | | | | | | | | | | | | | | | | | |
| tax equivalent basis | | $ | (11,223 | ) | | $ | 12,741 | | | $ | 1,518 | | | $ | 17,916 | | | $ | 17,705 | | | $ | 35,621 | |
The change in interest due to both volume and yield/rate has been allocated to change due to volume and change due to yield/rate in proportion to the absolute value of the change in each. Tax-exempt income has been adjusted to a tax equivalent basis using a tax rate of 35% for each of the three years presented. The balances of nonaccrual loans and related income recognized have been included for purposes of these computations.
Provision for Loan Losses
The provision for loan losses is determined by Management as the amount necessary to adjust the allowance for loan losses to a level, which, in Management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans, net charge-offs or recoveries and growth in the loan portfolio among other factors. Accordingly, the amount of the provision reflects both the necessary increases in the allowance for loan losses related to newly identified criticized loans, as well as the actions taken related to other loans including, among o ther things, any necessary increases or decreases in required allowances for specific loans or loan pools. As shown in the table below, the provision for loan losses for 2010 totaled $49.5 million, or 0.79% of average loans, compared with $77.1 million in 2009 and $76.4 million in 2008. Reduced loan provisioning during 2010 was a result of decreased levels of criticized loans, lower net charge-offs, adequate reserves established in prior years for both new and existing impaired loans and a more stabilized economy coupled with a smaller overall loan portfolio.
| Provision for Loan Losses | | | | | | | | | |
| ($ in thousands) | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| Florida | | $ | 19,926 | | | $ | 47,724 | | | $ | 43,360 | |
Mississippi (1) | | | 14,249 | | | | 21,661 | | | | 20,706 | |
Tennessee (2) | | | 5,612 | | | | 3,218 | | | | 4,707 | |
| Texas | | | 9,759 | | | | 4,509 | | | | 7,639 | |
| Total provision for loan losses | | $ | 49,546 | | | $ | 77,112 | | | $ | 76,412 | |
| | | | | | | | | | | | | |
| (1) - Mississippi includes Central and Southern Mississippi Regions | | | | | | | | | | | | |
| (2) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions | | | | | | | | | | | | |
Trustmark continues to devote significant resources to managing credit risks resulting from the slowdown in commercial developments of residential real estate. Trustmark’s Management believes that the construction and land development portfolio is appropriately risk rated and adequately reserved based on current conditions.
See the section captioned “Loans and Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses, which includes the table of nonperforming assets.
Noninterest Income
Trustmark’s noninterest income continues to play an important role in improving net income and total shareholder value and represents 31.7%, 31.5% and 35.6% of total revenue, before securities gains, net in 2010, 2009 and 2008, respectively. Total noninterest income before securities gains, net for 2010 increased $823 thousand compared to 2009, while total noninterest income before securities gains, net for 2009 decreased $14.0 million, or 7.9%, compared to 2008. The comparative components of noninterest income for the years ended December 31, 2010, 2009 and 2008, are shown in the accompanying table.
| Noninterest Income | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | Amount | | | % Change | | | Amount | | | % Change | | | Amount | | | % Change | |
| Service charges on deposit accounts | | $ | 55,183 | | | | 2.0 | % | | $ | 54,087 | | | | 0.7 | % | | $ | 53,717 | | | | -0.9 | % |
| Insurance commissions | | | 27,691 | | | | -4.8 | % | | | 29,079 | | | | -10.4 | % | | | 32,440 | | | | -8.1 | % |
| Wealth management | | | 21,872 | | | | -0.9 | % | | | 22,079 | | | | -20.0 | % | | | 27,600 | | | | 7.2 | % |
| Bank card and other fees | | | 25,014 | | | | 8.6 | % | | | 23,041 | | | | -0.8 | % | | | 23,230 | | | | -6.6 | % |
| Mortgage banking, net | | | 29,345 | | | | 1.6 | % | | | 28,873 | | | | 9.0 | % | | | 26,480 | | | | n/m | |
| Other, net | | | 4,493 | | | | -20.0 | % | | | 5,616 | | | | -57.7 | % | | | 13,286 | | | | 30.1 | % |
| Total Noninterest Income before | | | | | | | | | | | | | | | | | | | | | | | | |
| securities gains, net | | | 163,598 | | | | 0.5 | % | | | 162,775 | | | | -7.9 | % | | | 176,753 | | | | 8.9 | % |
| Securities gains, net | | | 2,329 | | | | -57.4 | % | | | 5,467 | | | | n/m | | | | 505 | | | | n/m | |
| Total Noninterest Income | | $ | 165,927 | | | | -1.4 | % | | $ | 168,242 | | | | -5.1 | % | | $ | 177,258 | | | | 9.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| n/m - percentage changes greater than +/- 100% are not considered meaningful | | | | | | | | | | |
Service Charges on Deposit Accounts
The single largest component of noninterest income continues to be service charges on deposit accounts, which increased $1.1 million, or 2.0%, during 2010, compared to an increase of $370 thousand, or 0.7%, during 2009. Service charges on deposit accounts include general account service charges and NSF fees. General account service charges decreased by $1.1 million in 2010 compared to a decrease of $556 thousand in 2009. The decrease in general account service charges during both 2010 and 2009 is primarily attributable to increased usage of accounts that do not charge a monthly fee. NSF fees increased by $2.2 million during 2010 compared to an increase of $926 thousand during 2009. Compared to 2009, the growth in NSF revenues during 20 10 reflected an increase in NSF opportunities as well as an upgrade in the decisioning tools used for determining NSFs.
In November 2009, the Federal Reserve Board adopted final rules that prohibit financial institutions, such as Trustmark, from charging customers for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents to the overdraft service for those products. Trustmark has made a concerted effort to obtain customer consent to the overdraft protection product. The response rate from all customer accounts that have been contacted has been approximately 72%, of which approximately 79% have consented to overdraft protection. This change, which became effective on July 1, 2010 for new accounts and August 15, 2010 for existing accounts, reduced noninterest income by approximately $1.0 million for the year ended December 31, 2010. The full impact of this change is expected to reduce n oninterest income by an estimated $3.0 to $4.0 million for 2011. In addition, final guidance is expected from the OCC in the first quarter of 2011, which will clarify their regulatory position as it pertains to overdraft programs. Trustmark expects that the impact of this guidance, which addresses posting order and number of occurences, could reduce noninterest income by an estimated $3.0 to $5.0 million for 2011, if implemented by the end of the second quarter. Management is currently evaluating Trustmark’s product structure and services to offset the potential impact of these recent regulatory developments.
Insurance Commissions
Insurance commissions were $27.7 million during 2010, compared with $29.1 million in 2009 and $32.4 million in 2008. The decline in insurance commissions experienced during 2010 and 2009 were primarily due to lower commission volume on commercial property and casualty policies, lower claims experience refunds from carriers, and lower fees generated from captive insurance plans. Insurance commission revenues continue to face pressure from falling premium prices for similar insurable risks. Furthermore, a recessionary economy has greatly suppressed demand for insurance coverage by businesses for their inventories and equipment, workers’ compensation and general liability, as well as forced companies to downsize or close.
Wealth Management
Wealth management income totaled $21.9 million for 2010, compared with $22.1 million in 2009 and $27.6 million in 2008. Wealth management consists of income related to investment management, trust and brokerage services. The decline in wealth management income in 2010 is largely attributed to historically low short-term interest rates that have negatively impacted money management fee income from money market funds and sweep arrangements. In addition, during 2010, revenues from brokerage services have increased primarily due to improved market conditions when compared with 2009. At December 31, 2010 and 2009, Trustmark held assets under management and administration of $7.5 billion and $7.2 billion, respectively, and brokerage assets of $1.2 billion at both year ends.
Bank Card and Other Fees
Bank card and other fees totaled $25.0 million during 2010, compared with $23.0 million in 2009 and $23.2 million in 2008. Bank card and other fees consist primarily of fees earned on bank card products as well as fees on various bank products and services and safe deposit box fees. The increase of $2.0 million in 2010 was primarily the result of growth in fees earned on bank card products due to increased consumer utilization.
The Dodd-Frank Act amends the Electronic Fund Transfer Act to authorize the Federal Reserve to issue regulations regarding any interchange fee that an issuer may receive or charge for an electronic debit card transaction. The interchange fees must be “reasonable and proportional” to the cost incurred by the issuer with respect to the transaction. If this legislation regarding interchange fees is implemented as written and within the estimated timeframe, Trustmark anticipates the impact could reduce noninterest income by an estimated $4.0 to $6.0 million during 2011. Management is currently evaluating Trustmark’s product structure and services to offset the potential impact of this legislation.
Mortgage Banking, Net
Net revenues from mortgage banking were $29.3 million during 2010, compared with $28.9 million in 2009 and $26.5 million in 2008. Mortgage banking, net increased $472 thousand during 2010 compared to an increase of $2.4 million during 2009 as Trustmark continued to take advantage of competitive disruptions and expand market share. As shown in the accompanying table, net mortgage servicing income decreased to $13.9 million for 2010, compared to $15.9 million in 2009 and $15.7 million in 2008. Loans serviced for others totaled $4.3 billion at December 31, 2010, compared with $4.2 billion at December 31, 2009, and $5.0 billion at December 31, 2008. The decrease in loans serviced for others in 2009 was due to the sale of approximately $920.9 million in mortgages serviced for others, which also re duced Trustmark’s MSR by approximately $8.5 million.
The following table illustrates the components of mortgage banking revenues included in noninterest income in the accompanying income statements:
| Mortgage Banking Income | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | Amount | | | % Change | | | Amount | | | % Change | | | Amount | | | % Change | |
| Mortgage servicing income, net | | $ | 13,927 | | | | -12.3 | % | | $ | 15,885 | | | | 0.9 | % | | $ | 15,741 | | | | 11.0 | % |
| Change in fair value-MSR from runoff | | | (7,305 | ) | | | 14.7 | % | | | (8,567 | ) | | | 4.7 | % | | | (8,986 | ) | | | 3.8 | % |
| Gain on sales of loans, net | | | 15,317 | | | | -26.2 | % | | | 20,755 | | | | n/m | | | | 5,968 | | | | 5.5 | % |
| Other, net | | | 94 | | | | -88.6 | % | | | 822 | | | | -68.5 | % | | | 2,609 | | | | n/m | |
| Mortgage banking income before hedge ineffectiveness | | | 22,033 | | | | -23.7 | % | | | 28,895 | | | | 88.5 | % | | | 15,332 | | | | 41.4 | % |
| Change in fair value-MSR from market changes | | | (8,943 | ) | | | n/m | | | | 6,607 | | | | n/m | | | | (34,838 | ) | | | n/m | |
| Change in fair value of derivatives | | | 16,255 | | | | n/m | | | | (6,629 | ) | | | n/m | | | | 45,986 | | | | n/m | |
| Net positive (negative) hedge ineffectiveness | | | 7,312 | | | | n/m | | | | (22 | ) | | | n/m | | | | 11,148 | | | | n/m | |
| Mortgage banking, net | | $ | 29,345 | | | | 1.6 | % | | $ | 28,873 | | | | 9.0 | % | | $ | 26,480 | | | | n/m | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| n/m - percentage changes greater than +/- 100% are not considered meaningful | | | | | | | | | | |
As part of Trustmark’s risk management strategy, exchange-traded derivative instruments are utilized to offset changes in the fair value of MSR attributable to changes in interest rates. Changes in the fair value of these exchange-traded derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of MSR. The MSR fair value represents the effect of present value decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the total hedge cost to the changes in the fair value of the MSR asset attributable to interest rate changes. During 2010, net positive ineffectiveness of the MSR hedge was $7.3 million, which primarily resulted from income generated from a steep yiel d curve and net option premium, which are both core components of the MSR hedge strategy. Also contributing to the positive ineffectiveness was a modest widening in the spread between primary mortgage rates and the yield on the 10-year Treasury note.
In comparison, during 2009, net negative ineffectiveness of the MSR hedge was $22 thousand, which resulted from a tightening of the spread between primary mortgage rates and the yield on the 10-year Treasury note as a result of various government programs as well as a general improvement in the credit markets. Although this spread tightening had a negative impact on the MSR hedge, this was mostly offset by income generated from a steep yield curve and net option premium, which are both core components of the MSR hedge strategy.
Representing a significant component of mortgage banking income are gains on the sales of loans, which equaled $15.3 million in 2010 compared with $20.8 million in 2009 and $6.0 million in 2008. The decline in the gain on sales of loans during 2010 resulted from a decrease in loan sales from secondary marketing activities offset by higher profit margins due to the current market environment. Loan sales totaled $1.149 billion during 2010, a decrease of $458.0 million when compared with 2009 loan sales of $1.607 billion.
Other Income, Net
Other income, net for 2010 was $4.5 million, compared with $5.6 million in 2009 and $13.3 million in 2008. The decrease of $1.1 million, or 20.0%, during 2010 primarily resulted from a reduction in gains on sales of student loans and increased amortization of the investment in related partnership tax credits offset by the Cadence merger transaction termination fee of $2.0 million . On October 6, 2010, Trustmark received notice that the board of directors of Cadence had accepted another acquisition proposal and terminated the Agreement and Plan of Reorganization with Trustmark dated September 21, 2010, triggering the payment of a $2.0 million termination fee from Cadence, which was recognized in other noninterest income during the fourth quarter of 2010. During 2009, the $7.7 million, or 57.7%, decrease primarily r esulted from a $1.0 million gain from the redemption of Trustmark’s shares in Visa upon their initial public offering along with $1.1 million of life insurance proceeds associated with Trustmark’s supplemental retirement plan that occurred during 2008. In addition, Trustmark exercised its right to convert MasterCard Class B shares into marketable Class A shares and sold them through a liquidation program achieving a gain of $5.4 million during 2008.
Security Gains, Net
During 2010, in order to manage the duration of the securities portfolio and capitalize upon advantageous market conditions, Trustmark sold approximately $65.1 million of mortgage-related securities compared to $188.5 million of security sales in 2009. This resulted in $2.3 million of securities gains, net during 2010 compared to $5.5 million during 2009.
Noninterest Expense
Trustmark’s noninterest expense for 2010 increased $17.4 million, or 5.6%, compared to 2009, while noninterest expense for 2009 increased $24.5 million, or 8.6%, compared to 2008. The increase during 2010 was primarily attributable to growth in salaries and benefits, loan expenses and real estate foreclosure expenses. Management considers disciplined expense management a key area of focus in the support of improving shareholder value. The comparative components of noninterest expense for 2010, 2009 and 2008 are shown in the accompanying table.
| Noninterest Expense | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | Amount | | | % Change | | | Amount | | | % Change | | | Amount | | | % Change | |
| Salaries and employee benefits | | $ | 174,582 | | | | 3.1 | % | | $ | 169,252 | | | | -1.1 | % | | $ | 171,137 | | | | 0.2 | % |
| Services and fees | | | 41,949 | | | | 4.1 | % | | | 40,292 | | | | 5.0 | % | | | 38,379 | | | | 3.0 | % |
| ORE/Foreclosure expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Writedowns | | | 17,127 | | | | n/m | | | | 7,439 | | | | n/m | | | | 302 | | | | n/m | |
| Carrying costs | | | 7,250 | | | | 34.9 | % | | | 5,375 | | | | n/m | | | | 2,078 | | | | n/m | |
| Total ORE/Foreclosure expense | | | 24,377 | | | | 90.2 | % | | | 12,814 | | | | n/m | | | | 2,380 | | | | n/m | |
| Net occupancy-premises | | | 19,808 | | | | -1.2 | % | | | 20,051 | | | | 2.8 | % | | | 19,508 | | | | 5.4 | % |
| Equipment expense | | | 17,135 | | | | 4.1 | % | | | 16,462 | | | | -1.0 | % | | | 16,632 | | | | 3.7 | % |
| FDIC assessment expense | | | 12,161 | | | | -23.1 | % | | | 15,808 | | | | n/m | | | | 3,471 | | | | n/m | |
| Other expense | | | 35,637 | | | | 6.1 | % | | | 33,580 | | | | 4.2 | % | | | 32,212 | | | | -0.9 | % |
| Total noninterest expense | | $ | 325,649 | | | | 5.6 | % | | $ | 308,259 | | | | 8.6 | % | | $ | 283,719 | | | | 2.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| n/m - percentage changes greater than +/- 100% are not considered meaningful | | | | | | | | | | |
Salaries and Employee Benefits
Salaries and employee benefits, the largest category of noninterest expense, were $174.6 million in 2010, $169.3 million in 2009 and $171.1 million in 2008. This increase primarily reflects modest general merit increases, higher stock-based and general incentive costs resulting from improved corporate performance and higher costs for the Capital Accumulation Plan which is primarily attributed to a one-time curtailment gain of $1.9 million recorded in 2009 as a result of the freeze in benefits of the Capital Accumulation Plan.
During 2009, salary expense increased approximately $684 thousand when compared with 2008. This increase was primarily due to higher stock-based and general incentive costs. Trustmark’s ongoing human capital management initiatives resulted in a decrease of 83 FTE employees at December 31, 2009 compared to December 31, 2008, which was primarily accomplished through attrition resulting from technology improvements. Employee benefits expense for 2009 decreased by approximately $2.6 million when compared to 2008 and was primarily attributed to the one-time curtailment gain previously mentioned.
Services and Fees
Services and fees for 2010 increased $1.7 million, or 4.1%, when compared with 2009, while an increase of $1.9 million, or 5.0%, occurred when 2009 is compared with 2008. The growth in services and fees expense during 2010 is primarily the result of the investment in a new core retail banking software system and was partially offset by decreased check clearing costs resulting from Trustmark’s use of industry-leading image technology to expedite funds availability. The 2009 growth in services and fees expenses was due to Trustmark’s investment in a debit card rewards program implemented during 2008 and legal and professional expenses incurred throughout the year.
ORE/Foreclosure Expense
During 2010, ORE/Foreclosure expense increased $11.6 million, or 90.2% when compared with 2009. The growth in ORE/Foreclosure expense during 2010 can be primarily attributed to other real estate writedowns of $17.1 million during 2010 compared with $7.4 million in 2009. The increase in writedowns is associated with declines in property values resulting from the annual reappraisal process. Because property values in Trustmark’s Florida market have been written down by approximately 48% from the point at which the loans failed to perform in accordance with contractual terms, Management anticipates that growth in other real estate foreclosure expenses will be slowed during 2011.
FDIC Assessment Expense
During 2010, FDIC insurance expense decreased $3.6 million, or 23.1% when compared with 2009 due to a special assessment applied to all insured institutions as of June 30, 2009. On November 12, 2009, the FDIC adopted a final rule requiring a majority of institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. As of December 31, 2010, Trustmark’s remaining prepaid assessment amount was approximately $27.0 million. As mentioned earlier, the Dodd-Frank Act requires the FDIC to revise the deposit insurance assessment system to base assessments on the average total consolidated assets of insured depository institutions during the assessment period, less the average tangible equity of the institution during the assessment period. In addition, the Dodd-Frank Act increases the minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35% of estimated insurable deposits, or the comparable percentage of the assessment base by September 30, 2020. The FDIC must offset the effect of the increase in the minimum reserve ratio on insured depository institutions with total consolidated assets of less than $10.0 billion. At this time, the FDIC has not clearly indicated at what point in the future these provisions will be implemented or how much the assessment rate will be impacted. As TNB’s assets are only slightly below $10.0 billion, it is not clear whether we will be entitled to the fee increase offset described above once these provisions are implemented.
Other Expense
During 2010, other expenses increased $2.1 million, or 6.1%, while in 2009, other expenses increased $1.4 million, or 4.2%. The growth in other expenses in both 2010 and 2009 was primarily the result of an increase in loan expenses, which increased $3.0 million in 2010 and $842 thousand in 2009.
During the normal course of business, Trustmark's mortgage banking operations originates and sells certain loans to investors in the secondary market. Trustmark has continued to experience a manageable level of investor repurchase demands. Trustmark is subject to losses in its loan servicing portfolio due to loan foreclosures. For loans sold without recourse, Trustmark has obligations to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations or warranties made by Trustmark at the time of the sale, herein referred to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that ha d missing or insufficient file documentation and / or loans obtained through fraud by borrowers or other third parties such as appraisers. The total mortgage loan servicing putback expenses incurred by Trustmark during 2010 were $2.1 million and were immaterial for 2009 and 2008. Trustmark operates a conservative, full service mortgage banking business and is confident in its mortgage foreclosure processes. Trustmark has not engaged in "robo-signing" and has not participated in private label securitizations, both of which have been a cause of concern in the mortgage industry. Trustmark works diligently to keep borrowers in their homes, resorting to foreclosure only as a last option.
Segment Information
Results of Segment Operations
Trustmark’s operations are managed along three operating segments: General Banking Division, Insurance Division and the Wealth Management Division. A description of each segment and the methodologies used to measure financial performance is described in Note 18 – Segment Information located in Item 8 – Financial Statements and Supplementary Data. Net income for 2010, 2009 and 2008 by operating segment is presented below ($ in thousands):
| | | 2010 | | | 2009 | | | 2008 | |
| General Banking | | $ | 92,391 | | | $ | 84,313 | | | $ | 79,471 | |
| Insurance | | | 4,176 | | | | 4,248 | | | | 5,377 | |
| Wealth Management | | | 4,069 | | | | 4,486 | | | | 7,569 | |
| Consolidated Net Income | | $ | 100,636 | | | $ | 93,047 | | | $ | 92,417 | |
General Banking
The General Banking Division is responsible for all traditional banking products and services including a full range of commercial and consumer banking services such as checking accounts, savings programs, overdraft facilities, commercial, installment and real estate loans, home equity loans and lines of credit, drive-in and night deposit services and safe deposit facilities offered through over 150 offices in Florida, Mississippi, Tennessee and Texas. The General Banking Division also consists of internal operations that include Human Resources, Executive Administration, Treasury (Funds Management), Public Affairs and Corporate Finance. Included in these operational units are expenses related to mergers, mark-to-market adjustments on loans and deposits, general incentives, stock options, supplemental retirement a nd amortization of core deposits. Other than Treasury, these business units are support-based in nature and are largely responsible for general overhead expenditures that are not allocated.
Net interest income for the General Banking Division for 2010 decreased $2.2 million, or 0.6%, when compared with 2009. Lower average earning asset balances coupled with a gradual downward repricing of Trustmark’s long-term fixed rate assets were mostly offset by an effort to reduce higher cost certificates of deposits along with prudent loan pricing, including the use of interest rate floors in the pricing of commercial loans. Net interest income during 2009 increased $34.9 million, or 11.1%, when compared with 2008. Trustmark expanded its net interest margin during 2009 primarily due to three main factors: 1) disciplined deposit pricing afforded to Trustmark due to a strong liquidity position, 2) prudent loan pricing, including the use of minimum loan rates/floors and 3) the purchase of fixed rate securiti es in 2008, which were funded mostly with declining short-term floating rate liabilities. The provision for loan losses during 2010 totaled $49.6 million compared with $77.1 million during 2009 and $76.4 million during 2008. For more information on this change, please see the analysis of the Provision for Loan Losses located elsewhere in this document.
Noninterest income for the General Banking Division decreased by approximately $401 thousand during 2010 compared to an increase of $194 thousand during 2009. Noninterest income for the General Banking Division represents 25.0% of total revenues for 2010 and 2009 as opposed to 27.0% for 2008 and includes service charges on deposit accounts, bank card and other fees, mortgage banking, net, other, net and securities gain, net. For more information on these noninterest income items, please see the analysis of Noninterest Income located elsewhere in this document.
Noninterest expense for the General Banking Division increased $18.4 million and $27.0 million during 2010 and 2009, respectively. During 2010 and 2009, other real estate writedowns increased $9.7 million and $7.1 million, respectively. Carrying costs associated with other real estate also increased during both years by approximately $1.9 million and $3.3 million, respectively. The increase in writedowns is associated with declines in property values resulting from the annual reappraisal process. During 2010, salaries and employee benefits expense increased $6.3 million, which reflected modest general merit increases, higher stock-based and general incentive costs resulting from improved corporate performance and higher costs for the Capital Accumulation Plan. During 2009, FDIC ins urance expense increased $12.3 million due to a special assessment applied to all insured institutions as of June 30, 2009 and growth in fee assessment rates.
Insurance
Trustmark’s Insurance Division provides a full range of retail insurance products, including commercial risk management products, bonding, group benefits and personal lines coverage. Prior to July 30, 2010, TNB provided these services through The Bottrell Insurance Agency, Inc. (Bottrell), which is based in Jackson, Mississippi, and Fisher-Brown, Incorporated (Fisher-Brown), headquartered in Pensacola, Florida. Effective July 30, 2010, Fisher-Brown was merged into Bottrell to create a newly formed entity named Fisher Brown Bottrell Insurance, Inc. (FBBI), a Mississippi corporation and subsidiary of Trustmark National Bank. FBBI will maintain the trade names of Bottrell and Fisher Brown and will offer services through divisions under these respective names. Financial results o f FBBI will be reported as the combined results of the prior subsidiaries.
During 2010, net income for the Insurance Division decreased $72 thousand, or 1.7% compared to a decrease of $1.1 million, or 21.0% during 2009, primarily from a reduction in insurance commissions, which is contained in noninterest income. For more information on this change, please see the analysis of Insurance commissions included in Noninterest Income located elsewhere in this document.
At December 31, 2010, Trustmark performed an impairment analysis on the reporting unit in the Insurance Division and concluded that no impairment charge was required. The analysis indicated that the Insurance Division’s fair value increased to 104.9% of book value at December 31, 2010, compared with 104.6% reported at September 30, 2010 and 102.1% reported at June 30, 2010. A continuing period of falling prices and suppressed demand for the products of the Insurance Division may result in impairment of goodwill in the future.
Wealth Management
The Wealth Management Division has been strategically organized to serve Trustmark’s customers as a financial partner providing reliable guidance and sound, practical advice for accumulating, preserving, and transferring wealth. The Investment Services group, along with the Trust group, are the primary service providers in this segment. Two wholly-owned subsidiaries of TNB are included in Wealth Management. TIA is a registered investment adviser that provides investment management services to individual and institutional accounts as well as The Performance Fund Family of Mutual Funds. Also during 2010, TRMI acted as an agent to provide life, long-term care and disability insurance services for wealth management customers. On December 30, 2010, TRMI was merged into Fisher Brow n Bottrell Insurance, Inc., which will continue to provide insurance-related wealth advisory services through the Insurance Division beginning in 2011.
During 2010, net income for the Wealth Management Division decreased $417 thousand, or 9.3%, compared to a decrease during 2009 of $3.1 million, or 40.7%, primarily from a reduction in fees earned from trust services, which is contained in noninterest income. For more information on this change, please see the analysis of Wealth Management income included in Noninterest Income located elsewhere in this document.
Income Taxes
For the year ended December 31, 2010, Trustmark’s combined effective tax rate was 29.5% compared to 32.1% in 2009 and 32.2% in 2008. The decrease in Trustmark's effective tax rate in 2010 is mainly due to an increase in investments in partnerships providing federal and state income tax credits, as well as to immaterial changes in permanent items as a percentage of pretax income.
Earning Assets
Earning assets serve as the primary revenue streams for Trustmark and are comprised of securities, loans, federal funds sold and securities purchased under resale agreements. Average earning assets totaled $8.287 billion, or 89.2% of total assets, at December 31, 2010, compared with $8.570 billion, or 90.0% of total assets, at December 31, 2009, a decrease of $282.9 million, or 3.3%.
Securities
When compared with December 31, 2009, total investment securities increased by $400.7 million during 2010. This increase resulted primarily from purchases of Agency guaranteed securities offset by maturities and paydowns. In addition, during 2010, Trustmark sold approximately $65.1 million in securities, generating a gain of approximately $2.3 million. This was a strategy undertaken primarily to manage the duration of the securities portfolio and capitalize upon advantageous market conditions.
The securities portfolio is one of many tools Management uses to control exposure to interest rate risk. Interest rate risk can be adjusted by altering duration, composition, as well as balance of the portfolio. Trustmark has maintained a strategy of offsetting potential exposure to higher interest rates by keeping the average life of the portfolio at relatively low levels. During 2010, the weighted-average life of the portfolio has somewhat lengthened primarily due to slower prepayment expectations for mortgage related securities. As a result, the weighted-average life of the portfolio increased to 3.98 years at December 31, 2010, compared to 3.58 years at December 31, 2009.
The table below indicates the amortized cost of securities available for sale and held to maturity by type at year end for each of the last three years:
| Amortized Cost of Securities by Type | | | | | | | | | |
| ($ in thousands) | | December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| Securities available for sale | | | | | | | | | |
| U.S. Treasury securities | | $ | - | | | $ | - | | | $ | 6,502 | |
| U.S. Government agency obligations | | | | | | | | | | | | |
| Issued by U.S. Government agencies | | | 12 | | | | 20 | | | | 27 | |
| Issued by U.S. Government sponsored agencies | | | 124,093 | | | | 48,685 | | | | 24,821 | |
| Obligations of states and political subdivisions | | | 159,418 | | | | 115,118 | | | | 98,323 | |
| Mortgage-backed securities | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | |
| Guaranteed by GNMA | | | 11,719 | | | | 11,765 | | | | 8,476 | |
| Issued by FNMA and FHLMC | | | 432,162 | | | | 49,510 | | | | 18,519 | |
| Other residential mortgage-backed securities | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 1,361,339 | | | | 1,333,983 | | | | 1,337,113 | |
| Commercial mortgage-backed securities | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 54,331 | | | | 67,294 | | | | 11,041 | |
| Corporate debt securities | | | - | | | | 6,087 | | | | 8,254 | |
| Total securities available for sale | | $ | 2,143,074 | | | $ | 1,632,462 | | | $ | 1,513,076 | |
| | | | | | | | | | | | | |
| Securities held to maturity | | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 53,246 | | | $ | 74,643 | | | $ | 102,901 | |
| Mortgage-backed securities | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | |
| Guaranteed by GNMA | | | 6,058 | | | | 7,044 | | | | - | |
| Other residential mortgage-backed securities | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 78,526 | | | | 148,226 | | | | 156,728 | |
| Commercial mortgage-backed securities | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 3,017 | | | | 3,071 | | | | - | |
| Total securities held to maturity | | $ | 140,847 | | | $ | 232,984 | | | $ | 259,629 | |
Available for sale (AFS) securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive loss, a separate component of shareholders’ equity. At December 31, 2010, AFS securities totaled $2.177 billion, which represented 93.9% of the securities portfolio, compared to $1.684 billion, or 87.8%, at December 31, 2009. At December 31, 2010, unrealized gains, net on AFS securities totaled $34.2 million compared with unrealized gains, net of $51.9 million at December 31, 2009. At December 31, 2010, AFS securities consisted of obligations of states and political subdivisions, mortgage related securities, and U.S. Government agency obligations.
Held to maturity (HTM) securities are carried at amortized cost and represent those securities that Trustmark both intends and has the ability to hold to maturity. At December 31, 2010, HTM securities totaled $140.8 million and represented 6.1% of the total portfolio, compared with $233.0 million, or 12.2%, at the end of 2009.
Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of approximately 91% of the portfolio in U.S. Government agency-backed obligations and other AAA rated securities. None of the securities owned by Trustmark are collateralized by assets which are considered sub-prime. Furthermore, outside of membership in the Federal Home Loan Bank of Dallas, Federal Reserve Bank and Depository Trust and Clearing Corporation, Trustmark does not hold any equity investment in government sponsored entities.
The following table details the maturities of securities available for sale and held to maturity using amortized cost at December 31, 2010, and the weighted-average yield for each range of maturities (tax equivalent basis):
| Maturity/Yield Analysis Table | | Maturing | | | | |
| ($ in thousands) | | | | | | | | After One, | | | | | | After Five, | | | | | | | | | | | | | |
| | | Within | | | | | | But Within | | | | | | But Within | | | | | | After | | | | | | | |
| | | One Year | | | Yield | | | Five Years | | | Yield | | | Ten Years | | | Yield | | | Ten Years | | | Yield | | | Total | |
| Securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government agency obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued by U.S. Government agencies | | $ | - | | | | - | | | $ | 12 | | | | 3.86 | % | | $ | - | | | | - | | | $ | - | | | | - | | | $ | 12 | |
| Issued by U.S. Government sponsored agencies | | | - | | | | - | | | | - | | | | - | | | | 124,093 | | | | 2.99 | % | | | - | | | | - | | | | 124,093 | |
| Obligations of states and political subdivisions | | | 12,786 | | | | 6.22 | % | | | 44,163 | | | | 3.86 | % | | | 77,072 | | | | 4.72 | % | | | 25,397 | | | | 5.10 | % | | | 159,418 | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Guaranteed by GNMA | | | 34 | | | | 6.19 | % | | | 9 | | | | 6.18 | % | | | 143 | | | | 9.43 | % | | | 11,533 | | | | 5.51 | % | | | 11,719 | |
| Issued by FNMA and FHLMC | | | - | | | | - | | | | 6 | | | | 5.05 | % | | | 10,426 | | | | 2.72 | % | | | 421,730 | | | | 3.24 | % | | | 432,162 | |
| Other residential mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC, or GNMA | | | 3 | | | | 4.00 | % | | | 5,614 | | | | 4.24 | % | | | 29,243 | | | | 5.12 | % | | | 1,326,479 | | | | 4.24 | % | | | 1,361,339 | |
| Commercial mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC, or GNMA | | | - | | | | - | | | | 2,282 | | | | 5.76 | % | | | 44,629 | | | | 3.90 | % | | | 7,420 | | | | 5.34 | % | | | 54,331 | |
| Total securities available for sale | | $ | 12,823 | | | | 6.22 | % | | $ | 52,086 | | | | 3.98 | % | | $ | 285,606 | | | | 3.81 | % | | $ | 1,792,559 | | | | 4.03 | % | | $ | 2,143,074 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held to maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 3,662 | | | | 6.75 | % | | $ | 16,459 | | | | 6.68 | % | | $ | 24,425 | | | | 7.28 | % | | $ | 8,700 | | | | 8.79 | % | | $ | 53,246 | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Guaranteed by GNMA | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 6,058 | | | | 4.57 | % | | | 6,058 | |
| Other residential mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC, or GNMA | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 78,526 | | | | 4.60 | % | | | 78,526 | |
| Commercial mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC, or GNMA | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,017 | | | | 4.65 | % | | | 3,017 | |
| Total securities held to maturity | | $ | 3,662 | | | | 6.75 | % | | $ | 16,459 | | | | 6.68 | % | | $ | 24,425 | | | | 7.28 | % | | $ | 96,301 | | | | 4.98 | % | | $ | 140,847 | |
Mortgage-backed securities and collateralized mortgage obligations are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
As of December 31, 2010, Trustmark did not hold securities of any one issuer with a carrying value exceeding ten percent of total shareholders’ equity, other than certain government-sponsored agencies which are exempt from inclusion. Management continues to closely monitor the credit quality as well as the ratings of the debt and mortgage-backed securities issued by the U.S. Government sponsored entities and held in Trustmark’s securities portfolio in light of issues currently facing these entities.
The following tables present Trustmark’s securities portfolio by amortized cost and estimated fair value and by credit rating at December 31, 2010:
Securities Portfolio by Credit Rating (1) | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | |
| | | December 31, 2010 | |
| | | Amortized Cost | | | Estimated Fair Value | |
| | | Amount | | | % | | | Amount | | | % | |
| Securities Available for Sale | | | | | | | | | | | | |
| AAA | | $ | 1,983,653 | | | | 92.6 | % | | $ | 2,017,609 | | | | 92.7 | % |
| Aa1 to Aa3 | | | 85,844 | | | | 4.0 | % | | | 84,919 | | | | 3.9 | % |
| A1 to A3 | | | 15,557 | | | | 0.7 | % | | | 15,614 | | | | 0.7 | % |
| Baa1 to Baa3 | | | 385 | | | | 0.0 | % | | | 386 | | | | 0.0 | % |
| Not Rated (2) | | | 57,635 | | | | 2.7 | % | | | 58,721 | | | | 2.7 | % |
| Total securities available for sale | | $ | 2,143,074 | | | | 100.0 | % | | $ | 2,177,249 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| Securities Held to Maturity | | | | | | | | | | | | | | | | |
| AAA | | $ | 87,805 | | | | 62.3 | % | | $ | 89,488 | | | | 61.7 | % |
| Aa1 to Aa3 | | | 26,426 | | | | 18.8 | % | | | 28,422 | | | | 19.6 | % |
| A1 to A3 | | | 4,164 | | | | 3.0 | % | | | 4,272 | | | | 2.9 | % |
| Baa1 to Baa3 | | | 534 | | | | 0.4 | % | | | 540 | | | | 0.4 | % |
| Not Rated (2) | | | 21,918 | | | | 15.5 | % | | | 22,421 | | | | 15.4 | % |
| Total securities held to maturity | | $ | 140,847 | | | | 100.0 | % | | $ | 145,143 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| (1) - Credit ratings obtained from Moody's Investors Service | | | | | | | | | | | | | | | | |
| (2) - Not rated issues primarily consist of Mississippi municipal general obligations | | | | | | | | | | | | | |
The table presenting the credit rating of Trustmark’s securities is formatted to show the securities according to the credit rating category, and not by category of the underlying security. At December 31, 2010, approximately 93% of the available for sale securities are rated AAA and the same is true with respect to 62% of held to maturity securities, which are carried at amortized cost.
Loans Held for Sale
At December 31, 2010, loans held for sale totaled $153.0 million, consisting of $123.3 million of residential real estate mortgage loans in the process of being sold to third parties and $29.7 million of Government National Mortgage Association (GNMA) optional repurchase loans. At December 31, 2009, loans held for sale totaled $226.2 million, consisting of $145.2 million in residential real estate mortgage loans in the process of being sold to third parties and $81.0 million in GNMA optional repurchase loans. Please refer to the nonperforming assets table that follows for information on GNMA loans eligible for repurchase which are past due 90 days or more.
GNMA optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer's option and without GNMA's prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When Trustmark is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether Trustmark intends to exercise th e buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings. During December of 2010, Trustmark purchased $53.9 million of GNMA serviced loans, which were subsequently sold to a third party principally at par. Trustmark will retain the servicing for these loans, which are fully guaranteed by FHA/VA. Trustmark benefited from this transaction by reducing the amount of delinquent loans serviced for GNMA as well as improving Trustmark’s servicer rating. The effect of this transaction did not have a material impact on Trustmark’s results of operations. Trustmark did not exercise their buy-back option on any delinquent loans serviced for GNMA during 2009 and 2008.
Loans and Allowance for Loan Losses
Loans
Loans at December 31, 2010 totaled $6.060 billion compared to $6.320 billion at December 31, 2009, a decrease of $259.6 million. These declines are directly attributable to a strategic focus to reduce certain loan classifications, specifically construction, land development and other land loans and the decision in prior years to discontinue indirect consumer auto loan financing. In addition, current economic conditions have also reduced demand for credit. The decline in construction, land development and other land loans can be primarily attributable to reductions in Trustmark’s Texas and Florida markets of approximately $174.5 million since December 31, 2009. The consumer loan portfolio decrease of $204.2 million primarily represents a decrease in the indirect consumer auto portfolio.& #160; The indirect consumer auto portfolio balance at December 31, 2010, 2009, and 2008, was $201.1 million, $386.0 million, and $634.2 million, respectively, and had an average remaining life of 1.06 years at December 31, 2010 compared with 1.24 years at December 31, 2009. The declines in these classifications reflect implementation of Management’s determination to reduce overall exposure to these types of assets.
In the following tables, loans reported by region (along with related nonperforming assets and net charge-offs) are associated with location of origination except for loans secured by 1-4 family residential properties (representing traditional mortgages), credit cards and indirect consumer auto loans. These loans are included in the Mississippi Region because they are centrally decisioned and approved as part of a specific line of business located at Trustmark’s headquarters in Jackson, Mississippi.
The table below shows the carrying value of the loan portfolio at the end of each of the last five years:
| Loan Portfolio by Type | | | | | | | | | | | | | | | |
| ($ in thousands) | | December 31, | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Loans secured by real estate: | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 583,316 | | | $ | 830,069 | | | $ | 1,028,788 | | | $ | 1,194,940 | | | $ | 896,254 | |
| Secured by 1-4 family residential properties | | | 1,732,056 | | | | 1,650,743 | | | | 1,524,061 | | | | 1,694,757 | | | | 1,842,886 | |
| Secured by nonfarm, nonresidential properties | | | 1,498,108 | | | | 1,467,307 | | | | 1,422,658 | | | | 1,325,379 | | | | 1,326,658 | |
| Other | | | 231,963 | | | | 197,421 | | | | 186,915 | | | | 167,610 | | | | 148,921 | |
| Commercial and industrial loans | | | 1,068,369 | | | | 1,059,164 | | | | 1,237,987 | | | | 1,200,918 | | | | 1,075,766 | |
| Consumer loans | | | 402,165 | | | | 606,315 | | | | 895,046 | | | | 1,087,337 | | | | 934,261 | |
| Other loans | | | 544,265 | | | | 508,778 | | | | 426,948 | | | | 369,851 | | | | 338,407 | |
| Loans | | $ | 6,060,242 | | | $ | 6,319,797 | | | $ | 6,722,403 | | | $ | 7,040,792 | | | $ | 6,563,153 | |
The loan composition by region at December 31, 2010 is illustrated in the following tables ($ in thousands) and reflects a diversified mix of loans by region.
| | | | | | | | | | | | | | | | |
| | | December 31, 2010 | |
| Loan Composition by Region | | Total | | | Florida | | | Mississippi (Central and Southern Regions) | | | Tennessee (Memphis, TN and Northern MS Regions) | | | Texas | |
| Loans secured by real estate: | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 583,316 | | | $ | 132,021 | | | $ | 246,036 | | | $ | 43,902 | | | $ | 161,357 | |
| Secured by 1-4 family residential properties | | | 1,732,056 | | | | 72,114 | | | | 1,471,570 | | | | 156,210 | | | | 32,162 | |
| Secured by nonfarm, nonresidential properties | | | 1,498,108 | | | | 183,250 | | | | 800,096 | | | | 199,127 | | | | 315,635 | |
| Other | | | 231,963 | | | | 14,038 | | | | 171,036 | | | | 8,864 | | | | 38,025 | |
| Commercial and industrial loans | | | 1,068,369 | | | | 16,053 | | | | 772,104 | | | | 81,743 | | | | 198,469 | |
| Consumer loans | | | 402,165 | | | | 1,487 | | | | 369,129 | | | | 24,818 | | | | 6,731 | |
| Other loans | | | 544,265 | | | | 25,488 | | | | 466,016 | | | | 18,538 | | | | 34,223 | |
| Loans | | $ | 6,060,242 | | | $ | 444,451 | | | $ | 4,295,987 | | | $ | 533,202 | | | $ | 786,602 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Construction, Land Development and Other Land Loans by Region | | | | | | | | | | | | | | | | | | | | |
| Lots | | $ | 83,183 | | | $ | 46,907 | | | $ | 22,764 | | | $ | 1,955 | | | $ | 11,557 | |
| Development | | | 156,860 | | | | 21,144 | | | | 56,717 | | | | 7,420 | | | | 71,579 | |
| Unimproved land | | | 212,417 | | | | 57,811 | | | | 94,586 | | | | 24,094 | | | | 35,926 | |
| 1-4 family construction | | | 89,232 | | | | 2,277 | | | | 60,875 | | | | 5,019 | | | | 21,061 | |
| Other construction | | | 41,624 | | | | 3,882 | | | | 11,094 | | | | 5,414 | | | | 21,234 | |
| Construction, land development and other land loans | | $ | 583,316 | | | $ | 132,021 | | | $ | 246,036 | | | $ | 43,902 | | | $ | 161,357 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Loans Secured by Nonfarm, Nonresidential Properties by Region | | | | | | | | | | | | | | | | | | | | |
| Income producing: | | | | | | | | | | | | | | | | | | | | |
| Retail | | $ | 173,601 | | | $ | 48,945 | | | $ | 69,985 | | | $ | 25,096 | | | $ | 29,575 | |
| Office | | | 159,603 | | | | 48,885 | | | | 79,015 | | | | 13,769 | | | | 17,934 | |
| Nursing homes/assisted living | | | 122,440 | | | | - | | | | 112,501 | | | | 4,564 | | | | 5,375 | |
| Hotel/motel | | | 68,124 | | | | 13,084 | | | | 29,849 | | | | 11,098 | | | | 14,093 | |
| Industrial | | | 36,273 | | | | 9,355 | | | | 5,132 | | | | 1,246 | | | | 20,540 | |
| Health care | | | 13,505 | | | | - | | | | 12,377 | | | | 59 | | | | 1,069 | |
| Convenience stores | | | 12,343 | | | | 456 | | | | 6,736 | | | | 2,476 | | | | 2,675 | |
| Other | | | 163,453 | | | | 13,050 | | | | 67,199 | | | | 12,819 | | | | 70,385 | |
| Total income producing loans | | | 749,342 | | | | 133,775 | | | | 382,794 | | | | 71,127 | | | | 161,646 | |
| | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied: | | | | | | | | | | | | | | | | | | | | |
| Office | | | 123,688 | | | | 18,296 | | | | 63,318 | | | | 18,255 | | | | 23,819 | |
| Churches | | | 117,552 | | | | 2,182 | | | | 54,153 | | | | 55,744 | | | | 5,473 | |
| Industrial warehouses | | | 94,574 | | | | 2,444 | | | | 57,326 | | | | 400 | | | | 34,404 | |
| Health care | | | 80,649 | | | | 11,051 | | | | 54,918 | | | | 7,080 | | | | 7,600 | |
| Convenience stores | | | 61,913 | | | | 1,277 | | | | 35,271 | | | | 2,855 | | | | 22,510 | |
| Retail | | | 36,556 | | | | 5,732 | | | | 22,688 | | | | 1,521 | | | | 6,615 | |
| Restaurants | | | 30,537 | | | | 800 | | | | 24,053 | | | | 3,994 | | | | 1,690 | |
| Auto dealerships | | | 20,875 | | | | 606 | | | | 15,530 | | | | 1,516 | | | | 3,223 | |
| Other | | | 182,422 | | | | 7,087 | | | | 90,045 | | | | 36,635 | | | | 48,655 | |
| Total owner-occupied loans | | | 748,766 | | | | 49,475 | | | | 417,302 | | | | 128,000 | | | | 153,989 | |
| | | | | | | | | | | | | | | | | | | | | |
| Loans secured by nonfarm, nonresidential properties | | $ | 1,498,108 | | | $ | 183,250 | | | $ | 800,096 | | | $ | 199,127 | | | $ | 315,635 | |
There is no industry standard definition of “subprime loans.” Trustmark categorizes certain loans as subprime for its purposes using a set of factors, which Management believes are consistent with industry practice. TNB has not originated or purchased subprime mortgages. At December 31, 2010, Trustmark held “alt A” mortgages with an aggregate principal balance of $4.2 million (0.10% of total loans secured by real estate at that date). These “alt A” loans have been originated by Trustmark as an accommodation to certain Trustmark customers for whom Trustmark determined that such loans were suitable under the purposes of the Fannie Mae “alt A” program and under Trustmark’s loan origination standards. Trustmark does not have any no- interest loans, other than a small number of loans made to customers that are charitable organizations, the aggregate amount of which is not material to Trustmark’s financial condition or results of operations.
Due to the short-term nature of most commercial real estate lending and the practice of annual renewal of commercial lines of credit, approximately one-third of Trustmark’s portfolio matures in less than one year. Such a short-term maturity profile is not unusual for a commercial bank and provides Trustmark the opportunity to obtain updated financial information from its borrowers and to actively monitor its borrowers’ creditworthiness. This maturity profile is well matched with many of Trustmark’s sources of funding, which are also short-term in nature.
The following table provides information regarding Trustmark’s loan maturities by category at December 31, 2010:
| Loan Maturities by Category | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | |
| | | Maturing | |
| | | | | | One Year | | | | | | | |
| | | Within | | | Through | | | After | | | | |
| | | One Year | | | Five | | | Five | | | | |
| Loan Type | | or Less | | | Years | | | Years | | | Total | |
| Construction, land development and other land loans | | $ | 421,947 | | | $ | 130,056 | | | $ | 31,313 | | | $ | 583,316 | |
| Secured by 1-4 family residential properties | | | 529,371 | | | | 257,036 | | | | 945,649 | | | | 1,732,056 | |
| Other loans secured by real estate | | | 440,164 | | | | 1,060,320 | | | | 229,587 | | | | 1,730,071 | |
| Commercial and industrial | | | 507,147 | | | | 494,702 | | | | 66,520 | | | | 1,068,369 | |
| Consumer loans | | | 89,408 | | | | 297,190 | | | | 15,567 | | | | 402,165 | |
| Other loans | | | 145,136 | | | | 155,744 | | | | 243,385 | | | | 544,265 | |
| Total | | $ | 2,133,173 | | | $ | 2,395,048 | | | $ | 1,532,021 | | | $ | 6,060,242 | |
The following table provides information regarding Trustmark’s loan maturities by interest rate sensitivity at December 31, 2010:
| Loan Maturities by Interest Rate Sensitivity | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | |
| | | Maturing | |
| | | | | | One Year | | | | | | | |
| | | Within | | | Through | | | After | | | | |
| | | One Year | | | Five | | | Five | | | | |
| Loan Type | | or Less | | | Years | | | Years | | | Total | |
| Predetermined interest rates | | $ | 747,886 | | | $ | 2,062,912 | | | $ | 1,374,916 | | | $ | 4,185,714 | |
| Floating interest rates: | | | | | | | | | | | | | | | | |
| Loans which are at contractual floor | | | 729,395 | | | | 132,223 | | | | 45,285 | | | | 906,903 | |
| Loans which are free to float | | | 655,892 | | | | 199,913 | | | | 111,820 | | | | 967,625 | |
| Total floating interest rates | | | 1,385,287 | | | | 332,136 | | | | 157,105 | | | | 1,874,528 | |
| Total | | $ | 2,133,173 | | | $ | 2,395,048 | | | $ | 1,532,021 | | | $ | 6,060,242 | |
Allowance for Loan Losses
The allowance for loan losses is established through provisions for estimated loan losses charged against net income. The allowance reflects Management’s best estimate of the probable loan losses related to specifically identified loans, as well as probable incurred loan losses in the remaining loan portfolio and requires considerable judgment. The allowance is based upon Management’s current judgments and the credit quality of the loan portfolio, including all internal and external factors that impact loan collectibility. Accordingly, the allowance is based upon both past events and current economic conditions.
The table below illustrates the changes in Trustmark’s allowance for loan losses as well as Trustmark’s loan loss experience for each of the last five years:
| Analysis of the Allowance for Loan Losses | | | | | | | | | | | | | | | |
| ($ in thousands) | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | | | | | | | |
| Balance at beginning of period | | $ | 103,662 | | | $ | 94,922 | | | $ | 79,851 | | | $ | 72,098 | | | $ | 76,691 | |
| Loans charged off: | | | | | | | | | | | | | | | | | | | | |
| Real estate loans | | | (50,395 | ) | | | (55,148 | ) | | | (48,182 | ) | | | (8,678 | ) | | | (1,511 | ) |
| Loans to finance agricultural production and other loans to farmers | | | - | | | | - | | | | (3 | ) | | | (297 | ) | | | (3 | ) |
| Commercial and industrial | | | (4,186 | ) | | | (5,715 | ) | | | (3,182 | ) | | | (2,136 | ) | | | (1,670 | ) |
| Consumer | | | (10,234 | ) | | | (15,759 | ) | | | (15,976 | ) | | | (10,207 | ) | | | (7,740 | ) |
| All other loans | | | (7,082 | ) | | | (4,089 | ) | | | (4,424 | ) | | | (5,472 | ) | | | (4,014 | ) |
| Total charge-offs | | | (71,897 | ) | | | (80,711 | ) | | | (71,767 | ) | | | (26,790 | ) | | | (14,938 | ) |
| Recoveries on loans previously charged off: | | | | | | | | | | | | | | | | | | | | |
| Real estate loans | | | 417 | | | | 555 | | | | 208 | | | | 57 | | | | 152 | |
| Commercial and industrial | | | 2,245 | | | | 2,935 | | | | 1,137 | | | | 1,356 | | | | 1,729 | |
| Consumer | | | 6,395 | | | | 5,997 | | | | 5,874 | | | | 5,944 | | | | 6,130 | |
| All other loans | | | 3,142 | | | | 2,852 | | | | 3,207 | | | | 3,402 | | | | 2,955 | |
| Total recoveries | | | 12,199 | | | | 12,339 | | | | 10,426 | | | | 10,759 | | | | 10,966 | |
| Net charge-offs | | | (59,698 | ) | | | (68,372 | ) | | | (61,341 | ) | | | (16,031 | ) | | | (3,972 | ) |
| Provision for loan losses | | | 49,546 | | | | 77,112 | | | | 76,412 | | | | 23,784 | | | | (5,938 | ) |
| Allowance of acquired bank | | | - | | | | - | | | | - | | | | - | | | | 5,317 | |
| Balance at end of period | | $ | 93,510 | | | $ | 103,662 | | | $ | 94,922 | | | $ | 79,851 | | | $ | 72,098 | |
| | | | | | | | | | | | | | | | | | | | | |
Percentage of net charge-offs during period to average loans outstanding during the period | | | 0.95 | % | | | 1.01 | % | | | 0.87 | % | | | 0.23 | % | | | 0.06 | % |
Trustmark’s allowance has been developed using different factors to estimate losses based upon specific evaluation of identified individual loans considered impaired, estimated identified losses on various pools of loans and/or groups of risk rated loans with common risk characteristics and other external and internal factors of estimated probable losses based on other facts and circumstances.
Trustmark’s allowance for probable loan loss methodology is based on guidance provided in SAB No. 102 as well as other regulatory guidance. The level of Trustmark’s allowance reflects Management’s continuing evaluation of specific credit risks, loan loss experience, current loan portfolio growth, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. This evaluation takes into account other qualitative factors including recent acquisitions; national, regional and local economic trends and conditions; changes in industry and credit concentration; changes in levels and trends of delinquencies and nonperforming loans; changes in levels and trends of net charge-offs; and changes in interest rates and collateral, financial and underwriting exceptions.
During 2009, Trustmark refined its allowance for loan loss methodology for commercial loans based upon current regulatory guidance from its primary regulator. This refined methodology delineated the commercial purpose and commercial construction loan portfolios into 13 separate loan types (or pools), which had similar characteristics, such as, repayment, collateral and risk profiles. The 13 separate loan pools utilized a 10-point risk rating system to apply a reserve factor consisting of quantitative and qualitative components to determine the needed allowance by each loan type. This change expanded commercial loans from a single pool in 2008 and prior years to the thirteen separate pools and increased risk factors for commercial loan types to 130. The thirteen separate loan pools included nine basic loan groups, of which four groups were separated between Florida and non-Florida. This allowed Trustmark to reallocate loan loss reserves to loans that represent the highest risk. As a result, approximately $8.0 million in qualitative reserves were reallocated to specific portfolios during 2009.
During the first quarter of 2010, Trustmark refined the allowance for loan loss methodology for commercial loans by segregating the pools into Trustmark’s four key market regions, Florida, Mississippi, Tennessee and Texas, to take into consideration the uniqueness of each market while continuing to utilize a 10-point risk rating system for each pool. As a result, risk rate factors for commercial loan types increased to 360 while having an immaterial impact to the overall balance of the allowance for loan losses. The nine separate pools are segmented below:
Commercial Purpose Loans
| · | Real Estate – Owner Occupied |
| · | Real Estate – Non-Owner Occupied |
Commercial Construction Loans
The quantitative factors utilized in determining the required reserve are intended to reflect a three-year average by loan type; however, because of the current economic environment and the development of the refined reserve methodology, a historical loss ratio utilizing both 2008 and 2009 was used. Trustmark will develop its three-year loss factors utilizing 2008 as a base year. The qualitative factors utilize eight separate factors made up of unique characteristics that, when weighted and combined, produce an estimated level of reserve for each loan type.
At December 31, 2010, the allowance for loan losses was $93.5 million, a decrease of $10.2 million when compared with December 31, 2009. Several larger commercial credit upgrades and declines in the loan portfolio contributed to the decrease in the allowance for loan losses. Total allowance coverage of nonperforming loans, excluding impaired loans, at December 31, 2010, was 188.1%, compared to 150.1% at December 31, 2009. Allocation of Trustmark’s $93.5 million allowance for loan losses represents 1.94% of commercial loans and 0.78% of consumer and home mortgage loans, resulting in an allowance to total loans of 1.54% at December 31, 2010. This compares with an allowance to total loans of 1.64% at December 31, 2009, which was allocated to commercial loans at 2.10% and to consumer and mo rtgage loans at 0.80%.
Net charge-offs for 2010 totaled $59.7 million, or 0.95% of average loans, compared to $68.4 million, or 1.01% in 2009, and $61.3 million, or 0.87% in 2008. This decrease can be primarily attributed to a slowing in the decline of property values in commercial developments of residential real estate along with a substantial reduction in auto finance charge-offs. The net charge-offs for Florida, Mississippi and Tennessee shown in the table below exceeded their provision for 2010 because a large portion of charge-offs had been fully reserved in prior periods. The increase for 2009 can be primarily attributed to a continued decline in commercial developments of residential real estate property values and sales activity. Management continues to monitor the impact of real estate values on borrowers and is proactively managing these situations.
| Net Charge-Offs | | | | | | | | | |
| ($ in thousands) | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| Florida | | $ | 28,650 | | | $ | 36,405 | | | $ | 42,691 | |
Mississippi (1) | | | 18,963 | | | | 21,799 | | | | 14,690 | |
Tennessee (2) | | | 6,578 | | | | 3,723 | | | | 2,341 | |
| Texas | | | 5,507 | | | | 6,445 | | | | 1,619 | |
| Total net charge-offs | | $ | 59,698 | | | $ | 68,372 | | | $ | 61,341 | |
| | | | | | | | | | | | | |
| (1) - Mississippi includes Central and Southern Mississippi Regions | | | | | | | | | |
| (2) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions | | | | | | | | | |
Trustmark’s loan policy dictates the guidelines to be followed in determining when a loan is charged-off. Commercial purpose loans are charged-off when a determination is made that the loan is uncollectible and continuance as a bankable asset is not warranted. Consumer loans secured by 1-4 family residential real estate are generally charged-off or written down when the credit becomes severely delinquent, and the balance exceeds the fair value of the property less costs to sell. Non-real estate consumer purpose loans, including both secured and unsecured, are generally charged-off in full during the month in which the loan becomes 120 days past due. Credit card loans are generally charged-off in full when the loan becomes 180 days past due.
Nonperforming Assets
Nonperforming assets totaled $229.6 million at December 31, 2010, a decrease of $1.6 million relative to December 31, 2009. Collectively, total nonperforming assets to total loans and other real estate at December 31, 2010 was 3.64% compared to 3.48% at December 31, 2009. The increase is principally attributable to residential real estate conditions. To put into proper perspective, the Florida market represented approximately 7.3% of Trustmark’s total loans but 37.5% of nonperforming assets, 40.2% of total provisioning and 48.0% of net charge-offs at December 31, 2010.
| Nonperforming Assets | | | | | | | | | | | | | | | |
| ($ in thousands) | | December 31, | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Nonaccrual loans | | | | | | | | | | | | | | | |
| Florida | | $ | 53,773 | | | $ | 74,159 | | | $ | 75,092 | | | $ | 43,787 | | | $ | 4,429 | |
Mississippi (1) | | | 39,803 | | | | 31,050 | | | | 18,703 | | | | 13,723 | | | | 23,889 | |
Tennessee (2) | | | 14,703 | | | | 12,749 | | | | 3,638 | | | | 4,431 | | | | 3,708 | |
| Texas | | | 34,644 | | | | 23,204 | | | | 16,605 | | | | 3,232 | | | | 4,373 | |
| Total nonaccrual loans | | | 142,923 | | | | 141,162 | | | | 114,038 | | | | 65,173 | | | | 36,399 | |
| Other real estate | | | | | | | | | | | | | | | | | | | | |
| Florida | | | 32,370 | | | | 45,927 | | | | 21,265 | | | | 995 | | | | - | |
Mississippi (1) | | | 24,181 | | | | 22,373 | | | | 6,113 | | | | 1,123 | | | | 1,065 | |
Tennessee (2) | | | 16,407 | | | | 10,105 | | | | 8,862 | | | | 6,084 | | | | 1,140 | |
| Texas | | | 13,746 | | | | 11,690 | | | | 2,326 | | | | 146 | | | | 304 | |
| Total other real estate | | | 86,704 | | | | 90,095 | | | | 38,566 | | | | 8,348 | | | | 2,509 | |
| Total nonperforming assets | | $ | 229,627 | | | $ | 231,257 | | | $ | 152,604 | | | $ | 73,521 | | | $ | 38,908 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Nonperforming assets/total loans (including loans held for sale) and ORE | | | 3.64 | % | | | 3.48 | % | | | 2.18 | % | | | 1.02 | % | | | 0.58 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Loans Past Due 90 days or more | | | | | | | | | | | | | | | | | | | | |
| Loans held for investment | | $ | 3,608 | | | $ | 8,901 | | | $ | 5,139 | | | $ | 4,853 | | | $ | 2,957 | |
| | | | | | | | | | | | | | | | | | | | | |
| Serviced GNMA loans eligible for repurchase (no obligation to repurchase) | | $ | 15,777 | | | $ | 46,661 | | | $ | 18,095 | | | $ | 11,847 | | | $ | 8,510 | |
| | | | | | | | | | | | | | | | | | | | | |
| (1) - Mississippi includes Central and Southern Mississippi Regions | | |
| (2) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions | | | |
See the previous discussion of Loans Held for Sale for more information on Trustmark’s serviced GNMA loans eligible for repurchase and the impact of Trustmark’s repurchases of delinquent mortgage loans under the GNMA optional repurchase program.
Total nonaccrual loans increased $1.8 million during 2010 to $142.9 million, or 2.30% of total loans including loans held for sale, due primarily to residential real estate development and commercial real estate credits in Trustmark’s Mississippi and Texas markets, which were impaired and written-down to fair value of the underlying collateral less estimated cost of disposition. Other real estate totaled $86.7 million at December 31, 2010, a decrease of $3.4 million when compared to December 31, 2009, as continued progress was made in the disposition of foreclosed properties in Trustmark’s Florida market. Florida other real estate balances declined 29.5% to total $32.4 million at December 31, 2010, which represents 37.3% of Trustmark’s other real estate. Collectively, other real estate balances i n Trustmark’s Florida market have been written down by approximately 48% from the point at which the loans failed to perform in accordance with contractual terms. Other real estate in Trustmark’s Mississippi, Tennessee and Texas markets, which represent 62.7% of the total, did not experience as significant of an increase in real estate prices and market declines during the current economic cycle, as did Florida. Trustmark continues to devote significant resources to managing risks related to other real estate.
The following table illustrates nonaccrual loans by loan type for the past five years:
| Nonaccrual Loans by Loan Type | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Construction, land development and other land loans | | $ | 57,831 | | | $ | 81,805 | | | $ | 72,582 | | | $ | 45,999 | | | $ | 2,182 | |
| Secured by 1-4 family residential properties | | | 30,313 | | | | 31,464 | | | | 11,699 | | | | 10,851 | | | | 5,314 | |
| Secured by nonfarm, nonresidential properties | | | 29,013 | | | | 18,056 | | | | 10,775 | | | | 4,694 | | | | 15,274 | |
| Other loans secured by real estate | | | 6,154 | | | | 2,097 | | | | 3,351 | | | | 165 | | | | 75 | |
| Commercial and industrial | | | 16,107 | | | | 6,630 | | | | 14,617 | | | | 2,506 | | | | 12,584 | |
| Consumer loans | | | 2,112 | | | | 973 | | | | 976 | | | | 883 | | | | 754 | |
| Other loans | | | 1,393 | | | | 137 | | | | 38 | | | | 75 | | | | 216 | |
| Total Nonaccrual Loans by Type | | $ | 142,923 | | | $ | 141,162 | | | $ | 114,038 | | | $ | 65,173 | | | $ | 36,399 | |
The following table illustrates other real estate by type of property for the past five years:
| Other Real Estate by Property Type | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Construction, land development and other land loans | | $ | 61,963 | | | $ | 60,276 | | | $ | 28,824 | | | $ | 3,635 | | | $ | 408 | |
| 1-4 family residential properties | | | 13,509 | | | | 11,001 | | | | 8,443 | | | | 4,446 | | | | 1,536 | |
| Nonfarm, nonresidential properties | | | 9,820 | | | | 7,285 | | | | 1,220 | | | | 174 | | | | 565 | |
| Other real estate loans | | | 1,412 | | | | 11,533 | | | | 79 | | | | 93 | | | | - | |
| Total other real estate | | $ | 86,704 | | | $ | 90,095 | | | $ | 38,566 | | | $ | 8,348 | | | $ | 2,509 | |
The following table illustrates writedowns of other real estate by region for the past three years:
| Writedowns of Other Real Estate by Region | | | | | | | | | |
| ($ in thousands) | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Florida | | $ | 11,033 | | | $ | 5,155 | | | $ | 234 | |
Mississippi (1) | | | 4,844 | | | | 1,336 | | | | 2 | |
Tennessee (2) | | | 935 | | | | 948 | | | | 66 | |
| Texas | | | 315 | | | | - | | | | - | |
| Total writedowns of other real estate | | $ | 17,127 | | | $ | 7,439 | | | $ | 302 | |
| | | | | | | | | | | | | |
| (1) - Mississippi includes Central and Southern Mississippi Regions | | |
| (2) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions | | |
Trustmark has made significant progress in the resolution of its construction and land development portfolio in Florida. Over the last 12 months, this portfolio has been reduced by $66.9 million, or 33.6%, to $132.0 million. At December 31, 2010, the associated reserve for loan losses on this portfolio totaled $16.4 million, or 12.4%. Managing credit risks resulting from the current economic and real estate market conditions continue to be a primary focus for Trustmark.
As seen in the table below, at December 31, 2010, approximately $43.3 million in construction, land development and other loans have been classified and reserved for at appropriate levels, including $22.9 million of impaired loans that have been charged down to fair value of the underlying collateral less cost to sell. Management believes that this portfolio is appropriately risk rated and adequately reserved based upon current conditions.
Florida Credit Quality
($ in thousands)
| | | December 31, 2010 | |
| | | | | | | | | | | | Classified (3) | |
| | | Total Loans | | | Criticized Loans (1) | | | Special Mention (2) | | | Accruing | | | Nonimpaired Nonaccrual | | | Impaired Nonaccrual (4) | |
| Construction, land development and other land loans: | | | | | | | | | | | | | | | | | | |
| Lots | | $ | 46,907 | | | $ | 15,964 | | | $ | 671 | | | $ | 10,037 | | | $ | 3,233 | | | $ | 2,023 | |
| Development | | | 21,144 | | | | 11,152 | | | | - | | | | 3,753 | | | | 99 | | | | 7,300 | |
| Unimproved land | | | 57,811 | | | | 37,098 | | | | 21,676 | | | | 2,164 | | | | 779 | | | | 12,479 | |
| 1-4 family construction | | | 2,277 | | | | 1,081 | | | | - | | | | - | | | | - | | | | 1,081 | |
| Other construction | | | 3,882 | | | | 302 | | | | - | | | | 302 | | | | - | | | | - | |
| Construction, land development and other land loans | | | 132,021 | | | | 65,597 | | | | 22,347 | | | | 16,256 | | | | 4,111 | | | | 22,883 | |
| Commercial, commercial real estate and consumer | | | 312,430 | | | | 73,928 | | | | 12,522 | | | | 34,627 | | | | 7,652 | | | | 19,127 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Florida loans | | $ | 444,451 | | | $ | 139,525 | | | $ | 34,869 | | | $ | 50,883 | | | $ | 11,763 | | | $ | 42,010 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Florida Loan Loss Reserves by Loan Type | | Total Loans | | | Loan Loss Reserves | | | Loan Loss Reserve % of Total Loans | | | | | | | | | | |
| Construction, land development and other land loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Lots | | $ | 46,907 | | | $ | 4,192 | | | | 8.94 | % | | | | | | | | | | | | |
| Development | | | 21,144 | | | | 4,272 | | | | 20.20 | % | | | | | | | | | | | | |
| Unimproved land | | | 57,811 | | | | 7,629 | | | | 13.20 | % | | | | | | | | | | | | |
| 1-4 family construction | | | 2,277 | | | | 32 | | | | 1.41 | % | | | | | | | | | | | | |
| Other construction | | | 3,882 | | | | 259 | | | | 6.67 | % | | | | | | | | | | | | |
| Construction, land development and other land loans | | | 132,021 | | | | 16,384 | | | | 12.41 | % | | | | | | | | | | | | |
| Commercial, commercial real estate and consumer | | | 312,430 | | | | 7,276 | | | | 2.33 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Florida loans | | $ | 444,451 | | | $ | 23,660 | | | | 5.32 | % | | | | | | | | | | | | |
| (1) | Criticized loans equal all special mention and classified loans. |
| (2) | Special mention loans exhibit potential credit weaknesses that, if not resolved, may ultimately result in a more severe classification. |
| (3) | Classified loans include those loans identified by management as exhibiting well-defined credit weaknesses that may jeopardize repayment in full of the debt. |
| (4) | All nonaccrual loans over $500 thousand are individually assessed for impairment. Impaired loans have been determined to be collateral dependent and assessed using a fair value approach. Fair value estimates begin with appraised values, normally from recently received and reviewed appraisals. Appraised values are adjusted down for costs associated with asset disposal. At the time a loan is deemed to be impaired, the full difference between book value and the most likely estimate of the asset’s net realizable value is charged off. However, as subsequent events dictate and estimated net realizable values decline, required reserves are established. |
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase agreements were $11.8 million at December 31, 2010, an increase of $5.4 million when compared with December 31, 2009. Trustmark utilizes these products as offerings for its correspondent banking customers as well 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. Deposits include interest-bearing and noninterest-bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. Total deposits were $7.045 billion at December 31, 2010, compared with $7.188 billion at December 31, 2009, a decrease of $143.9 million, or 2.0%. This decline in deposits is comprised of a decrease in both noninterest-bearing and interest-bearing deposits of $48.6 million and $95.3 million, respectively. Noninterest-bearing deposits decreased primarily due to day-to-day fluctuations in business Demand Deposit Accounts (DDA) balances. The decrease in interest-bearing deposits resulted primarily from a targeted effort to reduce higher-cost certificates of deposit partially offset by increases in high yield money market accounts and growth in balances held by public entities.
Trustmark uses short-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, short-term FHLB advances, and the treasury tax and loan note option account. Short-term borrowings totaled $1.125 billion at December 31, 2010, an increase of $218.5 million, when compared with $907.0 million at December 31, 2009, as Trustmark utilized wholesale funding products to provide liquidity in response to a decrease in deposits over the same period.
The table below presents information concerning qualifying components of Trustmark’s short-term borrowings for each of the last three years ($ in thousands):
| | | | | | | | | | |
Federal funds purchased and securities sold under repurchase agreements: | | 2010 | | | 2009 | | | 2008 | |
| Amount outstanding at end of period | | $ | 700,138 | | | $ | 653,032 | | | $ | 811,129 | |
| Weighted average interest rate at end of period | | | 0.19 | % | | | 0.11 | % | | | 0.18 | % |
| Maximum amount outstanding at any month end during each period | | $ | 827,162 | | | $ | 738,201 | | | $ | 927,902 | |
| Average amount outstanding during each period | | $ | 580,427 | | | $ | 621,638 | | | $ | 626,767 | |
| Weighted average interest rate during each period | | | 0.20 | % | | | 0.18 | % | | | 1.66 | % |
| | | | | | | | | | | | | |
| Short-term borrowings: | | | | | | | | | | | | |
| Amount outstanding at end of period | | $ | 425,343 | | | $ | 253,957 | | | $ | 730,958 | |
| Weighted average interest rate at end of period | | | 0.57 | % | | | 0.69 | % | | | 0.82 | % |
| Maximum amount outstanding at any month end during each period | | $ | 425,343 | | | $ | 766,715 | | | $ | 730,958 | |
| Average amount outstanding during each period | | $ | 209,550 | | | $ | 371,173 | | | $ | 276,974 | |
| Weighted average interest rate during each period | | | 0.86 | % | | | 0.66 | % | | | 2.54 | % |
Benefit Plans
Capital Accumulation Plan
As disclosed in Note 12 – Defined Benefit and Other Postretirement Benefits included in Item 8 - Financial Statements and Supplementary Data, Trustmark maintains a noncontributory defined benefit pension plan, which covers substantially all associates employed prior to January 1, 2007. The plan provides retirement benefits that are based on the length of credited service and final average compensation. In an effort to control expenses, the Board voted to freeze plan benefits effective May 15, 2009. Individuals will not earn additional benefits, except for interest as required by the IRS regulations, after the effective date. Associates will retain their previously earned pension benefits. During 2009, Trustmark recorded a one-time curtailment gain of $1.9 million as a result of the free ze in plan benefits due to the recognition of the prior service credits previously included in accumulated other comprehensive loss.
At December 31, 2010, the fair value of plan assets totaled $77.8 million and was exceeded by the plan projected benefit obligation of $94.1 million by $16.3 million. Net periodic benefit cost equaled $2.8 million in 2010 compared with $51 thousand in 2009 and $2.3 million in 2008.
The fair value of plan assets is determined utilizing current market quotes, while the benefit obligation and periodic benefit costs are determined utilizing actuarial methodology with certain weighted-average assumptions. For 2010, 2009 and 2008, the process used to select the discount rate assumption under FASB ASC Topic 715, “Employers’ Accounting for Pensions,” takes into account the benefit cash flow and the segmented yields on high-quality corporate bonds that would be available to provide for the payment of the benefit cash flow. Assumptions, which have been chosen to represent the estimate of a particular event as required by GAAP, have been reviewed and approved by Management based on recommendations from its actuaries.
The acceptable range of contributions to the plan is determined each year by the plan's actuary. Trustmark's policy is to fund amounts allowable for federal income tax purposes. The actual amount of the contribution is determined based on the plan's funded status and return on plan assets as of the measurement date, which is December 31. For 2010, the minimum required contribution was zero; however, in July 2010, Trustmark made a voluntary contribution of $1.9 million to improve the funded status of the plan. For 2009, Trustmark’s minimum required contribution was zero and there was no voluntary contribution. During 2011, Trustmark’s minimum required contribution is expected to be zero; however, Management and the Board of Directors will monitor the plan throughout 2011 to determine any funding requirements by the plan’s measurement date.
Supplemental Retirement Plan
Trustmark also maintains a nonqualified supplemental retirement plan covering directors who elect to defer fees, key executive officers and senior officers. The plan provides for defined death benefits and/or retirement benefits based on a participant’s covered salary. Trustmark has acquired life insurance contracts on the participants covered under the plan, which are anticipated to fund future payments under the plan.
At December 31, 2010, the accrued benefit obligation equaled $45.4 million, while the net periodic benefit cost equaled $3.5 million in 2010 and 2009, and $3.7 million in 2008. The net periodic benefit cost and projected benefit obligation are determined using actuarial assumptions as of the plan’s measurement date, which is December 31. The process used to select the discount rate assumption under FASB ASC Topic 715 takes into account the benefit cash flow and the segmented yields on high-quality corporate bonds that would be available to provide for the payment of the benefit cash flow. At December 31, 2010, these unrecognized actuarial losses and unrecognized prior service costs continue to be amortized over future service periods.
Off-Balance Sheet Arrangements
Trustmark makes commitments to extend credit and issues standby and commercial letters of credit in the normal course of business in order to fulfill the financing needs of its customers. These loan commitments and letters of credit are off-balance sheet arrangements.
Commitments to extend credit are agreements to lend money to customers pursuant to certain specified conditions. Commitments generally have fixed expiration dates or other termination clauses. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Trustmark applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based upon the assessed creditworthiness of the borrower. At both December 31, 2010 and 2009, Trustmark had commitments to extend credit of $1.6 billion and $1.7 billion, respectively.
Standby and commercial letters of credit are conditional commitments issued by Trustmark to ensure the performance of a customer to a first party. When issuing letters of credit, Trustmark uses essentially the same policies regarding credit risk and collateral that are followed in the lending process. At December 31, 2010 and 2009, Trustmark’s maximum exposure to credit loss in the event of nonperformance by the other party for letters of credit was $185.6 million and $187.5 million, respectively. These amounts consist primarily of commitments with maturities of less than three years. Trustmark holds collateral to support certain letters of credit when deemed necessary.
Contractual Obligations
Trustmark is obligated under certain contractual arrangements. The amount of the payments due under those obligations as of December 31, 2010 is shown in the table below:
| Contractual Obligations | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Less than | | | One to Three | | | Three to Five | | | After | | | | |
| | | One Year | | | Years | | | Years | | | Five Years | | | Total | |
| Subordinated notes | | $ | - | | | $ | - | | | $ | - | | | $ | 49,806 | | | $ | 49,806 | |
| Junior subordinated debt securities | | | - | | | | - | | | | - | | | | 61,856 | | | | 61,856 | |
| Operating lease obligations | | | 6,013 | | | | 9,574 | | | | 6,108 | | | | 5,448 | | | | 27,143 | |
| Time deposits | | | 1,800,167 | | | | 280,058 | | | | 44,448 | | | | 108 | | | | 2,124,781 | |
| FHLB advances | | | 350,000 | | | | - | | | | - | | | | - | | | | 350,000 | |
| Securities sold under repurchase agreements | | | 234,037 | | | | - | | | | - | | | | - | | | | 234,037 | |
| Total | | $ | 2,390,217 | | | $ | 289,632 | | | $ | 50,556 | | | $ | 117,218 | | | $ | 2,847,623 | |
Capital Resources
At December 31, 2010, Trustmark’s total shareholders’ equity was $1.149 billion, an increase of $39.4 million from its level at December 31, 2009. During 2010, shareholders’ equity increased primarily as a result of net income of $100.6 million and was offset by an increase in accumulated other comprehensive loss of $9.8 million and common stock dividends of $59.3 million. Trustmark utilizes a capital model in order to provide Management with a monthly tool for analyzing changes in its strategic capital ratios. This allows Management to hold sufficient capital to provide for growth opportunities, protect the balance sheet against sudden adverse market conditions while maintaining an attractive return on equity to shareholders.
Common Stock Offering
On December 7, 2009, Trustmark completed a public offering of 6,216,216 shares of its common stock, including 810,810 shares issued pursuant to the exercise of the underwriters’ over-allotment option, at a price of $18.50 per share. Trustmark received net proceeds of approximately $109.3 million after deducting underwriting discounts, commissions and estimated offering expenses. Proceeds from this offering were used in the repurchase of Senior Preferred Stock discussed below.
Repurchase of Preferred Stock
On November 21, 2008, Trustmark issued 215,000 shares of Senior Preferred Stock to the Treasury in a private placement transaction as part of the Troubled Assets Relief Program Capital Purchase Program (TARP CPP), a voluntary initiative for healthy U.S. financial institutions. As part of its participation in the TARP CPP, Trustmark also issued to the Treasury a Warrant to purchase up to 1,647,931 shares of Trustmark’s common stock, at an initial exercise price of $19.57 per share, subject to customary anti-dilution adjustments.
On December 9, 2009, Trustmark completed the repurchase of its 215,000 shares of Senior Preferred Stock from the Treasury at a purchase price of $215.0 million plus a final accrued dividend of $716.7 thousand. The repurchase of the Senior Preferred Stock resulted in a one-time, non-cash charge of $8.2 million to net income available to common shareholders in Trustmark’s fourth quarter financial statements for the unaccreted discount recorded at the date of issuance of the Senior Preferred Stock. In addition, on December 30, 2009, Trustmark repurchased in full from the Treasury, the Warrant to purchase 1,647,931 shares of Trustmark’s common stock, which was issued to the Treasury pursuant to the TARP CPP. The purchase price paid by Trustmark to the Treasury for the Warrant was its fair value of $10.0 million.
Regulatory Capital
Trustmark and TNB are subject to minimum capital requirements, which are administered by various federal regulatory agencies. These capital requirements, as defined by federal guidelines, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional, discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of both Trustmark and TNB. Trustmark aims to exceed the well-capitalized guidelines for regulatory capital. As of December 31, 2010, Trustmark and TNB have exceeded all of the minimum capital standards for the parent company and its primary banking subsidiary as established by reg ulatory requirements. In addition, TNB has met applicable regulatory guidelines to be considered well-capitalized at December 31, 2010. To be categorized in this manner, TNB must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the accompanying table. There are no significant conditions or events that have occurred since December 31, 2010, which Management believes have affected TNB’s present classification.
In addition, during 2006, Trustmark enhanced its capital structure with the issuance of trust preferred securities and Subordinated Notes. For regulatory capital purposes, the trust preferred securities currently qualify as Tier 1 capital while the Subordinated Notes qualify as Tier 2 capital. The addition of these capital instruments provided Trustmark a cost effective manner in which to manage shareholders’ equity and enhance financial flexibility.
| Regulatory Capital Table | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | |
| | | Actual Regulatory Capital | | | Minimum Regulatory Capital Required | | | Minimum Regulatory Provision to be Well-Capitalized | |
| At December 31, 2010: | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| Total Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | |
| Trustmark Corporation | | $ | 1,051,933 | | | | 15.77 | % | | $ | 533,774 | | | | 8.00 | % | | | n/a | | | | n/a | |
| Trustmark National Bank | | | 1,014,219 | | | | 15.40 | % | | | 526,894 | | | | 8.00 | % | | $ | 658,617 | | | | 10.00 | % |
| Tier 1 Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Trustmark Corporation | | $ | 918,600 | | | | 13.77 | % | | $ | 266,887 | | | | 4.00 | % | | | n/a | | | | n/a | |
| Trustmark National Bank | | | 883,549 | | | | 13.42 | % | | | 263,447 | | | | 4.00 | % | | $ | 395,170 | | | | 6.00 | % |
| Tier 1 Capital (to Average Assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Trustmark Corporation | | $ | 918,600 | | | | 10.14 | % | | $ | 271,867 | | | | 3.00 | % | | | n/a | | | | n/a | |
| Trustmark National Bank | | | 883,549 | | | | 9.89 | % | | | 267,967 | | | | 3.00 | % | | $ | 446,612 | | | | 5.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2009: | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Trustmark Corporation | | $ | 1,008,980 | | | | 14.58 | % | | $ | 553,504 | | | | 8.00 | % | | | n/a | | | | n/a | |
| Trustmark National Bank | | | 967,224 | | | | 14.16 | % | | | 546,344 | | | | 8.00 | % | | $ | 682,930 | | | | 10.00 | % |
| Tier 1 Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Trustmark Corporation | | $ | 872,509 | | | | 12.61 | % | | $ | 276,752 | | | | 4.00 | % | | | n/a | | | | n/a | |
| Trustmark National Bank | | | 834,056 | | | | 12.21 | % | | | 273,172 | | | | 4.00 | % | | $ | 409,758 | | | | 6.00 | % |
| Tier 1 Capital (to Average Assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Trustmark Corporation | | $ | 872,509 | | | | 9.74 | % | | $ | 268,868 | | | | 3.00 | % | | | n/a | | | | n/a | |
| Trustmark National Bank | | | 834,056 | | | | 9.45 | % | | | 264,817 | | | | 3.00 | % | | $ | 441,361 | | | | 5.00 | % |
Dividends on Common Stock
Dividends per common share for the years ended December 31, 2010 and 2009 were $0.92. Trustmark’s dividend payout ratio for 2010, 2009 and 2008 was 58.2%, 73.0%, and 57.9%, respectively. Approval by TNB’s regulators is required if the total of all dividends declared in any calendar year exceeds the total of its net income for that year combined with its retained net income of the preceding two years. TNB will have available in 2011 approximately $68.6 million plus its net income for that year to pay as dividends. The actual amount of any dividends declared in 2011 will be determined by Trustmark’s Board of Directors.
Common Stock Repurchase Program
Trustmark did not repurchase any common shares during 2010, 2009 or 2008 and currently has no authorization from the Board of Directors to repurchase its common stock.
Liquidity
Liquidity is the ability to meet asset funding requirements and operational cash outflows in a timely manner, in sufficient amount and without excess cost. Consistent cash flows from operations and adequate capital provide internally generated liquidity. Furthermore, Management maintains funding capacity from a variety of external sources to meet daily funding needs, such as those required to meet deposit withdrawals, loan disbursements and security settlements. Liquidity strategy also includes the use of wholesale funding sources to provide for the seasonal fluctuations of deposit and loan demand and the cyclical fluctuations of the economy that impact the availability of funds. Management keeps excess funding capacity available to meet potential demands associated with adverse circumstances .
The asset side of the balance sheet provides liquidity primarily through maturities and cash flows from loans and securities, as well as the ability to sell certain loans and securities while the liability portion of the balance sheet provides liquidity primarily through noninterest and interest-bearing deposits. Trustmark utilizes Federal funds purchased, brokered deposits, FHLB advances, securities sold under agreements to repurchase as well as the Federal Reserve Discount Window (Discount Window) to provide additional liquidity. Access to these additional sources represents Trustmark’s incremental borrowing capacity.
Deposit accounts represent Trustmark’s largest funding source. Average deposits totaled to $7.116 billion for 2010 and represented approximately 76.6% of average liabilities and shareholders’ equity when compared to average deposits of $7.012 billion, which represented 73.7% of average liabilities and shareholders’ equity for 2009.
Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. At December 31, 2010, brokered sweep Money Market Deposit Account (MMDA) deposits totaled $147.9 million compared to $107.7 million at December 31, 2009. At December 31, 2010 and December 31, 2009, Trustmark had no outstanding brokered certificates of deposit.
At December 31, 2010, Trustmark had $415.0 million of upstream Federal funds purchased, compared to $454.0 million at December 31, 2009. Trustmark maintains adequate federal funds lines in excess of the amount utilized to provide sufficient short-term liquidity. Trustmark also maintains a relationship with the FHLB, which provided $350.0 million in advances at December 31, 2010, compared with $200.0 million in advances at December 31, 2009. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances by $1.585 billion at December 31, 2010.
Additionally, during 2010, Trustmark could utilize wholesale funding repurchase agreements as a source of borrowing by utilizing its unencumbered investment securities as collateral. At December 31, 2010, Trustmark had approximately $497.4 million available in repurchase agreement capacity compared to $245.5 million at December 31, 2009.
Another borrowing source is the Discount Window. At December 31, 2010, Trustmark had approximately $845.5 million available in collateral capacity at the Discount Window from pledges of loans and securities, compared with $821.6 million at December 31, 2009.
TNB has outstanding $50.0 million in aggregate principal amount of Subordinated Notes (the Notes) due December 15, 2016. At December 31, 2010, the carrying amount of the Notes was $49.8 million. The Notes were sold pursuant to the terms of regulations issued by the Office of the Comptroller of the Currency (OCC) and in reliance upon an exemption provided by the Securities Act of 1933, as amended. The Notes are unsecured and subordinate and junior in right of payment to TNB’s obligations to its depositors, its obligations under bankers’ acceptances and letters of credit, its obligations to any Federal Reserve Bank or the FDIC and its obligations to its other creditors, and to any rights acquired by the FDIC as a result of loans made by the FDIC to TNB. The Notes, which are not redeemable prio r to maturity, currently qualify as Tier 2 capital for both TNB and Trustmark.
During 2006, Trustmark completed a private placement of $60.0 million of trust preferred securities through a newly formed Delaware trust affiliate, Trustmark Preferred Capital Trust I, (the Trust). The trust preferred securities mature September 30, 2036 and are redeemable at Trustmark’s option beginning after five years. Under applicable regulatory guidelines, these trust preferred securities qualify as Tier 1 capital. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase $61.856 million in aggregate principal amount of Trustmark’s junior subordinated debentures. The net proceeds to Trustmark from the sale of the related junior subordinated debentures to the Trust were used to assist in financing Trustmark’s merger with Republic.&# 160; On October 7, 2010, upon receipt of approval from the Federal Reserve Bank of Atlanta, the trust preferred securities of the Republic Trust, which totaled $8.0 million, were redeemed at par plus accrued interest and the junior subordinated debt securities were repaid.
Another funding mechanism set into place in 2006 was Trustmark’s grant of a Class B banking license from the Cayman Islands Monetary Authority. Subsequently, Trustmark established a branch in the Cayman Islands through an agent bank. The branch was established as a mechanism to attract dollar denominated foreign deposits (i.e., Eurodollars) as an additional source of funding. At December 31, 2010, Trustmark had $36.8 million in Eurodollar deposits outstanding.
The Board of Directors currently has the authority to issue up to 20.0 million preferred shares with no par value. The ability to issue preferred shares in the future will provide Trustmark with additional financial and management flexibility for general corporate and acquisition purposes. Trustmark repurchased the 215,000 shares of Senior Preferred Stock from the Treasury in December 2009. Also, in December 2009, Trustmark issued common stock and received net proceeds of $109.3 million to use in the repurchase of the Senior Preferred Stock. At December 31, 2010, Trustmark has no shares of preferred stock issued. For further information regarding Trustmark’s repurchase of Senior Preferred Stock and the issuance of common stock, please refer to the section Capital Resources fo und elsewhere in this report.
Liquidity position and strategy are reviewed regularly by the Asset/Liability Committee and continuously adjusted in relationship to Trustmark’s overall strategy. Management believes that Trustmark has sufficient liquidity and capital resources to meet presently known cash flow requirements arising from ongoing business transactions.
Asset/Liability Management
Overview
Market risk reflects the potential risk of loss arising from adverse changes in interest rates and market prices. Trustmark has risk management policies to monitor and limit exposure to market risk. Trustmark’s primary market risk is interest rate risk created by core banking activities. Interest rate risk is the potential variability of the income generated by Trustmark’s financial products or services, which results from changes in various market interest rates. Market rate changes may take the form of absolute shifts, variances in the relationships between different rates and changes in the shape or slope of the interest rate term structure.
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 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.
Derivatives
Trustmark uses financial derivatives for management of interest rate risk. The Asset/Liability Committee, in its oversight role for the management of interest rate risk, approves the use of derivatives in balance sheet hedging strategies. The most common derivatives employed by Trustmark are interest rate lock commitments, forward contracts, both futures contracts and options on futures contracts, interest rate swaps, interest rate caps and interest rate floors. In addition, Trustmark may, in the future, enter into derivative contracts as counterparty to one or more customers in connection with loans extended to those customers. These transactions would be designed to hedge exposures of the customers and would not be entered into by Trustmark for s peculative purposes.
As part of Trustmark’s risk management strategy in the mortgage banking area, various derivative instruments such as interest rate lock commitments and forward sales contracts are utilized. Rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified period of time. 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. These derivative instruments are designated as fair value hedges under FASB ASC Topic 815, “Derivatives and Hedging.” The gross, notional amount of Trustmark’s off-balance sheet obligations under these derivative instruments totaled $230.9 million at December 31, 20 10, with a positive valuation adjustment of $3.5 million, compared to $267.0 million, with a positive valuation adjustment of $2.1 million as of December 31, 2009.
Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and exchange-traded option contracts, to achieve a fair value return that offsets the changes in fair value of MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. Changes in the fair value of these exchange-traded derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of MSR. The MSR fair value represents the effect of present value decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the total hedge cost to the changes in the fair value of the MSR asset a ttributable to interest rate changes. The impact of implementing this strategy resulted in a net positive ineffectiveness of $7.3 million for the year ended December 31, 2010 and a net negative ineffectiveness of $22 thousand for the year ended December 31, 2009. Increased federal regulation of the over-the-counter derivative markets may increase the cost to Trustmark to administer derivative programs.
Accounting Policies Recently Adopted and Pending Accounting Pronouncements
ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU 2010-20.” On January 19, 2011, the FASB issued Accounting Standards Update (ASU) 2011-01, which temporarily delays the effective date for public entities of the disclosures about troubled debt restructurings (TDRs) in ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The deferral will allow the FASB to complete its deliberations on what constitutes a TDR, and to coordinate the effective dates of the new disclosures about TDRs for public entities in ASU 2010-20 and the guidance for determining what constitutes a TDR. Without the deferral, public-entity creditors would have been required to c omply with the disclosures about TDRs in ASU 2010-20 for periods beginning on or after December 15, 2010.
ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” In December 2010, the FASB issued ASU 2010-28 which modifies Step 1 of the goodwill impairment test under FASB ASC Topic 350, “Intangibles -Goodwill and Other,” for reporting units with zero or negative carrying amounts to require an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodw ill impairment exists, an entity should consider whether there are adverse qualitative factors in determining whether an interim goodwill impairment test between annual test dates is necessary. The ASU allows an entity to use either the equity or enterprise valuation premise to determine the carrying amount of a reporting unit. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010 for a public entity and is not expected to have a significant impact on Trustmark’s financial statements.
ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” In July 2010, the FASB issued ASU 2010-20, which requires Trustmark to provide a greater level of disaggregated information about the credit quality of loans and the Allowance for Loan Losses (Allowance). This ASU also requires Trustmark to disclose additional information related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. Disclosures related to period-end information will be effective in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occurs during a reporting period are required in interim or annual periods beginning on or after December 15, 2010. The required disclosures are reported in Note 4 – Loans and Allowance for Loan Losses.
ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset.” In April 2010, the FASB issued ASU 2010-18, which states that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments do not affect the accounting for loans under the scope of ASC 310-30 that are not accounted for within pools. Loans accounted for individually under ASC 310-30 con tinue to be subject to the troubled debt restructuring accounting provisions within ASC 310-40, “Receivables—Troubled Debt Restructurings by Creditors”. The amendments were effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010 and did not have a significant impact on Trustmark’s financial statements.
ASU 2010-09, “Amendments to Certain Recognition and Disclosure Requirements.” In February 2010, the FASB issued ASU 2010-09, to address potential practice issues associated with FASB ASC Topic 855 (Statement 165). The ASU eliminates the requirement for SEC filers to disclose the date through which subsequent events have been evaluated in originally issued and reissued financial statements. This amendment was immediately effective.
ASU 2010-06, “Improving Disclosures about Fair Value Measurements.” In January 2010, the FASB issued ASU 2010-06, which requires additional disclosures related to the transfers in and out of fair value hierarchy and the activity of Level 3 financial instruments. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair val ue measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for Trustmark beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for Trustmark on January 1, 2010 and are reported in Note 16 – Fair Value.
SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” In June 2009, the FASB issued SFAS No. 167, codified as ASU 2009-17, which modifies how a company determines when a variable interest entity (VIE) that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate a VIE is based on, among other things, the VIE’s purpose and design and a company’s ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance. ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial statements. ASU 2009-17 became effective for Trustmark’s financial statements on January 1, 2010 and the adoption did not have a significant impact on Trustmark’s financial statements.
SFAS No. 166, “Accounting for Transfers of Financial Assets.” In June 2009, the FASB issued SFAS No. 166, codified as ASU 2009-16, which amended ASC Topic 860, “Transfers and Servicing,” to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 eliminated the concept of a “qualifying special-purpose entity” and changed the requirements for derecognizing financial assets. ASU 2009-16 also required additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. ASU 2009-16 als o modified the criteria that must be met in order for a transfer of a portion of a financial asset, such as a loan participation, to qualify for sale accounting. ASU 2009-16 became effective for Trustmark’s financial statements on January 1, 2010 and the adoption did not have a significant impact on Trustmark’s financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market/Interest Rate Risk Management
The primary purpose in managing interest rate risk is to invest capital effectively and preserve the value created by the core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.
Financial simulation models are the primary tools used by Trustmark’s Asset/Liability Committee to measure interest rate exposure. Using a wide range of scenarios, Management is provided with extensive information on the potential impact to net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Trustmark’s balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of Trustmark’s balance sheet, resulting from both strategic plans and customer behavior. In addition, the model incorporates Management’s assumptions and expectations regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates.
Based on the results of the simulation models using static balances at both December 31, 2010 and 2009, it is estimated that net interest income may decrease 3.2% in a one-year, shocked, up 200 basis point rate shift scenario, compared to a base case, flat rate scenario for the same time periods. In the event of a 100 basis point decrease in interest rates using static balances at December 31, 2010, it is estimated net interest income may decrease by 3.6% compared to a 0.8% decrease at December 31, 2009. At December 31, 2010 and 2009, the impact of a 200 basis point drop scenario was not calculated due to the historically low interest rate environment.
The table below summarizes the effect various rate shift scenarios would have on net interest income at December 31, 2010 and 2009:
| Interest Rate Exposure Analysis | | Estimated Annual % Change | |
| | | in Net Interest Income | |
| | | 2010 | | | 2009 | |
| Change in Interest Rates | | | | | | |
| +200 basis points | | | -3.2 | % | | | -3.2 | % |
| +100 basis points | | | -2.0 | % | | | -2.2 | % |
| -100 basis points | | | -3.6 | % | | | -0.8 | % |
As shown in the table above, the interest rate shocks illustrate the negative contribution to net interest income in both rising and falling interest rate environments. Although there are several contributing factors, the primary reason in a one-year, shocked, down 100 basis point rate shift scenario is an increased speed of prepayment of mortgage-related assets reinvested at lower interest rates, only partially offset by declining deposit costs. In the one-year, shocked, up 200 basis point rate shift scenario, the principal factor is an increased cost of deposits and other short-term liabilities. Although an increase in the rate on floating rate loans partially offsets this additional cost, it is limited by the interest rate floors placed on these loans. Management cannot provide any assurance about th e actual effect of changes in interest rates on net interest income. The estimates provided do not include the effects of possible strategic changes in the balances of various assets and liabilities throughout 2011 or additional actions Trustmark could undertake in response to changes in interest rates. Management will continue to prudently manage the balance sheet in an effort to control interest rate risk and maintain profitability over the long term.
Another component of interest rate risk management is measuring the economic value-at-risk for a given change in market interest rates. The economic value-at-risk may indicate risks associated with longer-term balance sheet items that may not affect net interest income at risk over shorter time periods. Trustmark also uses computer-modeling techniques to determine the present value of all asset and liability cash flows (both on- and off-balance sheet), adjusted for prepayment expectations, using a market discount rate. The net change in the present value of the asset and liability cash flows in the different market rate environments is the amount of economic value at risk from those rate movements, which is referred to as net portfolio value. As of December 31, 2010, the economic value of equity at risk for an instantaneous up 200 basi s point shift in rates produced an increase in net portfolio value of 0.5%, while an instantaneous 100 basis point decrease in interest rates produced a decline in net portfolio value of 4.6%. In comparison, the models indicated a net portfolio value increase of 1.1% as of December 31, 2009, had interest rates moved up instantaneously 200 basis points, and a decrease of 4.0%, had an instantaneous 100 basis points decrease in interest rates occurred. The following table summarizes the effect that various rate shifts would have on net portfolio value at December 31, 2010 and 2009:
| Economic Value - at - Risk | | Estimated % Change | |
| | | in Net Portfolio Value | |
| | | 2010 | | | 2009 | |
| Change in Interest Rates | | | | | | |
| +200 basis points | | | 0.5 | % | | | 1.1 | % |
| +100 basis points | | | 1.4 | % | | | 1.5 | % |
| -100 basis points | | | -4.6 | % | | | -4.0 | % |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Trustmark Corporation:
We have audited the accompanying consolidated balance sheets of Trustmark Corporation and subsidiaries (the Corporation) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trustmark Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Corporation’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2011, expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.
Jackson, Mississippi
February 25, 2011
| Trustmark Corporation and Subsidiaries | | | | | | |
| Consolidated Balance Sheets | | | | | | |
| ($ in thousands except share data) | | | | | | |
| | | | | | | |
| | | December 31, | |
| | | 2010 | | | 2009 | |
| Assets | | | | | | |
| Cash and due from banks (noninterest-bearing) | | $ | 161,544 | | | $ | 213,519 | |
| Federal funds sold and securities purchased | | | | | | | | |
| under reverse repurchase agreements | | | 11,773 | | | | 6,374 | |
| Securities available for sale (at fair value) | | | 2,177,249 | | | | 1,684,396 | |
| Securities held to maturity (fair value: $145,143-2010; $240,674-2009) | | | 140,847 | | | | 232,984 | |
| Loans held for sale | | | 153,044 | | | | 226,225 | |
| Loans | | | 6,060,242 | | | | 6,319,797 | |
| Less allowance for loan losses | | | 93,510 | | | | 103,662 | |
| Net loans | | | 5,966,732 | | | | 6,216,135 | |
| Premises and equipment, net | | | 142,289 | | | | 147,488 | |
| Mortgage servicing rights | | | 51,151 | | | | 50,513 | |
| Goodwill | | | 291,104 | | | | 291,104 | |
| Identifiable intangible assets | | | 16,306 | | | | 19,825 | |
| Other real estate | | | 86,704 | | | | 90,095 | |
| Other assets | | | 355,159 | | | | 347,360 | |
| Total Assets | | $ | 9,553,902 | | | $ | 9,526,018 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Deposits: | | | | | | | | |
| Noninterest-bearing | | $ | 1,636,625 | | | $ | 1,685,187 | |
| Interest-bearing | | | 5,407,942 | | | | 5,503,278 | |
| Total deposits | | | 7,044,567 | | | | 7,188,465 | |
| Federal funds purchased and securities sold under repurchase agreements | | | 700,138 | | | | 653,032 | |
| Short-term borrowings | | | 425,343 | | | | 253,957 | |
| Long-term FHLB advance | | | - | | | | 75,000 | |
| Subordinated notes | | | 49,806 | | | | 49,774 | |
| Junior subordinated debt securities | | | 61,856 | | | | 70,104 | |
| Other liabilities | | | 122,708 | | | | 125,626 | |
| Total Liabilities | | | 8,404,418 | | | | 8,415,958 | |
| | | | | | | | | |
| Commitments and Contingencies | | | | | | | | |
| | | | | | | | | |
| Shareholders' Equity | | | | | | | | |
| Common stock, no par value: | | | | | | | | |
| Authorized: 250,000,000 shares | | | | | | | | |
| Issued and outstanding: 63,917,591 shares - 2010; | | | | | | | | |
| 63,673,839 shares - 2009 | | | 13,318 | | | | 13,267 | |
| Capital surplus | | | 256,675 | | | | 244,864 | |
| Retained earnings | | | 890,917 | | | | 853,553 | |
| Accumulated other comprehensive loss, net of tax | | | (11,426 | ) | | | (1,624 | ) |
| Total Shareholders' Equity | | | 1,149,484 | | | | 1,110,060 | |
| Total Liabilities and Shareholders' Equity | | $ | 9,553,902 | | | $ | 9,526,018 | |
| | | | | | | | | |
| See notes to consolidated financial statements. | | | | | | | | |
| Trustmark Corporation and Subsidiaries | | | | | | | | | |
| Consolidated Statements of Income | | | | | | | | | |
| ($ in thousands except per share data) | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| Interest Income | | | | | | | | | |
| Interest and fees on loans | | $ | 324,118 | | | $ | 354,518 | | | $ | 429,681 | |
| Interest on securities: | | | | | | | | | | | | |
| Taxable | | | 77,078 | | | | 80,715 | | | | 46,161 | |
| Tax exempt | | | 5,577 | | | | 5,349 | | | | 5,113 | |
| Interest on federal funds sold and securities purchased | | | | | | | | | | | | |
| under reverse repurchase agreements | | | 36 | | | | 66 | | | | 502 | |
| Other interest income | | | 1,409 | | | | 1,414 | | | | 1,822 | |
| Total Interest Income | | | 408,218 | | | | 442,062 | | | | 483,279 | |
| Interest Expense | | | | | | | | | | | | |
| Interest on deposits | | | 48,657 | | | | 78,886 | | | | 139,922 | |
| Interest on federal funds purchased and securities | | | | | | | | | | | | |
| sold under repurchase agreements | | | 1,183 | | | | 1,133 | | | | 10,393 | |
| Other interest expense | | | 6,355 | | | | 7,834 | | | | 13,804 | |
| Total Interest Expense | | | 56,195 | | | | 87,853 | | | | 164,119 | |
| Net Interest Income | | | 352,023 | | | | 354,209 | | | | 319,160 | |
| Provision for loan losses | | | 49,546 | | | | 77,112 | | | | 76,412 | |
| Net Interest Income After Provision for Loan Losses | | | 302,477 | | | | 277,097 | | | | 242,748 | |
| Noninterest Income | | | | | | | | | | | | |
| Service charges on deposit accounts | | | 55,183 | | | | 54,087 | | | | 53,717 | |
| Insurance commissions | | | 27,691 | | | | 29,079 | | | | 32,440 | |
| Wealth management | | | 21,872 | | | | 22,079 | | | | 27,600 | |
| Bank card and other fees | | | 25,014 | | | | 23,041 | | | | 23,230 | |
| Mortgage banking, net | | | 29,345 | | | | 28,873 | | | | 26,480 | |
| Other, net | | | 4,493 | | | | 5,616 | | | | 13,286 | |
| Securities gains, net | | | 2,329 | | | | 5,467 | | | | 505 | |
| Total Noninterest Income | | | 165,927 | | | | 168,242 | | | | 177,258 | |
| Noninterest Expense | | | | | | | | | | | | |
| Salaries and employee benefits | | | 174,582 | | | | 169,252 | | | | 171,137 | |
| Services and fees | | | 41,949 | | | | 40,292 | | | | 38,379 | |
| ORE/Foreclosure expense | | | 24,377 | | | | 12,814 | | | | 2,380 | |
| Net occupancy - premises | | | 19,808 | | | | 20,051 | | | | 19,508 | |
| Equipment expense | | | 17,135 | | | | 16,462 | | | | 16,632 | |
| FDIC assessment expense | | | 12,161 | | | | 15,808 | | | | 3,471 | |
| Other expense | | | 35,637 | | | | 33,580 | | | | 32,212 | |
| Total Noninterest Expense | | | 325,649 | | | | 308,259 | | | | 283,719 | |
| Income Before Income Taxes | | | 142,755 | | | | 137,080 | | | | 136,287 | |
| Income taxes | | | 42,119 | | | | 44,033 | | | | 43,870 | |
| Net Income | | | 100,636 | | | | 93,047 | | | | 92,417 | |
| Preferred stock dividends | | | - | | | | 10,124 | | | | 1,165 | |
| Accretion of discount on preferred stock | | | - | | | | 9,874 | | | | 188 | |
| Net Income Available to Common Shareholders | | $ | 100,636 | | | $ | 73,049 | | | $ | 91,064 | |
| | | | | | | | | | | | | |
| Earnings Per Common Share | | | | | | | | | | | | |
| Basic | | $ | 1.58 | | | $ | 1.26 | | | $ | 1.59 | |
| Diluted | | $ | 1.57 | | | $ | 1.26 | | | $ | 1.59 | |
| | | | | | | | | | | | | |
| See notes to consolidated financial statements. | | | | | | | | | | | | |
| Trustmark Corporation and Subsidiaries | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Changes in Shareholders' Equity | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands except per share data) | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | Common Stock | | | | | | | | | Other | | | | |
| | | Preferred | | | Shares | | | | | | Capital | | | Retained | | | Comprehensive | | | | |
| | | Stock | | | Outstanding | | | Amount | | | Surplus | | | Earnings | | | Loss | | | Total | |
| Balance, January 1, 2008 | | $ | - | | | | 57,272,408 | | | $ | 11,933 | | | $ | 124,161 | | | $ | 797,993 | | | $ | (14,451 | ) | | $ | 919,636 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income per consolidated statements of income | | | - | | | | - | | | | - | | | | - | | | | 92,417 | | | | - | | | | 92,417 | |
| Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change in fair value of securities available for sale | | | - | | | | - | | | | - | | | | - | | | | - | | | | 19,090 | | | | 19,090 | |
| Net change in capital accumulation and other postretirement benefit plans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change in prior service cost | | | - | | | | - | | | | - | | | | - | | | | - | | | | (451 | ) | | | (451 | ) |
| Net increase in loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (18,905 | ) | | | (18,905 | ) |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 92,151 | |
| Issuance of preferred stock and warrant | | | 205,126 | | | | - | | | | - | | | | 10,062 | | | | (188 | ) | | | - | | | | 215,000 | |
| Cash dividends paid on common stock ($0.92 per share) | | | - | | | | - | | | | - | | | | - | | | | (53,022 | ) | | | - | | | | (53,022 | ) |
| Common stock issued, long-term incentive plan | | | - | | | | 52,329 | | | | 11 | | | | 1,312 | | | | (558 | ) | | | - | | | | 765 | |
| Compensation expense, long-term incentive plan | | | - | | | | - | | | | - | | | | 3,936 | | | | - | | | | - | | | | 3,936 | |
| Balance, December 31, 2008 | | | 205,126 | | | | 57,324,737 | | | | 11,944 | | | | 139,471 | | | | 836,642 | | | | (14,717 | ) | | | 1,178,466 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income per consolidated statements of income | | | - | | | | - | | | | - | | | | - | | | | 93,047 | | | | - | | | | 93,047 | |
| Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change in fair value of securities available for sale | | | - | | | | - | | | | - | | | | - | | | | - | | | | 13,691 | | | | 13,691 | |
| Net change in capital accumulation and other postretirement benefit plans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change in prior service cost | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,164 | ) | | | (1,164 | ) |
| Net decrease in loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | 566 | | | | 566 | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 106,140 | |
| Common stock offering | | | - | | | | 6,216,216 | | | | 1,295 | | | | 108,001 | | | | - | | | | - | | | | 109,296 | |
| Repurchase of preferred stock and warrant | | | (205,126 | ) | | | - | | | | - | | | | (10,000 | ) | | | (9,874 | ) | | | - | | | | (225,000 | ) |
| Cash dividends paid on common stock ($0.92 per share) | | | - | | | | - | | | | - | | | | - | | | | (53,295 | ) | | | - | | | | (53,295 | ) |
| Cash dividends paid on preferred stock | | | - | | | | - | | | | - | | | | - | | | | (11,288 | ) | | | - | | | | (11,288 | ) |
| Common stock issued, long-term incentive plan | | | - | | | | 132,886 | | | | 28 | | | | 2,835 | | | | (1,679 | ) | | | - | | | | 1,184 | |
| Compensation expense, long-term incentive plan | | | - | | | | - | | | | - | | | | 4,557 | | | | - | | | | - | | | | 4,557 | |
| Balance, December 31, 2009 | | | - | | | | 63,673,839 | | | | 13,267 | | | | 244,864 | | | | 853,553 | | | | (1,624 | ) | | | 1,110,060 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income per consolidated statements of income | | | - | | | | - | | | | - | | | | - | | | | 100,636 | | | | - | | | | 100,636 | |
| Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change in fair value of securities available for sale | | | - | | | | - | | | | - | | | | - | | | | - | | | | (10,967 | ) | | | (10,967 | ) |
| Net change in capital accumulation and other postretirement benefit plans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change in prior service cost | | | - | | | | - | | | | - | | | | - | | | | - | | | | 76 | | | | 76 | |
| Net decrease in loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,089 | | | | 1,089 | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 90,834 | |
| Cash dividends paid on common stock ($0.92 per share) | | | - | | | | - | | | | - | | | | - | | | | (59,302 | ) | | | - | | | | (59,302 | ) |
| Common stock issued, long-term incentive plan | | | - | | | | 243,752 | | | | 51 | | | | 7,047 | | | | (3,970 | ) | | | - | | | | 3,128 | |
| Compensation expense, long-term incentive plan | | | - | | | | - | | | | - | | | | 4,824 | | | | - | | | | - | | | | 4,824 | |
| Other | | | - | | | | - | | | | - | | | | (60 | ) | | | - | | | | - | | | | (60 | ) |
| Balance, December 31, 2010 | | $ | - | | | | 63,917,591 | | | $ | 13,318 | | | $ | 256,675 | | | $ | 890,917 | | | $ | (11,426 | ) | | $ | 1,149,484 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| See notes to consolidated financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trustmark Corporation and Subsidiaries | | | | | | | | | |
| Consolidated Statements of Cash Flows | | | | | | | | | |
| ($ in thousands) | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| Operating Activities | | | | | | | | | |
| Net income | | $ | 100,636 | | | $ | 93,047 | | | $ | 92,417 | |
| Adjustments to reconcile net income to net cash provided | | | | | | | | | | | | |
| by operating activities: | | | | | | | | | | | | |
| Provision for loan losses | | | 49,546 | | | | 77,112 | | | | 76,412 | |
| Depreciation and amortization | | | 25,646 | | | | 26,489 | | | | 26,914 | |
| Net amortization (accretion) of securities | | | 3,264 | | | | (110 | ) | | | 1,109 | |
| Securities gains, net | | | (2,329 | ) | | | (5,467 | ) | | | (505 | ) |
| Gains on sales of loans, net | | | (15,317 | ) | | | (21,705 | ) | | | (6,046 | ) |
| Deferred income tax benefit | | | (6,389 | ) | | | (4,477 | ) | | | (17,673 | ) |
| Proceeds from sales of loans held for sale | | | 1,164,541 | | | | 1,627,971 | | | | 1,350,017 | |
| Purchases and originations of loans held for sale | | | (1,127,346 | ) | | | (1,553,674 | ) | | | (1,413,152 | ) |
| Originations and sales of mortgage servicing rights | | | (16,885 | ) | | | (9,590 | ) | | | (19,515 | ) |
| Net decrease (increase) in other assets | | | 1,588 | | | | (61,545 | ) | | | 11,039 | |
| Net increase (decrease) in other liabilities | | | 736 | | | | (1,391 | ) | | | (27,471 | ) |
| Other operating activities, net | | | 29,087 | | | | 5,657 | | | | 39,117 | |
| Net cash provided by operating activities | | | 206,778 | | | | 172,317 | | | | 112,663 | |
| | | | | | | | | | | | | |
| Investing Activities | | | | | | | | | | | | |
| Proceeds from calls and maturities of securities held to maturity | | | 92,324 | | | | 37,217 | | | | 30,207 | |
| Proceeds from calls and maturities of securities available for sale | | | 650,419 | | | | 388,781 | | | | 230,021 | |
| Proceeds from sales of securities available for sale | | | 65,074 | | | | 188,460 | | | | 157,949 | |
| Purchases of securities held to maturity | | | - | | | | (10,428 | ) | | | (14,833 | ) |
| Purchases of securities available for sale | | | (1,227,199 | ) | | | (691,195 | ) | | | (1,458,061 | ) |
| Net (increase) decrease in federal funds sold and securities | | | | | | | | | | | | |
| purchased under reverse repurchase agreements | | | (5,399 | ) | | | 17,027 | | | | (5,404 | ) |
| Net decrease in loans | | | 138,071 | | | | 256,885 | | | | 218,149 | |
| Purchases of premises and equipment | | | (6,720 | ) | | | (6,279 | ) | | | (16,861 | ) |
| Proceeds from sales of premises and equipment | | | 183 | | | | 623 | | | | 170 | |
| Proceeds from sales of other real estate | | | 48,019 | | | | 18,290 | | | | 8,289 | |
| Net cash (used in) provided by investing activities | | | (245,228 | ) | | | 199,381 | | | | (850,374 | ) |
| | | | | | | | | | | | | |
| Financing Activities | | | | | | | | | | | | |
| Net (decrease) increase in deposits | | | (143,898 | ) | | | 364,595 | | | | (45,402 | ) |
| Net increase (decrease) in federal funds purchased and | | | | | | | | | | | | |
| securities sold under repurchase agreements | | | 47,106 | | | | (158,097 | ) | | | 350,366 | |
| Net increase (decrease) in short-term borrowings | | | 147,689 | | | | (518,504 | ) | | | 234,951 | |
| Proceeds from long-term FHLB advances | | | - | | | | 75,000 | | | | - | |
| Redemption of junior subordinated debt securities | | | (8,248 | ) | | | - | | | | - | |
| Common stock dividends | | | (59,302 | ) | | | (53,295 | ) | | | (53,022 | ) |
| Common stock issued-net, long-term incentive plan | | | 1,273 | | | | 593 | | | | 567 | |
| Excess tax benefit from stock-based compensation arrangements | | | 1,855 | | | | 591 | | | | 198 | |
| Proceeds from issuance of preferred stock and warrant | | | - | | | | - | | | | 215,000 | |
| Repurchase of preferred stock | | | - | | | | (215,000 | ) | | | - | |
| Preferred stock dividends | | | - | | | | (11,288 | ) | | | - | |
| Proceeds from issuance of common stock, net | | | - | | | | 109,296 | | | | - | |
| Repurchase of common stock warrant | | | - | | | | (10,000 | ) | | | - | |
| Net cash (used in) provided by financing activities | | | (13,525 | ) | | | (416,109 | ) | | | 702,658 | |
| | | | | | | | | | | | | |
| Decrease in cash and cash equivalents | | | (51,975 | ) | | | (44,411 | ) | | | (35,053 | ) |
| Cash and cash equivalents at beginning of year | | | 213,519 | | | | 257,930 | | | | 292,983 | |
| Cash and cash equivalents at end of year | | $ | 161,544 | | | $ | 213,519 | | | $ | 257,930 | |
| | | | | | | | | | | | | |
| See notes to consolidated financial statements. | | | | | | | | | | | | |
Business
Trustmark Corporation (Trustmark) is a multi-bank holding company headquartered in Jackson, Mississippi. Through its subsidiaries, Trustmark operates as a financial services organization providing banking and financial solutions to corporate institutions and individual customers through over 150 offices in Florida, Mississippi, Tennessee and Texas.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Trustmark and all other entities in which Trustmark has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with these accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expense during the reporting period and the related disclosures. Although Management’s estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that in 2011 actual conditions could vary from those anticipated, which could affect our results of operations and financial condition. The allowance for loan losses, the valuation of other real estate, the fair value of mortgage servicing rights, the valuation of goodwill and other identifiable intangibles, the status of contingencies and the fair values of financial instruments are particularly subject to change. Actual results could differ from those estimates.
Accounting Standards Codification
The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. GAAP applicable to all public and nonpublic nongovernmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered nonauthoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
Securities
Securities are classified as either held to maturity, available for sale or trading. Securities are classified as held to maturity and carried at amortized cost when Management has the positive intent and the ability to hold them until maturity. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses reported as a component of other comprehensive income, net of tax. Securities available for sale are used as part of Trustmark’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment rates and other factors. Securities held for resale in anticipation of short-term market movements are classified as trading and are carried at fair value, with changes in unrealized holding gains and losses included in other interest income. Management determines the appropriate classification of securities at the time of purchase. Trustmark currently has no securities classified as trading.
The amortized cost of debt securities classified as securities held to maturity or securities available for sale is adjusted for amortization of premiums and accretion of discounts to maturity over the estimated life of the security using the interest method. In the case of mortgage related securities, premium and discount are amortized to yield using the retrospective yield method. Such amortization or accretion is included in interest on securities. Realized gains and losses are determined using the specific identification method and are included in noninterest income as securities gains (losses), net.
Trustmark reviews securities for impairment quarterly. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, Management considers, among other things, the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer and Trustmark’s intent to sell the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Loans Held for Sale
Primarily, all mortgage loans purchased from wholesale customers or originated in Trustmark’s General Banking Division are considered to be held for sale. In certain circumstances, Trustmark will retain a mortgage loan in its portfolio based on banking relationships or certain investment strategies. Mortgage loans held for sale in the secondary market that are hedged using fair value hedges are carried at estimated fair value on an aggregate basis. Substantially, all mortgage loans held for sale are hedged. These loans are primarily first-lien mortgage loans originated or purchased by Trustmark. Deferred loan fees and costs are reflected in the basis of loans held for sale and, as such, impact the resulting gain or loss when loans are sold. Adjustments to reflect fair value and realized gain s and losses upon ultimate sale of the loans are recorded in noninterest income in mortgage banking, net.
Government National Mortgage Association (GNMA) optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer’s option and without GNMA’s prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When Trustmark is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether Trustmark intends to exercise the buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings. During December of 2010, Trustmark purchased approximately $53.9 million of GNMA serviced loans, which were subsequently sold to a third party. Trustmark will retain the servicing for these loans, which are fully guaranteed by FHA/VA. Trustmark did not exercise their buy-back option on any delinquent loans serviced for GNMA during 2009. GNMA loans eligible for repurchase had an unpaid principal balance of $29.7 million at December 31, 2010, $81.0 million at December 31, 2009 and $39.5 million at December 31, 2008.
Loans
Loans are stated at the amount of unpaid principal, adjusted for the net amount of direct costs and nonrefundable loan fees associated with lending. The net amount of nonrefundable loan origination fees and direct costs associated with the lending process, including commitment fees, is deferred and accreted to interest income over the lives of the loans using a method that approximates the interest method. Interest on loans is accrued and recorded as interest income based on the outstanding principal balance.
Trustmark established acceptable ranges or limits for individual types of credit underwriting where the overall risk of individual credits are restrained by maximum repayment periods, maximum loan to value ratios, minimum debt service coverage ratios, maximum advance rates and required ongoing monitoring of these measures. These measures are periodically reviewed to ensure that such ranges and limits accurately reflect the level of restraint for overall loan risk. It is accepted that not all extensions of credit will fully comply with all established policy limitations and to the end, all exceptions to loan policy must be properly approved and justified by means of such features of the loan that mitigate the perceived risk from an extension of credit that falls outside one or more of the policy limitations.
Past due loans are loans contractually past due 30 days or more as to principal or interest payments. A loan is classified as nonaccrual, and the accrual of interest on such loan is discontinued, when the contractual payment of principal or interest becomes 90 days past due on commercial credits and 120 days past due on non-business purpose credits. In addition, a credit may be placed on nonaccrual at any other time Management has serious doubts about further collectibility of principal or interest according to the contractual terms, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and well secured. When a loan is placed on nonaccrual status, unpaid interest is reversed against interest income. Interest received on nonaccrual loans is applied against principal. Loans are restored to accrual status when the obligation is brought current or has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.
A loan is considered impaired when, based on current information and events, it is probable that Trustmark will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. All classes of commercial loans at $500,000 or more, which are classified as nonaccrual, are identified for impairment analysis. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case i nterest is recognized on a cash basis. The policy for recognizing income on impaired loans is consistent with the nonaccrual policy. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Commercial purpose loans are charged-off when a determination is made that the loan is uncollectible and continuance as a bankable asset is not warranted. Consumer loans secured by 1-4 family residential real estate are generally charged-off or written down to the fair value of the collateral less costs to sell, no later than when the loan becomes 180 days past due. Non-real estate consumer purpose loans, including both secured and unsecured, are generally charged-off in full no later than when the loan becomes 120 days past due. Credit card loans are generally charged-off in full on or before 180 days of delinquency.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for estimated loan losses charged against net income. The allowance for loan losses is maintained at a level believed adequate by management, based on estimated probable losses within the existing loan portfolio. Each such evaluation is inherently subjective, as it requires a range of estimates, assumptions and judgments as to the facts and circumstances of the particular situation, including the amounts and timings of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
Trustmark’s allowance for probable loan loss methodology is based on guidance provided in SEC Staff Accounting Bulletin (SAB) No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues,” as well as on other regulatory guidance. The allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 310 “Receivables,” based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with FASB ASC Topic 450, “Contingencies,” based on historical loan loss experience for similar loans with similar characteristics and trends; and (iii) qualitative risk valuation allowances determined in accordan ce with FASB ASC Topic 450 based on general economic conditions and other qualitative risk factors, both internal and external, to Trustmark. Each of these elements calls for estimates, assumptions and judgments, as described below.
Loans-Specific Valuation Allowances
Valuation allowances for probable losses on specific commercial loans are based on an ongoing analysis and evaluation of classified loans. Loans are classified based on Trustmark’s internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability and willingness to repay; (ii) the value of any underlying collateral; (iii) the ability of any guarantor to perform its payment obligation, and (iv) the economic environment and industry in which the borrower operates. Once a loan is classified, it is subject to periodic review to determine whether or not the loan is impaired. If determined to be impaired, the loan is evaluated using one of the valuation criteria permitted under FASB ASC Topic 310. The amount of impairment, if any, becomes a specific allo cated portion of the allowance for loan losses and segregated from any pool of loans. Specific valuation allowances are determined based upon analysis of the factors identified above, among other things. If, after review, a specific valuation allowance is not assigned to the loan and the loan is not considered to be impaired, the loan remains with a pool of similar risk-rated loans that is assigned a valuation allowance appropriate for non-impaired classified loans, based on Trustmark’s internal loan grading system.
Historical Valuation Allowances
Historical valuation allowances are calculated for pools of loans based on the historical loss experience of specific types of loans. Trustmark calculates historical net charge-off ratios for pools of loans with similar characteristics based on the proportion of actual charge-offs and recoveries experienced to the total population of loans in the pool. The historical net loss ratios are periodically updated based on subsequent net charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. Trustmark’s pools of similar loans include commercial and industrial loans, commercial loans secured by real estate, consumer loans and 1-4 family residen tial mortgages.
Qualitative Risk Valuation Allowances
These allowances are based on general economic conditions and other qualitative factors, both internal and external to the bank. These allowances are determined by evaluating a range of potential factors, which may include one or more of the following: (i) the experience, ability and effectiveness of the bank’s lending management and staff assigned to the loan; (ii) adherence to Trustmark’s loan policies, procedures and internal controls; (iii) impact of recent performance trends by region; (iv) national and regional economic trends and conditions; (v) concentrations of commercial and consumer credits in Trustmark’s loan portfolio by region; (vi) collateral, financial and underwriting exception trends by region; (vii) the impact of recent significant natural disasters or catastrophes and (viii) the impact o f recent acquisitions.
Management evaluates the degree of risk that these components have on the quality of the loan portfolio not less frequently than quarterly. The results are then input into a “qualitative factor allocation matrix” to determine an appropriate qualitative risk allowance.
During 2009, Trustmark refined its allowance for loan loss methodology for commercial loans based upon current regulatory guidance from its primary regulator. This refinement resulted in Trustmark classifying commercial loans into thirteen separate homogenous loan types with common risk characteristics, while taking into consideration the uniqueness of Trustmark’s markets. In addition, Trustmark combined its quantitative historical loan loss factors and qualitative risk factors for each of its homogenous loan types, which allowed for better segmentation of the loan portfolio based upon the risk characteristics that are presented. Because of these enhancements, Trustmark reallocated loan loss reserves to loans that represent the highest risk. These changes also resulted in approximately $8.0 million in qualitative reserves being allocated to specific portfolios during 2009. During the first quarter of 2010, Trustmark refined the allowance for loan loss methodology for commercial loans by segregating the pools into Trustmark’s four key market regions, Florida, Mississippi, Tennessee and Texas, to take into consideration the uniqueness of each market while continuing to utilize a 10-point risk rating system for each pool. As a result, risk rate factors for commercial loan types increased to 360 while having an immaterial impact to the overall balance of the allowance for loan losses.
Premises and Equipment, Net
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is charged to expense over the estimated useful lives of the assets, which are up to thirty-nine years for buildings and three to seven years for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. In cases where Trustmark has the right to renew the lease for additional periods, the lease term for the purpose of calculating amortization of the capitalized cost of the leasehold improvements is extended when Trustmark is “reasonably assured” that it will renew the lease. Depreciation and amortization expenses are computed using the straight-line method. Trustmark continu ally evaluates whether events and circumstances have occurred that indicate that such long-lived assets have become impaired. Measurement of any impairment of such long-lived assets is based on the fair values of those assets. There were no impairment losses on premises and equipment recorded during 2010, 2009 or 2008.
Mortgage Servicing Rights
Trustmark recognizes as assets the rights to service mortgage loans based on the estimated fair value of the mortgage servicing rights (MSR) when loans are sold and the associated servicing rights are retained. Trustmark has elected to account for MSR at fair value. Trustmark also incorporates an economic hedging strategy, which utilizes a portfolio of derivative instruments that are accounted for at fair value with changes recorded in the results of operations, such as interest rate futures contracts and exchange-traded option contracts, to achieve a return that would substantially offset the changes in fair value of MSR attributable to interest rates. Changes in the fair value of these derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by the changes in t he fair value of MSR.
The fair value of MSR is determined using discounted cash flow techniques benchmarked against third-party valuations. Estimates of fair value involve several assumptions, including the key valuation assumptions about market expectations of future prepayment rates, interest rates and discount rates. Prepayment rates are projected using an industry standard prepayment model. The model considers other key factors, such as a wide range of standard industry assumptions tied to specific portfolio characteristics such as remittance cycles, escrow payment requirements, geographic factors, foreclosure loss exposure, VA no-bid exposure, delinquency rates and cost of servicing, including base cost and cost to service delinquent mortgages. Prevailing market conditions at the time of analysis are factored into the accumulation of assumpt ions and determination of servicing value.
Goodwill and Identifiable Intangible Assets
Goodwill, which represents the excess of cost over the fair value of the net assets of an acquired business, is not amortized but tested for impairment on an annual basis, which is October 1 for Trustmark, or more often if events or circumstances indicate that there may be impairment.
Identifiable intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or legal rights or because the assets are capable of being sold or exchanged either on their own or in combination with a related contract, asset or liability. Trustmark’s identifiable intangible assets primarily relate to core deposits, insurance customer relationships and borrower relationships. These intangibles, which have definite useful lives, are amortized on an accelerated basis over their estimated useful lives. In addition, these intangibles are evaluated annually for impairment or whenever events and changes in circumstances indicate that the carrying amount should be reevaluated. Trustmark has also purchased banking charters in order to facilitat e its entry into the states of Florida and Texas. These identifiable intangible assets are being amortized on a straight-line method over 20 years.
Other Real Estate Owned
Other real estate owned includes assets that have been acquired in satisfaction of debt through foreclosure and is recorded at the lower of cost or estimated fair value less the estimated cost of disposition. Fair value is based on independent appraisals and other relevant factors. Valuation adjustments required at foreclosure are charged to the allowance for loan losses. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged to net income in ORE/Foreclosure expense. Costs of operating and maintaining the properties as well as gains (losses) on their disposition are also included in ORE/Foreclosure expense as incurred. Improvements made to properties are capitalized if the expenditures are expected to be recovered upon the sale of the properties.
Federal Home Loan Bank and Federal Reserve Stock
Securities with limited marketability, such as stock in the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB), are carried at cost and totaled $40.7 million at December 31, 2010 and $38.0 million at December 31, 2009. Trustmark’s investment in FRB and FHLB stock is included in other assets because these equity securities do not have a readily determinable fair value, which places them outside the scope of FASB ASC Topic 320, “Investments – Debt and Equity Securities.” At December 31, 2010, the fair value of Trustmark’s stock in the FHLB of Dallas gave rise to no other-than-temporary impairment.
Insurance Commissions
Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. Trustmark also receives contingent commissions from insurance companies as additional incentive for achieving specified premium volume goals and/or the loss experience of the insurance placed by Trustmark. Contingent commissions from insurance companies are recognized through the calendar year using reasonable estimates that are continuously reviewed and revised to reflect current experience. Trustmark maintains reserves for commission adjustments and doubtful accounts receivable which were not considered significant at December 31, 2010 or 2009.
Wealth Management
Assets under administration held by Trustmark in a fiduciary or agency capacity for customers are not included in the consolidated balance sheets. Investment management and trust income is recorded on a cash basis, which because of the regularity of the billing cycles, approximates the accrual method, in accordance with industry practice.
Derivative Financial Instruments
Trustmark maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. Trustmark’s interest rate risk management strategy involves modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Under the guidelines of FASB ASC Topic 815, “Derivatives and Hedging,” all derivative instruments are required to be recognized as either assets or liabilities and be carried at fair value on the balance sheet. The fair value of derivative positions outstanding is included in other assets and/or other liabilities in the accompanyi ng consolidated balance sheets and in the net change in these financial statement line items in the accompanying consolidated statements of cash flows as well as included in noninterest income in mortgage banking, net in the accompanying consolidated statements of income.
Derivatives Designated as Hedging Instruments
As part of Trustmark’s risk management strategy in the mortgage banking area, derivative instruments such as forward sales contracts are utilized. 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. These derivative instruments are designated as fair value hedges under FASB ASC Topic 815. The ineffective portion of changes in the fair value of the forward contracts and changes in the fair value of the loans designated as loans held for sale are recorded in noninterest income in mortgage banking, net.
Derivatives not Designated as Hedging Instruments
Trustmark utilizes a portfolio of derivative instruments, such as Treasury note futures contracts and exchange-traded option contracts, to achieve a fair value return that attempts to economically offset the changes in fair value of MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. Changes in the fair value of these derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of MSR. Change in MSR fair value represents the effect of present value decay and the effect of changes in interest rates. Ineffectiveness of hedging MSR fair value is measured by comparing total hedge cost to the change in fair value of the MSR attributable to intere st rate changes.
Trustmark also utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area. Rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified time period. Changes in the fair value of these derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of excess forward sales contracts.
Income Taxes
Trustmark accounts for uncertain tax positions in accordance with FASB ASC Topic 740, “Income Taxes,” which clarifies the accounting and disclosure for uncertainty in tax positions. Under the guidance of FASB ASC Topic 740, Trustmark accounts for deferred income taxes using the liability method. Deferred tax assets and liabilities are based on temporary differences between the financial statement carrying amounts and the tax basis of Trustmark’s assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled and are presented net in the balance sheet in other assets.
Stock-Based Compensation
Trustmark accounts for the stock and incentive compensation under the provisions of FASB ASC Topic 718, “Compensation – Stock Compensation.” Under this accounting guidance, fair value is established as the measurement objective in accounting for stock awards and requires the application of a fair value based measurement method in accounting for compensation cost, which is recognized over the requisite service period.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. The following table reflects specific transaction amounts for the periods presented ($ in thousands):
| | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| Income taxes paid | | $ | 53,628 | | | $ | 60,456 | | | $ | 56,906 | |
| Interest expense paid on deposits and borrowings | | | 59,858 | | | | 93,402 | | | | 176,456 | |
| Noncash transfers from loans to foreclosed properties | | | 61,786 | | | | 78,300 | | | | 38,955 | |
| Transfer of long-term FHLB advance to short-term | | | 75,000 | | | | - | | | | - | |
Per Share Data
Trustmark accounts for per share data in accordance with FASB ASC Topic 260, “Earnings Per Share,” which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Trustmark has determined that its outstanding nonvested stock awards and deferred stock units are not participating securities. Based on this determination, no change has been made to Trustmark’s current computation for basic and diluted 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 potentially dilutive stock awards outstanding during the period. Weighted-average antidilutive stock awards and common stock warrants for 2010, 2009 and 2008, totaled 1.259 million, 1.552 million and 1.659 million, respectively, and accordingly, were excluded in determining diluted earnings per share. The following table reflects weighted-average shares used to calculate basic and diluted EPS for the periods presented (in thousands):
| | | Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| Basic shares | | | 63,849 | | | | 57,834 | | | | 57,301 | |
| Dilutive shares | | | 190 | | | | 102 | | | | 36 | |
| Diluted shares | | | 64,039 | | | | 57,936 | | | | 57,337 | |
Fair Value Measurements
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements. The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. Depending on the nature of the asset or liability, Trustmark uses various valuation techniques and assumptions when estimating fair value. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that Trustmark has the ability to access at the measurement date.
Level 2 Inputs – Valuation is based upon quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability such as interest rates, yield curves, volatilities and default rates and inputs that are derived principally from or corroborated by observable market data.
Level 3 Inputs – Unobservable inputs reflecting the reporting entity’s own determination about the assumptions that market participants would use in pricing the asset or liability based on the best information available.
Accounting Policies Recently Adopted and Pending Accounting Pronouncements
ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU 2010-20.” On January 19, 2011, the FASB issued Accounting Standards Update (ASU) 2011-01, which temporarily delays the effective date for public entities of the disclosures about troubled debt restructurings (TDRs) in ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The deferral will allow the FASB to complete its deliberations on what constitutes a TDR, and to coordinate the effective dates of the new disclosures about TDRs for public entities in ASU 2010-20 and the guidance for determining what constitutes a TDR. Without the deferral, public-entity creditors would have been required to comply with the disclosures about TDRs in ASU 2010-20 for periods beginning on or after December 15, 2010.
ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” In December 2010, the FASB issued ASU 2010-28 which modifies Step 1 of the goodwill impairment test under FASB ASC Topic 350, “Intangibles -Goodwill and Other,” for reporting units with zero or negative carrying amounts to require an entity to perform Step 2 of the goodwill impairment test if it is more lik ely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are adverse qualitative factors in determining whether an interim goodwill impairment test between annual test dates is necessary. The ASU allows an entity to use either the equity or enterprise valuation premise to determine the carrying amount of a reporting unit. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010 for a public entity and is not expected to have a significant impact on Trustmark’s financial statements.
ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” In July 2010, the FASB issued ASU 2010-20, which requires Trustmark to provide a greater level of disaggregated information about the credit quality of loans and the Allowance for Loan Losses (Allowance). This ASU also requires Trustmark to disclose additional information related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. Disclosures related to period-end information will be effective in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occurs during a reporting period are required in interim or annual periods beginning on or after December 15, 2010. The required disclosures are reported in Note 4 – Loans and Allowance for Loan Losses.
ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset.” In April 2010, the FASB issued ASU 2010-18, which states that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments do not affect the accounting for loans under the scope of ASC 310-30 that are not accounted for within pools. Loans accounted for individually under ASC 310-30 continue to be subject to the troubled debt restructuring accounting provisions within ASC 310-40, “Receivables—Troubled Debt Restructurings by Creditors”. The amendments were effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010 and did not have a significant impact on Trustmark’s financial statements.
ASU 2010-09, “Amendments to Certain Recognition and Disclosure Requirements.” In February 2010, the FASB issued ASU 2010-09, to address potential practice issues associated with FASB ASC Topic 855 (Statement 165). The ASU eliminates the requirement for SEC filers to disclose the date through which subsequent events have been evaluated in originally issued and reissued financial statements. This amendment was immediately effective.
ASU 2010-06, “Improving Disclosures about Fair Value Measurements.” In January 2010, the FASB issued ASU 2010-06, which requires additional disclosures related to the transfers in and out of fair value hierarchy and the activity of Level 3 financial instruments. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair val ue measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for Trustmark beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for Trustmark on January 1, 2010 and are reported in Note 16 – Fair Value.
SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” In June 2009, the FASB issued SFAS No. 167, codified as ASU 2009-17, which modifies how a company determines when a variable interest entity (VIE) that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate a VIE is based on, among other things, the VIE’s purpose and design and a company’s ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance. ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial statements. ASU 2009-17 became effective for Trustmark’s financial statements on January 1, 2010 and the adoption did not have a significant impact on Trustmark’s financial statements.
SFAS No. 166, “Accounting for Transfers of Financial Assets.” In June 2009, the FASB issued SFAS No. 166, codified as ASU 2009-16, which amended ASC Topic 860, “Transfers and Servicing,” to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 eliminated the concept of a “qualifying special-purpose entity” and changed the requirements for derecognizing financial assets. ASU 2009-16 also required additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. ASU 2009-16 als o modified the criteria that must be met in order for a transfer of a portion of a financial asset, such as a loan participation, to qualify for sale accounting. ASU 2009-16 became effective for Trustmark’s financial statements on January 1, 2010 and the adoption did not have a significant impact on Trustmark’s financial statements.
Note 2 – Cash and Due from Banks
Trustmark is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. The average amounts of those reserves for the years ended December 31, 2010 and 2009 were $31.8 million and $14.9 million, respectively.
Note 3 – Securities Available for Sale and Held to Maturity
The following table is a summary of the amortized cost and estimated fair value of securities available for sale and held to maturity at December 31, 2010 and 2009 ($ in thousands):
| | | Securities Available for Sale | | | Securities Held to Maturity | |
| | | | | | Gross | | | Gross | | | Estimated | | | | | | Gross | | | Gross | | | Estimated | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| December 31, 2010 | | Cost | | | Gains | | | (Losses) | | | Value | | | Cost | | | Gains | | | (Losses) | | | Value | |
| U.S. Government agency obligations | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued by U.S. Government agencies | | $ | 12 | | | $ | - | | | $ | - | | | $ | 12 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Issued by U.S. Government sponsored agencies | | | 124,093 | | | | 114 | | | | (2,184 | ) | | | 122,023 | | | | - | | | | - | | | | - | | | | - | |
| Obligations of states and political subdivisions | | | 159,418 | | | | 2,259 | | | | (2,040 | ) | | | 159,637 | | | | 53,246 | | | | 2,628 | | | | (10 | ) | | | 55,864 | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Guaranteed by GNMA | | | 11,719 | | | | 723 | | | | - | | | | 12,442 | | | | 6,058 | | | | 171 | | | | - | | | | 6,229 | |
| Issued by FNMA and FHLMC | | | 432,162 | | | | 1,188 | | | | (6,846 | ) | | | 426,504 | | | | - | | | | - | | | | - | | | | - | |
| Other residential mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 1,361,339 | | | | 43,788 | | | | (4,311 | ) | | | 1,400,816 | | | | 78,526 | | | | 1,503 | | | | - | | | | 80,029 | |
| Commercial mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 54,331 | | | | 2,007 | | | | (523 | ) | | | 55,815 | | | | 3,017 | | | | 6 | | | | (2 | ) | | | 3,021 | |
| Total | | $ | 2,143,074 | | | $ | 50,079 | | | $ | (15,904 | ) | | $ | 2,177,249 | | | $ | 140,847 | | | $ | 4,308 | | | $ | (12 | ) | | $ | 145,143 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government agency obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued by U.S. Government agencies | | $ | 20 | | | $ | - | | | $ | - | | | $ | 20 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Issued by U.S. Government sponsored agencies | | | 48,685 | | | | - | | | | (768 | ) | | | 47,917 | | | | - | | | | - | | | | - | | | | - | |
| Obligations of states and political subdivisions | | | 115,118 | | | | 2,758 | | | | (368 | ) | | | 117,508 | | | | 74,643 | | | | 2,551 | | | | (211 | ) | | | 76,983 | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Guaranteed by GNMA | | | 11,765 | | | | 462 | | | | (35 | ) | | | 12,192 | | | | 7,044 | | | | 10 | | | | (65 | ) | | | 6,989 | |
| Issued by FNMA and FHLMC | | | 49,510 | | | | 366 | | | | (597 | ) | | | 49,279 | | | | - | | | | - | | | | - | | | | - | |
| Other residential mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 1,333,983 | | | | 48,650 | | | | (77 | ) | | | 1,382,556 | | | | 148,226 | | | | 5,448 | | | | - | | | | 153,674 | |
| Commercial mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 67,294 | | | | 1,506 | | | | (65 | ) | | | 68,735 | | | | 3,071 | | | | - | | | | (43 | ) | | | 3,028 | |
| Corporate debt securities | | | 6,087 | | | | 102 | | | | - | | | | 6,189 | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 1,632,462 | | | $ | 53,844 | | | $ | (1,910 | ) | | $ | 1,684,396 | | | $ | 232,984 | | | $ | 8,009 | | | $ | (319 | ) | | $ | 240,674 | |
The table below includes securities with gross unrealized losses segregated by length of impairment ($ in thousands)
| | | Less than 12 Months | | | 12 Months or More | | | Total | |
| | | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | |
| December 31, 2010 | | Fair Value | | | (Losses) | | | Fair Value | | | (Losses) | | | Fair Value | | | (Losses) | |
| U.S. Government agency obligations | | | | | | | | | | | | | | | | | | |
| Issued by U.S. Government sponsored agencies | | $ | 86,917 | | | $ | (2,184 | ) | | $ | - | | | $ | - | | | $ | 86,917 | | | $ | (2,184 | ) |
| Obligations of states and political subdivisions | | | 65,523 | | | | (2,045 | ) | | | 307 | | | | (5 | ) | | | 65,830 | | | | (2,050 | ) |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued by FNMA and FHLMC | | | 312,787 | | | | (6,846 | ) | | | - | | | | - | | | | 312,787 | | | | (6,846 | ) |
| Other residential mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 232,279 | | | | (4,311 | ) | | | - | | | | - | | | | 232,279 | | | | (4,311 | ) |
| Commercial mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 21,073 | | | | (525 | ) | | | - | | | | - | | | | 21,073 | | | | (525 | ) |
| Total | | $ | 718,579 | | | $ | (15,911 | ) | | $ | 307 | | | $ | (5 | ) | | $ | 718,886 | | | $ | (15,916 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government agency obligations | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued by U.S. Government sponsored agencies | | $ | 47,917 | | | $ | (768 | ) | | $ | - | | | $ | - | | | $ | 47,917 | | | $ | (768 | ) |
| Obligations of states and political subdivisions | | | 18,694 | | | | (280 | ) | | | 6,476 | | | | (299 | ) | | | 25,170 | | | | (579 | ) |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage pass-through securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Guaranteed by GNMA | | | 8,461 | | | | (100 | ) | | | - | | | | - | | | | 8,461 | | | | (100 | ) |
| Issued by FNMA and FHLMC | | | 42,255 | | | | (597 | ) | | | - | | | | - | | | | 42,255 | | | | (597 | ) |
| Other residential mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 40,109 | | | | (77 | ) | | | - | | | | - | | | | 40,109 | | | | (77 | ) |
| Commercial mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued or guaranteed by FNMA, FHLMC or GNMA | | | 26,514 | | | | (108 | ) | | | - | | | | - | | | | 26,514 | | | | (108 | ) |
| Total | | $ | 183,950 | | | $ | (1,930 | ) | | $ | 6,476 | | | $ | (299 | ) | | $ | 190,426 | | | $ | (2,229 | ) |
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, Management considers, among other things, the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer and the intent and ability of Trustmark to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The unrealized losses shown above are primarily due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. Because Trustmark does not intend to sell these securities and it is more likely than not that Trustmark will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Trustmark does not consider these investments to be other-than-temporarily impaired at December 31, 2010.
Security Gains and Losses
Gains and losses as a result of calls and disposition of securities were as follows ($ in thousands):
| | | | Years Ended December 31, | |
| Available for Sale | | | 2010 | | | 2009 | | | 2008 | |
| Proceeds from sales of securities | | | $ | 65,074 | | | $ | 188,460 | | | $ | 157,949 | |
| Gross realized gains | | | | 2,216 | | | | 5,379 | | | | 487 | |
| Gross realized (losses) | | | | - | | | | (11 | ) | | | (84 | ) |
| | | | | | | | | | | | | | |
| Held to Maturity | | | | | | | | | | | | | |
| Proceeds from calls of securities | | | $ | 11,305 | | | $ | 9,303 | | | $ | 7,087 | |
| Gross realized gains | | | | 113 | | | | 99 | | | | 102 | |
Securities Pledged
Securities with a carrying value of $1.7 billion and $1.6 billion at December 31, 2010 and 2009, respectively, were pledged to collateralize public deposits and securities sold under repurchase agreements and for other purposes as permitted by law. Of the amount pledged at December 31, 2010, $8.6 million was pledged to the Discount Window to provide additional contingency funding capacity. At year-end, these securities were not required to collateralize any borrowings from the FRB.
Contractual Maturities
The amortized cost and estimated fair value of securities available for sale and held to maturity at December 31, 2010, by contractual maturity, are shown below ($ in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | Securities | | | Securities | |
| | | Available for Sale | | | Held to Maturity | |
| | | | | | Estimated | | | | | | Estimated | |
| | | Amortized | | | Fair | | | Amortized | | | Fair | |
| | | Cost | | | Value | | | Cost | | | Value | |
| Due in one year or less | | $ | 12,786 | | | $ | 12,929 | | | $ | 3,662 | | | $ | 3,689 | |
| Due after one year through five years | | | 44,175 | | | | 45,034 | | | | 16,459 | | | | 16,916 | |
| Due after five years through ten years | | | 201,165 | | | | 199,275 | | | | 24,425 | | | | 25,836 | |
| Due after ten years | | | 25,397 | | | | 24,434 | | | | 8,700 | | | | 9,423 | |
| | | | 283,523 | | | | 281,672 | | | | 53,246 | | | | 55,864 | |
| Mortgage-backed securities | | | 1,859,551 | | | | 1,895,577 | | | | 87,601 | | | | 89,279 | |
| Total | | $ | 2,143,074 | | | $ | 2,177,249 | | | $ | 140,847 | | | $ | 145,143 | |
Note 4 – Loans and Allowance for Loan Losses
At December 31, 2010 and 2009, loans consisted of the following ($ in thousands):
| | | 2010 | | | 2009 | |
| Loans secured by real estate: | | | | | | |
| Construction, land development and other land loans | | $ | 583,316 | | | $ | 830,069 | |
| Secured by 1-4 family residential properties | | | 1,732,056 | | | | 1,650,743 | |
| Secured by nonfarm, nonresidential properties | | | 1,498,108 | | | | 1,467,307 | |
| Other | | | 231,963 | | | | 197,421 | |
| Commercial and industrial loans | | | 1,068,369 | | | | 1,059,164 | |
| Consumer loans | | | 402,165 | | | | 606,315 | |
| Other loans | | | 544,265 | | | | 508,778 | |
| Loans | | | 6,060,242 | | | | 6,319,797 | |
| Less allowance for loan losses | | | 93,510 | | | | 103,662 | |
| Net loans | | $ | 5,966,732 | | | $ | 6,216,135 | |
| | | Loans Evaluated for Impairment | |
| | | Individually | | | Collectively | | | Total | |
| | | | | | | | | | |
| Loans secured by real estate: | | | | | | | | | |
| Construction, land development and other land loans | | $ | 57,831 | | | $ | 525,485 | | | $ | 583,316 | |
| Secured by 1-4 family residential properties | | | 30,313 | | | | 1,701,743 | | | | 1,732,056 | |
| Secured by nonfarm, nonresidential properties | | | 29,013 | | | | 1,469,095 | | | | 1,498,108 | |
| Other | | | 6,154 | | | | 225,809 | | | | 231,963 | |
| Commercial and industrial loans | | | 16,107 | | | | 1,052,262 | | | | 1,068,369 | |
| Consumer loans | | | 2,112 | | | | 400,053 | | | | 402,165 | |
| Other loans | | | 1,393 | | | | 542,872 | | | | 544,265 | |
| Total | | $ | 142,923 | | | $ | 5,917,319 | | | $ | 6,060,242 | |
Loan Concentrations
Trustmark does not have any loan concentrations other than those reflected in the preceding table, which exceed 10% of total loans. At December 31, 2010, Trustmark's geographic loan distribution was concentrated primarily in its Florida, Mississippi, Tennessee and Texas markets. A substantial portion of construction, land development and other land loans are secured by real estate in markets in which Trustmark is located. Accordingly, the ultimate collectability of a substantial portion of these loans and the recovery of a substantial portion of the carrying amount of other real estate owned, are susceptible to changes in market conditions in these areas.
Related Party Loans
Trustmark makes loans in the normal course of business to certain executive officers and directors, including their immediate families and companies in which they are principal owners. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability at the time of the transaction. At December 31, 2010 and 2009, total loans to these borrowers were $77.9 million and $72.2 million, respectively. During 2010, $142.8 million of new loan advances were made, while repayments were $137.7 million, as well as increases from changes in executive officers and directors of $639 thousand.
Nonaccrual/Impaired Loans
At December 31, 2010 and 2009, the carrying amounts of nonaccrual loans, which are considered for impairment analysis, were $142.9 million and $141.2 million, respectively. When a loan is deemed impaired, the full difference between the carrying amount of the loan and the most likely estimate of the asset’s fair value less cost to sell, is charged-off. At December 31, 2010 and 2009, specifically evaluated impaired loans totaled $97.6 million and $74.2 million, respectively. In addition, these specifically evaluated impaired loans had a related allowance of $8.3 million and $3.2 million at the end of the respective periods. The average carrying amounts of specifically evaluated impaired loans for 2010, 2009 and 2008 were $87.5 million, $55.2 million and $33.6 million, respectively. For 2010, specific charge-offs related to impaired loans totaled $33.0 million while the provisions charged to net income during the year for these loans totaled $11.5 million. For 2009, specific charge-offs related to impaired loans totaled $29.1 million while the provisions charged to net income during the year for these loans totaled $20.7 million. For 2008, specific charge-offs related to impaired loans totaled $31.6 million while the provisions charged to net income during the year for these loans totaled $21.0 million.
At December 31, 2010 and 2009, nonaccrual loans, not specifically impaired and written down to fair value less cost to sell, totaled $45.3 million and $67.0 million, respectively. In addition, these nonaccrual loans had allocated allowance for loan losses of $3.5 million and $10.0 million at the end of the respective periods. No material interest income was recognized in the income statement on impaired or nonaccrual loans for each of the years in the three-year period ended December 31, 2010.
At December 31, 2010, the carrying amount of impaired loans consisted of the following ($ in thousands):
| | | | | | Total Loans | | | | | | | | | | |
| | | Unpaid | | | with No Related | | | Total Loans | | | Total | | | | |
| | | Principal | | | Allowance | | | with an Allowance | | | Carrying | | | Related | |
| | | Balance | | | Recorded | | | Recorded | | | Amount | | | Allowance | |
| | | | | | | | | | | | | | | | |
| Loans secured by real estate: | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 81,945 | | | $ | 33,201 | | | $ | 24,630 | | | $ | 57,831 | | | $ | 6,782 | |
| Secured by 1-4 family residential properties | | | 41,475 | | | | 3,082 | | | | 27,230 | | | | 30,312 | | | | 1,745 | |
| Secured by nonfarm, nonresidential properties | | | 35,679 | | | | 18,582 | | | | 10,431 | | | | 29,013 | | | | 1,580 | |
| Other | | | 7,009 | | | | 5,042 | | | | 1,113 | | | | 6,155 | | | | 95 | |
| Commercial and industrial loans | | | 17,413 | | | | 9,172 | | | | 6,935 | | | | 16,107 | | | | 1,514 | |
| Consumer loans | | | 2,420 | | | | - | | | | 2,112 | | | | 2,112 | | | | 23 | |
| Other loans | | | 2,868 | | | | 1,107 | | | | 286 | | | | 1,393 | | | | 58 | |
| Total | | $ | 188,809 | | | $ | 70,186 | | | $ | 72,737 | | | $ | 142,923 | | | $ | 11,797 | |
Credit Quality Indicators
Trustmark’s loan portfolio credit quality indicators focus on six key quality ratios that are compared against bank tolerances. The loan indicators are total classified outstanding, total criticized outstanding, nonperforming loans, nonperforming assets, delinquencies and net loan losses. Due to the homogenous nature of consumer loans, Trustmark does not assign a formal internal risk rating to each credit and therefore the criticized and classified measures are unique to commercial loans.
In addition to monitoring portfolio credit quality indictors, Trustmark also measures how effectively the lending process is being managed and risks are being identified. As part of an ongoing monitoring process, Trustmark grades the commercial portfolio as it relates to financial statement exceptions, total policy exceptions, collateral exceptions and violations of law as shown below:
| Financial Statement Exceptions – focuses on the officers’ ongoing efforts to obtain, evaluate and/or document sufficient information to determine the quality and status of the credits. This area includes the quality and condition of the files in terms of content, completeness and organization. Included is an evaluation of the systems/procedures used to insure compliance with policy such as financial statements, review memos and loan agreement covenants. |
| Underwriting/Policy – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within requirements of bank loan policy. A properly approved credit is approved by adequate authority in a timely manner with all conditions of approval fulfilled. Total policy exceptions measure the level of exceptions to loan policy within a loan portfolio. |
| · | Collateral Documentation – focuses on the adequacy of documentation to support the obligation, perfect Trustmark’s collateral position and protect collateral value. There are two parts to this measure: |
| ü | Collateral exceptions where certain collateral documentation is either not present, is not considered current or has expired. |
| ü | 90 days and over collateral exceptions are where certain collateral documentation is either not present, is not considered current or has expired and the exception has been identified in excess of 90 days. |
| · | Compliance with Law – focuses on underwriting, documentation, approval and reporting in compliance with banking laws and regulations. Primary emphasis is directed to FIRREA and Regulation O requirements. |
Commercial Credits
Trustmark has established a Loan Grading System that consists of ten individual Credit Risk Grades (Risk Ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to delineate the level of risk across the ten unique Credit Risk Grades. Credit risk grade definitions are as follows:
| · | Risk Rate (RR) 1 through RR 6 – Grades one through six represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risk measured by using a variety of credit risk criteria such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties. |
| · | OAEM (RR 7) – a loan that has a potential weakness that if not corrected will lead to a more severe rating. This rating is for credits that are currently protected but potentially weak because of an adverse feature or condition that if not corrected will lead to a further downgrade. |
| · | Substandard (RR 8) – a loan that has at least one identified weakness that is well defined. This rating is for credits where the primary sources of repayment are not viable at this time or where either the capital or collateral is not adequate to support the loan and the secondary means of repayment do not provide the a sufficient level of support to offset the identified weakness but are sufficient to prevent a loss at this time. While these credits do not demonstrate any level of loss at this time, further deterioration would lead to a further downgrade. |
| · | Doubtful (RR 9) – a loan with an identified weakness that does not have a valid secondary source of repayment. Generally these credits have an impaired primary source of repayment and secondary sources are not sufficient to prevent a loss in the credit. |
| · | Loss (RR 10) – a loan or a portion of a loan that is deemed to be uncollectible. |
By definition, credit risk grades OAEM (RR 7), substandard (RR 8), doubtful (RR 9) and loss (RR 10) are criticized loans while substandard (RR 8), doubtful (RR 9) and loss (RR 10) are classified loans. These definitions are standardized by all bank regulatory agencies and are generally equally applied to each individual lending institution. The remaining credit risk grades are considered pass credits and are solely defined by Trustmark.
The credit risk grades represent the probability of default (PD) for an individual credit and as such is not a direct indication of loss given default (LGD). The LGD aspect of the subject risk ratings is neither uniform across the nine primary commercial loan groups or constant between the geographic areas. To account for the variance in the LGD aspects of the risk rate system, the loss expectations for each risk rating is integrated into the allowance for loan and loss methodology where the calculated LGD is allotted for each individual risk rating with respect to the individual loan group and unique geographic area. The LGD aspect of the reserve methodology is calculated each quarter as a component of the overall reserve factor for each risk grade by loan group and geographic area.
To enhance this process, loans of a certain size that are rated in one of the criticized categories are routinely reviewed to establish an expectation of loss, if any, and if such examination indicates that the level of reserve is not adequate to cover the expectation of loss, a special reserve or impairment is generally applied.
Each loan officer assesses the appropriateness of the internal risk rating assigned to their credits on an ongoing basis. Trustmark’s Asset Review area conducts independent credit quality reviews of the majority of the bank’s commercial loan portfolio concentrations both on the underlying credit quality of each individual loan portfolio as well as the adherence to bank loan policy and the loan administration process. In general, Asset Review conducts reviews of each lending area within a six to eighteen month window depending on the overall credit quality results of the individual area.
In addition to the ongoing internal risk rate monitoring described above, Trustmark conducts monthly credit quality reviews (CQR) as well as semi-annual analysis and stress testing on all residential real estate development credits and non-owner occupied commercial real estate (CRE) credits of $1.0 million or more as described below:
| · | Trustmark’s Credit Quality Review Committee meets monthly and performs the following functions: detailed review and evaluation of all loans of $100 thousand or more that are either delinquent thirty days or more or on nonaccrual, including determination of appropriate risk ratings, accrual status, and appropriate servicing officer; review of risk rate changes for relationships of $100 thousand or more; quarterly review of all nonaccruals less than $100 thousand to determine whether the credit should be charged off, returned to accrual, or remain in nonaccrual status; monthly/quarterly review of continuous action plans for all credits rated seven or worse for relationships of $100 thousand or more; monthly review of all commercial charge-offs of $25 thousand or more for the preceding month. |
| · | Residential real estate developments - a development project analysis is performed on all projects regardless of size. Performance of the development is assessed through an evaluation of the number of lots remaining, the payout ratios, and the loan-to-value ratios. Results are stress tested as to absorption and price of lots. This information is reviewed by each senior credit officer for that market to determine the need for any risk rate or accrual status changes. |
| · | Non-owner occupied commercial real estate – a cash flow analysis is performed on all projects with an outstanding balance of $1.0 million or more. In addition, credits are stress tested for vacancies and rate sensitivity. Confirmation is obtained that guarantor’s financial statements are current, taxes have been paid, and that there are no other issues that need to be addressed. This information is reviewed by each senior credit officer for that market to determine the need for any risk rate or accrual status changes. |
Consumer Credits
Loans that do not meet a minimum custom credit score are reviewed quarterly by management. The committee reviews the volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer. To assure that Trustmark continues to originate quality loans, this process allows management to make necessary changes such as changes to underwriting procedures, credit policies, or changes in loan authority to Trustmark personnel.
Trustmark monitors the levels and severity of past due consumer loans on a daily basis through its collection activities. A detailed assessment of consumer loan delinquencies is performed monthly at both a product and market level by delivery channel, which incorporates the perceived level of risk at time of underwriting. Trustmark also monitors its consumer loan delinquency trends by comparing them to quarterly industry averages.
The allowance calculation methodology delineates the consumer loan portfolio into homogeneous pools of loans that contain similar structure, repayment, collateral and risk profile, which include residential mortgage, direct consumer loans, auto finance, credit cards, and overdrafts. For these pools, the historical loss experience is determined by calculating a 20-quarter rolling average and that loss factor is applied to each homogeneous pool to establish the quantitative aspect of the methodology. Where the loss experience does not fully cover the anticipated loss for a pool, an estimate is also applied to the each homogeneous pool to establish the qualitative aspect of the methodology. The qualitative portion is the allocation of perceived risks across the loan portfolio to derive the potent ial losses that exist at the current point in time. This methodology utilizes five separate factors where each factor made up of unique components that when weighted and combined produce an estimated level of reserve for each of the loan pools. The five factors include economic indicators, performance trends, management experience, lending policy measures, and credit concentrations.
The table below illustrates the carrying amount of loans by credit quality indicator at December 31, 2010 ($ in thousands):
| | | | | | | | | | | | | | | | | | | |
| | | | | | Commercial Loans | |
| | | | | | Pass - | | | Special Mention - | | | Substandard - | | | Doubtful - | | | | |
| | | | | | Categories 1-6 | | | Category 7 | | | Category 8 | | | Category 9 | | | Subtotal | |
| Loans secured by real estate: | | | | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | | | | $ | 347,287 | | | $ | 44,459 | | | $ | 134,503 | | | $ | 512 | | | $ | 526,761 | |
| Secured by 1-4 family residential properties | | | | | | 113,776 | | | | 780 | | | | 25,167 | | | | 226 | | | | 139,949 | |
| Secured by nonfarm, nonresidential properties | | | | | | 1,353,794 | | | | 16,858 | | | | 126,050 | | | | 431 | | | | 1,497,133 | |
| Other | | | | | | 216,022 | | | | 180 | | | | 7,418 | | | | - | | | | 223,620 | |
| Commercial and industrial loans | | | | | | 977,793 | | | | 25,642 | | | | 58,307 | | | | 1,416 | | | | 1,063,158 | |
| Consumer loans | | | | | | 524 | | | | - | | | | - | | | | - | | | | 524 | |
| Other loans | | | | | | 535,110 | | | | 210 | | | | 3,633 | | | | 146 | | | | 539,099 | |
| | | | | | $ | 3,544,306 | | | $ | 88,129 | | | $ | 355,078 | | | $ | 2,731 | | | $ | 3,990,244 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consumer Loans | | | | | |
| | | | | | Past Due | | | Past Due Greater | | | | | | | | | | | Total | |
| | | Current | | | 30-89 Days | | | Than 90 days | | | Nonaccrual | | | Subtotal | | | Loans | |
| Loans secured by real estate: | | | | | | | | | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 53,797 | | | $ | 223 | | | $ | - | | | $ | 2,535 | | | $ | 56,555 | | | $ | 583,316 | |
| Secured by 1-4 family residential properties | | | 1,559,611 | | | | 10,302 | | | | 1,278 | | | | 20,916 | | | | 1,592,107 | | | | 1,732,056 | |
| Secured by nonfarm, nonresidential properties | | | 975 | | | | - | | | | - | | | | - | | | | 975 | | | | 1,498,108 | |
| Other | | | 8,282 | | | | 26 | | | | - | | | | 35 | | | | 8,343 | | | | 231,963 | |
| Commercial and industrial loans | | | 5,075 | | | | 97 | | | | - | | | | 39 | | | | 5,211 | | | | 1,068,369 | |
| Consumer loans | | | 383,529 | | | | 13,741 | | | | 2,260 | | | | 2,111 | | | | 401,641 | | | | 402,165 | |
| Other loans | | | 5,166 | | | | - | | | | - | | | | - | | | | 5,166 | | | | 544,265 | |
| | | $ | 2,016,435 | | | $ | 24,389 | | | $ | 3,538 | | | $ | 25,636 | | | $ | 2,069,998 | | | $ | 6,060,242 | |
Loans past due 90 days or more totaled $19.4 million and $55.6 million at December 31, 2010 and 2009, respectively. Included in these amounts are $15.8 million and $46.7 million, respectively, of serviced loans eligible for repurchase, which are fully guaranteed by GNMA. GNMA optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer's option and without GNMA's prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When Trustmark is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether Trustmark intends to exercise the buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings. During December of 2010, Trustmark purchased approximately $53.9 million of GNMA serviced loans, which were subsequently sold to a third party. Trustmark will retain the servicing for these loans, which are fully guaranteed by FHA/VA. Trustmark did not exercise their buy-back option on any delinquent loans serviced for GNMA during 2009.
The following table provides an aging analysis of past due loans and nonaccrual loans by class at December 31, 2010 ($ in thousands):
| | | | | | | | | | | | | | | | | | | |
| | | Past Due | | | | | | | | | | |
| | | | | | Greater than | | | | | | | | | Current | | | Total | |
| | | 30-89 Days | | | 90 Days (1) | | | Total | | | Nonaccrual | | | Loans | | | Loans | |
| | | | | | | | | | | | | | | | | | | |
| Loans secured by real estate: | | | | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 1,651 | | | $ | - | | | $ | 1,651 | | | $ | 57,831 | | | $ | 523,834 | | | $ | 583,316 | |
| Secured by 1-4 family residential properties | | | 11,654 | | | | 1,278 | | | | 12,932 | | | | 30,313 | | | | 1,688,811 | | | | 1,732,056 | |
| Secured by nonfarm, nonresidential properties | | | 9,149 | | | | 31 | | | | 9,180 | | | | 29,013 | | | | 1,459,915 | | | | 1,498,108 | |
| Other | | | 441 | | | | - | | | | 441 | | | | 6,154 | | | | 225,368 | | | | 231,963 | |
| Commercial and industrial loans | | | 4,178 | | | | 39 | | | | 4,217 | | | | 16,107 | | | | 1,048,045 | | | | 1,068,369 | |
| Consumer loans | | | 13,741 | | | | 2,260 | | | | 16,001 | | | | 2,112 | | | | 384,052 | | | | 402,165 | |
| Other loans | | | 67 | | | | - | | | | 67 | | | | 1,393 | | | | 542,805 | | | | 544,265 | |
| Total past due loans | | $ | 40,881 | | | $ | 3,608 | | | $ | 44,489 | | | $ | 142,923 | | | $ | 5,872,830 | | | $ | 6,060,242 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) - Past due greater than 90 days but still accruing interest. | | | | | | |
Allowance for Loan Losses
Changes in the allowance for loan losses were as follows ($ in thousands):
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Balance at January 1, | | $ | 103,662 | | | $ | 94,922 | | | $ | 79,851 | |
| Loans charged-off | | | (71,897 | ) | | | (80,711 | ) | | | (71,767 | ) |
| Recoveries | | | 12,199 | | | | 12,339 | | | | 10,426 | |
| Net charge-offs | | | (59,698 | ) | | | (68,372 | ) | | | (61,341 | ) |
| Provision for loan losses | | | 49,546 | | | | 77,112 | | | | 76,412 | |
| Balance at December 31, | | $ | 93,510 | | | $ | 103,662 | | | $ | 94,922 | |
| | | Allowance for Loan Losses | |
| | | Balance | | | | | | | | | | | | Balance | |
| | | January 1, | | | | | | | | | Provision for | | | December 31, | |
| | | 2010 | | | Charge-offs | | | Recoveries | | | Loan Losses | | | 2010 | |
| Loans secured by real estate: | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | $ | 43,551 | | | $ | (31,135 | ) | | $ | - | | | $ | 23,146 | | | $ | 35,562 | |
| Secured by 1-4 family residential properties | | | 13,151 | | | | (11,375 | ) | | | 417 | | | | 10,858 | | | | 13,051 | |
| Secured by nonfarm, nonresidential properties | | | 20,110 | | | | (6,520 | ) | | | - | | | | 7,390 | | | | 20,980 | |
| Other | | | 1,631 | | | | (1,365 | ) | | | - | | | | 1,316 | | | | 1,582 | |
| Commercial and industrial loans | | | 16,275 | | | | (4,186 | ) | | | 2,245 | | | | 441 | | | | 14,775 | |
| Consumer loans | | | 7,246 | | | | (10,234 | ) | | | 6,395 | | | | 1,993 | | | | 5,400 | |
| Other loans | | | 1,698 | | | | (7,082 | ) | | | 3,142 | | | | 4,402 | | | | 2,160 | |
| Total | | $ | 103,662 | | | $ | (71,897 | ) | | $ | 12,199 | | | $ | 49,546 | | | $ | 93,510 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Allowance for Loan Losses | |
| | | | | | | | | | | Disaggregated by Impairment Method | |
| | | | | | | | | | | Individually | | Collectively | | | Total | |
| Loans secured by real estate: | | | | | | | | | | | | | | | | | | | | |
| Construction, land development and other land loans | | | | | | | | | | $ | 6,782 | | | $ | 28,780 | | | $ | 35,562 | |
| Secured by 1-4 family residential properties | | | | | | | | | | | 1,745 | | | | 11,306 | | | | 13,051 | |
| Secured by nonfarm, nonresidential properties | | | | | | | | | | | 1,579 | | | | 19,401 | | | | 20,980 | |
| Other | | | | | | | | | | | 96 | | | | 1,486 | | | | 1,582 | |
| Commercial and industrial loans | | | | | | | | | | | 1,514 | | | | 13,261 | | | | 14,775 | |
| Consumer loans | | | | | | | | | | | 23 | | | | 5,377 | | | | 5,400 | |
| Other loans | | | | | | | | | | | 58 | | | | 2,102 | | | | 2,160 | |
| Total | | | | | | | | | | $ | 11,797 | | | $ | 81,713 | | | $ | 93,510 | |
Note 5 – Premises and Equipment, Net
At December 31, 2010 and 2009, premises and equipment are summarized as follows ($ in thousands):
| | | 2010 | | | 2009 | |
| Land | | $ | 39,653 | | | $ | 39,698 | |
| Buildings and leasehold improvements | | | 151,690 | | | | 151,393 | |
| Furniture and equipment | | | 120,529 | | | | 137,500 | |
| Total cost of premises and equipment | | | 311,872 | | | | 328,591 | |
| Less accumulated depreciation and amortization | | | 169,583 | | | | 181,103 | |
| Premises and equipment, net | | $ | 142,289 | | | $ | 147,488 | |
Mortgage Servicing Rights
The activity in MSR is detailed in the table below ($ in thousands):
| | | 2010 | | | 2009 | |
| Balance at beginning of period | | $ | 50,513 | | | $ | 42,882 | |
| Origination of servicing assets | | | 18,657 | | | | 24,591 | |
| Disposals of mortgage loans sold serviced released | | | (1,772 | ) | | | (5,367 | ) |
| Sale of MSR | | | - | | | | (9,633 | ) |
| Change in fair value: | | | | | | | | |
| Due to market changes | | | (8,943 | ) | | | 6,606 | |
| Due to runoff | | | (7,304 | ) | | | (8,566 | ) |
| Balance at end of period | | $ | 51,151 | | | $ | 50,513 | |
In the determination of the fair value of MSR at the date of securitization, certain key economic assumptions are made. At December 31, 2010, the fair value of MSR included an assumed average prepayment speed of 14.19 CPR and an average discount rate of 10.66%. By way of example, an increase in either the prepayment speed or discount rate assumption will result in a decrease in the fair value of the MSR, while a decrease in either assumption will result in an increase in the fair value of the MSR. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and discount rates. These fluctuations can be rapid and may continue to be significant. Therefore, estimating prepayment speed and/or discount rates within ranges that market participants wou ld use in determining the fair value of MSR requires significant management judgment.
During the first quarter of 2010, Trustmark completed the final settlement of the sale of approximately $920.9 million in mortgages serviced for others, which reduced Trustmark’s MSR by approximately $8.5 million. In addition, during December of 2010, Trustmark purchased approximately $53.9 million of GNMA serviced loans, which were subsequently sold to a third party. Trustmark will retain the servicing for these loans, which are fully guaranteed by FHA/VA. The effect of these transactions did not have a material impact on Trustmark's results of operations.
Mortgage Loans Sold/Serviced
During 2010 and 2009, Trustmark sold $1.1 billion and $1.6 billion of residential mortgage loans. Pretax gains on these sales were recorded in mortgage banking noninterest income and totaled $15.3 million in 2010, $20.8 million in 2009 and $6.0 million in 2008. Trustmark receives annual servicing fee income approximating 0.33% of the outstanding balance of the underlying loans. Trustmark's total mortgage loans serviced for others totaled $4.3 billion at December 31, 2010, compared with $4.2 billion at December 31, 2009. The investors and the securitization trusts have no recourse to the assets of Trustmark for failure of debtors to pay when due.
Trustmark is subject to losses in its loan servicing portfolio due to loan foreclosures. For loans sold without recourse, Trustmark has obligations to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations or warranties made by Trustmark at the time of the sale, herein referred to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that had missing or insufficient file documentation and/or loans obtained through fraud by borrowers or other third parties such as appraisers. The total mortgage loan servicing put back expenses incurred by Trustmark during 2010 were $2.1 million and were immaterial for 2009 and 2008. At December 31, 2010, accrued mortgage loan servicing putback expenses were approximately $900 thousand. There is inherent uncertainty in reasonably estimating the requirement for reserves against future mortgage loan servicing putback expenses. Future putback expenses are dependent on many subjective factors, including the review procedures of the purchasers and the potential refinance activity on loans sold with servicing released and the subsequent consequences under the representations and warranties. Based on Trustmark’s experience to date, and its confidence in its underwriting practices on loans sold to others, Management does not believe that a material loss related to these transactions are probable nor reasonably estimated.
