FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-3683
TRUSTMARK CORPORATION
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Mississippi 64-0471500
Trustmark Corporation
248 East Capitol Street
Jackson, MS 39201
(601) 354-5111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of October 31, 2001.
Title Outstanding
Common stock, no par value 63,983,271
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Trustmark Corporation and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
(Unaudited)
September 30, December 31,
2001 2000
------------ ------------
Assets
Cash and due from banks (noninterest-bearing) $ 300,605 $ 298,651
Federal funds sold and securities purchased
under reverse repurchase agreements 9,840 47,849
Trading account securities - 990
Securities available for sale (at fair value) 1,167,418 1,119,643
Securities held to maturity (fair value: $889,997 - 2001;
$1,021,444 - 2000) 851,016 1,005,455
Loans 4,359,580 4,143,933
Less allowance for loan losses 72,529 65,850
------------ ------------
Net loans 4,287,051 4,078,083
Premises and equipment 94,539 80,692
Intangible assets 93,563 66,381
Other assets 192,757 189,244
------------ ------------
Total Assets $ 6,996,789 $ 6,886,988
============ ============
Liabilities
Deposits:
Noninterest-bearing $ 1,031,369 $ 952,696
Interest-bearing 3,344,188 3,105,722
------------ ------------
Total deposits 4,375,557 4,058,418
Federal funds purchased 330,381 435,262
Securities sold under repurchase agreements 602,695 819,751
Short-term borrowings 463,552 632,964
Long-term FHLB advances 475,000 250,000
Other liabilities 69,746 60,952
------------ ------------
Total Liabilities 6,316,931 6,257,347
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 64,113,271 shares - 2001;
64,755,022 shares - 2000 13,358 13,491
Capital surplus 75,484 94,229
Retained earnings 567,576 512,107
Accumulated other comprehensive income, net of tax 23,440 9,814
------------ ------------
Total Shareholders' Equity 679,858 629,641
------------ ------------
Total Liabilities and Shareholders' Equity $ 6,996,789 $ 6,886,988
============ ============
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Income
($ in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Interest Income
Interest and fees on loans $ 86,857 $ 87,759 $ 260,658 $ 255,944
Interest on securities:
Taxable interest income 29,979 34,043 97,154 100,523
Interest income exempt from federal income taxes 2,473 1,950 7,050 5,649
Interest on federal funds sold and securities purchased
under reverse repurchase agreements 108 661 843 1,586
Other interest income 396 - 396 -
--------- --------- --------- ---------
Total Interest Income 119,813 124,413 366,101 363,702
Interest Expense
Interest on deposits 31,106 33,666 100,560 92,005
Interest on federal funds purchased and securities
sold under repurchase agreements 8,624 15,816 36,963 52,103
Other interest expense 9,600 17,614 33,280 42,616
--------- --------- --------- ---------
Total Interest Expense 49,330 67,096 170,803 186,724
--------- --------- --------- ---------
Net Interest Income 70,483 57,317 195,298 176,978
Provision for loan losses 3,800 2,195 8,600 7,511
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan Losses 66,683 55,122 186,698 169,467
Noninterest Income
Service charges on deposit accounts 12,077 10,802 34,448 31,157
Other account charges, fees and commissions 9,340 9,385 27,517 27,771
Mortgage servicing fees 4,294 3,702 12,537 11,040
Trust service income 3,480 3,961 10,449 11,254
Securities gains 1,362 793 1,730 9,355
Other income 3,659 670 10,548 4,807
--------- --------- --------- ---------
Total Noninterest Income 34,212 29,313 97,229 95,384
Noninterest Expense
Salaries and employee benefits 28,225 24,930 81,950 75,363
Net occupancy - premises 3,201 2,635 8,634 7,793
Equipment expense 3,942 3,805 11,684 11,421
Services and fees 7,638 6,271 21,725 19,579
Amortization of intangible assets 5,281 2,037 10,575 6,536
Other expense 8,266 6,591 23,213 21,945
--------- --------- --------- ---------
Total Noninterest Expense 56,553 46,269 157,781 142,637
--------- --------- --------- ---------
Income Before Income Taxes and Cumulative Effect of a
Change in Accounting Principle 44,342 38,166 126,146 122,214
Income taxes 15,633 13,011 44,274 41,913
--------- --------- --------- ---------
Income Before Cumulative Effect of a Change in Accounting Principle 28,709 25,155 81,872 80,301
Cumulative effect of a change in accounting principle, net of tax - - - (2,464)
--------- --------- --------- ---------
Net Income $ 28,709 $ 25,155 $ 81,872 $ 77,837
========= ========= ========= =========
Earnings Per Share
Basic and diluted earnings per share before cumulative effect
of a change in accounting principle $ 0.45 $ 0.37 $ 1.26 $ 1.16
Cumulative effect of a change in accounting principle, net of tax - - - (0.03)
--------- --------- --------- ---------
Earnings per share - basic and diluted $ 0.45 $ 0.37 $ 1.26 $ 1.13
========= ========= ========= =========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
($ in thousands)
(Unaudited)
2001 2000
--------- ---------
Balance, January 1, $ 629,641 $ 655,756
Comprehensive income:
Net income per consolidated statements of income 81,872 77,837
Net change in unrealized gains/losses on
securities available for sale, net of tax 14,696 (2,559)
Net change in accumulated net losses on cash
flow hedges, net of tax (1,070) (275)
--------- ---------
Comprehensive income 95,498 75,003
Cash dividends paid (26,403) (25,885)
Common stock issued in business combination 46,022 -
Repurchase and retirement of common stock (64,900) (92,647)
--------- ---------
Balance, September 30, $ 679,858 $ 612,227
========= =========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2001 2000
--------- ---------
Operating Activities
Net income $ 81,872 $ 77,837
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 8,600 7,511
Depreciation and amortization 20,046 15,812
Net amortization (accretion) of securities 570 (1,588)
Securities gains (1,730) (9,355)
Gains on sales of loans (6,489) (2,561)
Cumulative effect of a change in accounting principle - 3,820
Net decrease (increase) in loans held for sale 186,266 (1,004)
Proceeds from sales of trading securities 990 130,575
Net increase in intangible assets (15,663) (7,054)
Net decrease in deferred income taxes 1,807 2,141
Net increase in other assets (7,501) (25,410)
Net increase in other liabilities 534 16,080
Other operating activities, net 1,859 473
--------- ---------
Net cash provided by operating activities 271,161 207,277
Investing Activities
Proceeds from calls and maturities of securities held to maturity 156,868 157,897
Proceeds from calls and maturities of securities available for sale 465,121 116,123
Proceeds from sales of securities available for sale 12,076 144,726
Purchases of securities held to maturity - (163,968)
Purchases of securities available for sale (400,401) (322,750)
Net decrease in federal funds sold and securities
purchased under reverse repurchase agreements 96,313 13,279
Net increase in loans (98,737) (99,729)
Purchases of premises and equipment (9,330) (8,444)
Proceeds from sales of premises and equipment 123 146
Proceeds from sales of other real estate 2,474 3,183
Cash paid in business combination (38,175) -
--------- ---------
Net cash provided (used) by investing activities 186,332 (159,537)
Financing Activities
Net (decrease) increase in deposits (97,887) 36,406
Net decrease in federal funds purchased and securities sold
under repurchase agreements (321,937) (203,118)
Net (decrease) increase in other borrowings (169,412) 255,868
Proceeds from long-term FHLB advances 225,000 -
Cash dividends (26,403) (25,885)
Common stock transactions, net (64,900) (92,647)
--------- ---------
Net cash used by financing activities (455,539) (29,376)
--------- ---------
Increase in cash and cash equivalents 1,954 18,364
Cash and cash equivalents at beginning of period 298,651 279,957
--------- ---------
Cash and cash equivalents at end of period $ 300,605 $ 298,321
========= =========
See notes to consolidated financial statements.
TRUSTMARK CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles in the United States for complete
financial statements. In the opinion of Management, all adjustments (consisting
of normal recurring accruals) considered necessary for the fair presentation of
these consolidated financial statements have been included. The notes included
herein should be read in conjunction with the notes to the consolidated
financial statements included in Trustmark Corporation's (Trustmark) 2000 annual
report on Form 10-K.
The consolidated financial statements include the accounts of Trustmark and
its wholly-owned banking subsidiaries, Trustmark National Bank (TNB) and
Somerville Bank & Trust Company. All 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.
NOTE 2 - BUSINESS COMBINATIONS
On April 6, 2001, Barret Bancorp, Inc. (Barret) of Barretville, Tennessee,
was merged with Trustmark in a business combination accounted for by the
purchase method of accounting. Barret was the holding company for the former
Peoples Bank in Barretville and Somerville Bank and Trust in Somerville,
Tennessee. At the merger date, Barret had approximately $307 million in gross
loans, $508 million in total assets and $414 million in total deposits.
Trustmark paid $51.2 million and issued 2.4 million shares of common stock,
valued at approximately $46 million, in connection with the merger. Excess cost
over net assets acquired equaled $22.1 million, of which $10.5 million has been
allocated to core deposits and $11.5 million has been allocated to goodwill. The
results of operations, which are not material, have been included in the
financial statements from the merger date.
On September 7, 2001, Trustmark and Nashoba Bancshares, Inc. (Nashoba),
located in Germantown, Tennessee, announced the signing of a definitive
agreement in which Nashoba will be acquired by Trustmark. Nashoba, with assets
of $177 million, is the holding company for Nashoba Bank. Under the terms of the
agreement, Trustmark will pay $27.55 million in cash, or $36.27 per share, in
connection with the merger, which will be accounted for using the purchase
method of accounting. The transaction, which is subject to the approval of
regulatory authorities, is expected to be completed in the fourth quarter of
2001.
NOTE 3 - LOANS
The following table summarizes the activity in the allowance for loan
losses for the nine month periods ended September 30, ($ in thousands):
2001 2000
-------- --------
Balance at beginning of year $ 65,850 $ 65,850
Provision charged to expense 8,600 7,511
Loans charged off (16,426) (12,658)
Recoveries 5,797 5,147
Allowance applicable to loans of acquired banks 8,708 -
-------- --------
Balance at end of period $ 72,529 $ 65,850
======== ========
At September 30, 2001 and 2000, the carrying amounts of nonaccrual loans
were $31.1 million and $14.6 million, respectively. Included in these nonaccrual
loans at September 30, 2001 and 2000, are loans that are considered to be
impaired, which totaled $24.5 million and $11.2 million, respectively. As a
result of direct write-downs, the specific allowance related to these impaired
loans was not material. The average carrying amounts of impaired loans during
the third quarter of 2001 and 2000 were $22.5 million and $11.3 million,
respectively. No material amounts of interest income were recognized on impaired
loans or nonaccrual loans for the third quarter of 2001 or 2000. The gross
amount of interest income that would have been recorded on nonaccrual loans, if
all such loans had been accruing interest at their contractual rates, was also
immaterial.
NOTE 4 - CONTINGENCIES
Trustmark and its subsidiaries are parties to lawsuits and other claims
that arise in the ordinary course of business; some of the lawsuits assert
claims related to the lending, collection, servicing, investment, trust and
other business activities; and some of the lawsuits allege substantial claims
for damages. The cases are being vigorously contested. In the regular course of
business, Management evaluates estimated losses or costs related to litigation,
and provision is made for anticipated losses whenever Management believes that
such losses are probable and can be reasonably estimated. At the present time,
Management believes, based on the advice of legal counsel, that the final
resolution of pending legal proceedings will not have a material impact on
Trustmark's consolidated financial position or results of operations.
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average shares of common stock outstanding. Diluted EPS is computed by
dividing net income by the weighted average shares of common stock outstanding,
adjusted for the effect of stock options outstanding during the period. The
following table reflects weighted average shares used to calculate basic and
diluted EPS for the periods presented:
Nine Months Ended
September 30,
---------------------------
2001 2000
---------- ----------
Weighted Average Shares Outstanding
Basic 65,033,889 68,892,433
Diluted 65,140,949 68,935,738
NOTE 6 - STATEMENTS OF CASH FLOWS
Trustmark paid income taxes approximating $36.3 million and $28.8 million
during the nine months ended September 30, 2001 and 2000, respectively. Interest
paid on deposit liabilities and other borrowings approximated $177.2 million in
the first nine months of 2001 and $182.0 million in the first nine months of
2000. For the nine months ended September 30, 2001 and 2000, noncash transfers
from loans to foreclosed properties were $4.1 million and $3.7 million,
respectively. Assets acquired as a result of the Barret business combination
totaled $508 million, while liabilities assumed totaled $422 million.
NOTE 7 - RECENT PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations." SFAS No. 141 addresses financial accounting and reporting for
business combinations and supersedes Accounting Principles Board (APB) Option
No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." This statement eliminates the pooling
method for accounting for business combinations and requires intangible assets
that meet certain criteria be reported separately from goodwill. The provisions
of this statement apply to all business combinations initiated after June 30,
2001. Trustmark will apply the provisions of this statement in future business
combinations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." This statement requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. This statement also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and also be reviewed for
impairment. Impairment losses resulting from the initial application of this
statement are to be reported as resulting from a change in accounting principle.
This statement is effective for fiscal years beginning after December 15, 2001,
and must be applied to all goodwill and other intangible assets recognized in
the financial statements as of the start of that fiscal year. Based on
intangibles currently recorded, at the date of adoption, Trustmark expects to
have unamortized goodwill in the amount of $22.1 million and unamortized
identifiable intangible assets in the amount of $75.6 million. Amortization
expense for the nine months ended September 30, 2001, was $963 thousand related
to goodwill and $9.6 million related to identifiable intangible assets. The
impact of adoption on Trustmark's consolidated financial position and results of
operation have not yet been determined, including whether any transitional
impairment losses will be required to be recognized as a cumulative effect of a
change in accounting principle.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement applies to all entities and
amends SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies" and is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The impact of this statement on Trustmark's
consolidated financial position and results of operation have not yet been
determined.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for
the disposal of a segment of a business. This statement also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application encouraged. The
effects of this statement are not expected to have a material impact on
Trustmark's consolidated financial position and results of operation.
NOTE 8 - SEGMENT INFORMATION
Trustmark has three reportable segments: Retail Banking Group, Commercial
Banking Group and Investment Services. Retail Banking delivers a full range of
financial products and services to individuals and small businesses through
Trustmark's extensive branch network. Commercial Banking provides various
financial products and services to corporate and middle market clients. Included
among these products and services are specialized services for commercial and
residential real estate development lending, indirect auto financing and other
specialized lending services. Investment Services includes trust and fiduciary
services, discount brokerage services, insurance services, as well as credit
card and mortgage services. Also included in this segment is a selection of
investment management services including Trustmark's proprietary mutual fund
family. The Operational Support Group consists of asset/liability management
activities that include the investment portfolio and the related gains (losses)
on sales of securities. The Operational Support Group also includes expenses
such as corporate overhead and amortization of intangible assets.
The following tables disclose financial information by segment for the
periods ended September 30, 2001 and 2000, ($ in thousands):
TRUSTMARK CORPORATION
SEGMENT INFORMATION
(000'S IN THOUSANDS)
Retail Commercial Invest Operational
Group Group Services /Support Total
----------- ----------- ----------- ----------- -----------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
- ---------------------------------------------------
Net interest income from external customers $ 7,195 $ 31,122 $ 14,124 $ 18,042 $ 70,483
Internal funding 31,890 (19,795) (4,843) (7,252) -
----------- ----------- ----------- ----------- -----------
Net interest income 39,085 11,327 9,281 10,790 70,483
Provision for loan losses 3,677 910 505 (1,292) 3,800
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 35,408 10,417 8,776 12,082 66,683
Noninterest income 13,835 120 15,368 4,889 34,212
Noninterest expenses 32,571 3,981 16,564 3,437 56,553
----------- ----------- ----------- ----------- -----------
Income before income taxes 16,672 6,556 7,580 13,534 44,342
Income taxes 5,748 2,263 2,701 4,921 15,633
----------- ----------- ----------- ----------- -----------
Segment net income $ 10,924 $ 4,293 $ 4,879 $ 8,613 $ 28,709
=========== =========== =========== =========== ===========
Selected Financial Information
Average assets $ 2,336,247 $ 1,593,915 $ 881,954 $ 2,203,673 $ 7,015,789
Depreciation and amortization $ 1,276 $ 55 $ 4,405 $ 2,859 $ 8,595
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
- ---------------------------------------------------
Net interest income from external customers $ 6,382 $ 32,613 $ 12,061 $ 6,261 $ 57,317
Internal funding 24,291 (23,649) (5,462) 4,820 -
----------- ----------- ----------- ----------- -----------
Net interest income 30,673 8,964 6,599 11,081 57,317
Provision for loan losses 1,411 400 384 - 2,195
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 29,262 8,564 6,215 11,081 55,122
Noninterest income 12,814 115 14,252 2,132 29,313
Noninterest expenses 27,244 4,054 12,173 2,798 46,269
----------- ----------- ----------- ----------- -----------
Income before income taxes 14,832 4,625 8,294 10,415 38,166
Income taxes 5,117 1,597 2,901 3,396 13,011
----------- ----------- ----------- ----------- -----------
Segment net income $ 9,715 $ 3,028 $ 5,393 $ 7,019 $ 25,155
=========== =========== =========== =========== ===========
Selected Financial Information
Average assets $ 2,130,195 $ 1,509,800 $ 858,679 $ 2,297,017 $ 6,795,691
Depreciation and amortization $ 1,041 $ 49 $ 1,469 $ 2,533 $ 5,092
TRUSTMARK CORPORATION
SEGMENT INFORMATION
(000'S IN THOUSANDS)
Retail Commercial Invest Operational
Group Group Services /Support Total
----------- ----------- ----------- ----------- -----------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
- ---------------------------------------------------
Net interest income from external customers $ 15,317 $ 95,812 $ 35,978 $ 48,191 $ 195,298
Internal funding 91,545 (63,096) (10,068) (18,381) -
----------- ----------- ----------- ----------- -----------
Net interest income 106,862 32,716 25,910 29,810 195,298
Provision for loan losses 6,264 2,551 1,652 (1,867) 8,600
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 100,598 30,165 24,258 31,677 186,698
Noninterest income 40,117 379 49,059 7,674 97,229
Noninterest expenses 93,456 11,499 43,499 9,327 157,781
----------- ----------- ----------- ----------- -----------
Income before income taxes 47,259 19,045 29,818 30,024 126,146
Income taxes 16,306 6,576 10,487 10,905 44,274
----------- ----------- ----------- ----------- -----------
Segment net income $ 30,953 $ 12,469 $ 19,331 $ 19,119 $ 81,872
=========== =========== =========== =========== ===========
Selected Financial Information
Average assets $ 2,262,529 $ 1,585,213 $ 857,942 $ 2,306,678 $ 7,012,362
Depreciation and amortization $ 3,589 $ 161 $ 8,246 $ 8,050 $ 20,046
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
- ---------------------------------------------------
Net interest income from external customers $ 22,814 $ 94,819 $ 35,152 $ 24,193 $ 176,978
Internal funding 70,238 (67,641) (14,708) 12,111 -
----------- ----------- ----------- ----------- -----------
Net interest income 93,052 27,178 20,444 36,304 176,978
Provision for loan losses 4,934 1,163 1,414 - 7,511
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 88,118 26,015 19,030 36,304 169,467
Noninterest income 37,296 431 43,922 13,735 95,384
Noninterest expenses 83,577 11,699 36,017 11,344 142,637
----------- ----------- ----------- ----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 41,837 14,747 26,935 38,695 122,214
Income taxes 14,440 5,092 9,428 12,953 41,913
----------- ----------- ----------- ----------- -----------
Income before cumulative effect
of change in accounting principle 27,397 9,655 17,507 25,742 80,301
Cumulative effect of change
in accounting principle - - - (2,464) (2,464)
----------- ----------- ----------- ----------- -----------
Segment net income $ 27,397 $ 9,655 $ 17,507 $ 23,278 $ 77,837
=========== =========== =========== =========== ===========
Selected Financial Information
Average assets $ 2,139,857 $ 1,494,382 $ 862,609 $ 2,275,233 $ 6,772,081
Depreciation and amortization $ 3,141 $ 155 $ 4,273 $ 8,243 $ 15,812
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following provides a narrative discussion and analysis of significant
changes in Trustmark Corporation's (Trustmark) 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.
The Private Securities Litigation Reform Act evidences Congress'
determination that the disclosure of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by Management. Management's Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements with respect to the adequacy of the allowance for loan losses; the
effect of legal proceedings on Trustmark's financial condition, results of
operations and liquidity; and market risk disclosures. Although Management of
Trustmark believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Such forward-looking statements are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks
materialize, or should any such underlying assumptions prove to be significantly
different, actual results may vary significantly from those anticipated,
estimated, projected or expected.
FINANCIAL HIGHLIGHTS
For the third quarter of 2001, Trustmark announced record basic and diluted
earnings per share of $0.45, compared with $0.37 for the third quarter of 2000,
an increase of 21.6%. Net income totaled $28.7 million in the third quarter of
2001. This level of performance resulted in a return on average assets of 1.62%
and a return on average equity of 17.27%. For the nine months ended September
30, 2001, basic and diluted earnings per share were $1.26, an increase of 11.5%
from comparable periods one year earlier. Net income for the first nine months
totaled $81.9 million, resulting in a return on average assets of 1.56% and a
return on average equity of 16.78%. At September 30, 2001, Trustmark reported
total loans of $4.4 billion, total assets of $7.0 billion, total deposits of
$4.4 billion and shareholders' equity of $679.9 million.
BUSINESS COMBINATIONS
On April 6, 2001, Barret Bancorp, Inc. (Barret) of Barretville, Tennessee,
was merged with Trustmark in a business combination accounted for by the
purchase method of accounting. Barret was the holding company for the former
Peoples Bank in Barretville and Somerville Bank and Trust in Somerville,
Tennessee. At the merger date, Barret had approximately $307 million in gross
loans, $508 million in total assets and $414 million in total deposits. The
results of operations, which are not material, have been included in the
financial statements from the merger date.
On September 7, 2001, Trustmark and Nashoba Bancshares, Inc. (Nashoba),
located in Germantown, Tennessee, announced the signing of a definitive
agreement in which Nashoba will be acquired by Trustmark. Nashoba, with assets
of $177 million, is the holding company for Nashoba Bank. Under the terms of the
agreement, Trustmark will pay $27.55 million in cash, or $36.27 per share, in
connection with the merger, which will be accounted for using the purchase
method of accounting. The transaction, which is subject to the approval of
regulatory authorities, is expected to be completed in the fourth quarter of
2001.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Trustmark's results of operations are impacted by its ability to
effectively manage interest income and expense. Since interest rates are
determined by outside market forces and economic conditions, generating net
interest income is dependent upon Trustmark's ability to obtain an adequate
spread between the rate earned on interest-earning assets and the rate paid on
interest-bearing liabilities. The key performance measure for net interest
income is the interest margin, which is taxable-equivalent net interest income
divided by average earning assets. Tax-exempt income and yields are stated on a
taxable-equivalent basis in order to be comparable to taxable investments and
loans. This fully taxable equivalent (FTE) yield on tax-exempt income has been
computed based on a 35% federal marginal tax rate for the periods shown. The
following table summarizes Trustmark's NIM for the periods shown:
Nine Months Ended
September 30,
-----------------
2001 2000
----- -----
Yield on interest-earning assets-FTE 7.74% 7.91%
Rate on interest-bearing liabilities 3.54% 3.99%
----- -----
Net interest margin-FTE 4.20% 3.92%
===== =====
Since the beginning of 2001, the Federal Open Market Committee (which is
the primary monetary policy body of the Federal Reserve System), has lowered its
target short-term interest rate ten times. In response, Trustmark has lowered
its prime rate by 400 basis points. While earning asset yields have been
affected, a greater impact has been felt by the cost of interest-bearing
liabilities as a result of Trustmark's negative gap position. The result has
been that for the nine months ended September 30, 2001, NII increased $18.3
million, or 10.4%, compared with the same period in 2000. Average
interest-earning assets for the first nine months of 2001, were $6.438 billion,
compared to $6.286 billion for the first nine months of 2000, an increase of
2.4%. The average interest-earning asset growth is attributable to a 7.1%
increase in average loans offset by a decrease in average securities, when
comparing these periods. This combination resulted in growth in interest income
of $2.4 million, or 0.7%, when comparing the first nine months of 2001 to the
same period in 2000. The largest impact to net interest income growth during
2001 has come from the reduction in interest expense. Interest expense for the
nine months ended September 30, 2001, decreased $15.9 million, or 8.5%, when
compared to the same time period in 2000. This reduction has been fueled by
lower interest expense on federal funds sold, repurchase agreements and other
borrowings as Trustmark utilized liquidity from maturing securities to pay down
its short-term borrowings. Growth in deposits has added to interest expense but
at a lower cost than borrowings. While average interest-bearing deposits
increased 8.5%, when comparing the first nine months of 2001 with the same
period in 2000, average federal funds purchased and securities sold under
repurchase agreements decreased 2.1% and average borrowings decreased 14.4%. NII
is also impacted by Trustmark's ongoing capital management plan, which utilizes
available funds to repurchase common stock instead of funding earning assets.
During 2001, Trustmark continues to be heavily involved in this program as
demonstrated by the repurchase of $64.8 million in common stock.
PROVISION FOR LOAN LOSSES
Trustmark's provision for loan losses totaled $8.6 million during the first
nine months of 2001, compared to $7.5 million in the same period in 2000. The
provision to average loans was 0.27% for the first nine months of 2001, compared
with 0.25% for the same period in 2000. The provision for loan losses reflects
Management's assessment of the adequacy of the allowance for loan losses to
absorb inherent charge-offs in the loan portfolio. The provision for each period
is dependent upon many factors including loan growth, net charge-offs, changes
in the composition of the loan portfolio, delinquencies, Management's assessment
of loan portfolio quality, the value of collateral and general economic factors.
Trustmark's provision for loan losses to average loans continues to remain
favorable when compared with its peer banks.
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
banking, insurance and investment products and services. For the first nine
months of 2001, noninterest income increased by $1.8 million, or 1.9%. Excluding
securities gains, noninterest income would have increased $9.5 million, or
11.0%. The Barret business combination contributed $1.5 million, primarily from
service charges on deposit accounts.
Service charges for deposit products and services continue to be the single
largest component of noninterest income. Income from service charges on deposit
accounts increased $3.3 million, or 10.6% during the first nine months of 2001,
when compared to the first nine months of 2000. Revised fee structures for
certain deposit services, the overall growth in fee-based deposit accounts,
transaction volume and an intensified effort to collect fees resulted in the
increase. The Barret business combination contributed $1.2 million to the growth
in service charge income.
The second largest component of noninterest income is other account
charges, fees and commissions. In the first nine months of 2001, this category
decreased $254 thousand, or 0.9%, when compared to the same time period in 2000.
Decreases in fees from brokerage activities, which have been reduced due to
current market conditions, more than offset increases in insurance commissions
and credit card fees.
Mortgage servicing fees grew $1.5 million or 13.6% in the first nine months
of 2001, when compared to the same period in 2000. Reductions in interest rates
have resulted in an increase in mortgages originated, refinanced and purchased,
leading to growth in mortgages serviced. Trustmark serviced $4.2 billion in
mortgage loans at September 30, 2001.
Trust service income decreased $805 thousand, or 7.2% during the first nine
months of 2001, compared to the same period in 2000. Current market conditions
have contributed to a decline in valuation of assets managed, corporate trust
fees and advisory fees during the first nine months of 2001, compared to the
same period in 2000. At September 30, 2001, Trustmark, which continues to be one
of the largest providers of asset management services in Mississippi, held
assets under administration of $6.9 billion.
During the first nine months of 2001, $1.7 million in security transaction
gains were recognized from sales and calls of securities. During the first nine
months of 2000, securities gains totaled $9.4 million, which were realized from
sales of available for sale equity securities and were used to offset the effect
of adopting SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
Other income totaled $10.5 million for the first nine months of 2001,
compared to $4.8 million during the same period in 2000. The primary components
of this increase are a $3.9 million gain from the sale of $192 million in
mortgage loans with significant prepayment risk that occurred during the first
quarter of 2001, combined with the $3.0 million increase in fair market value of
Trustmark's interest rate contracts. These were offset by $1.3 million in
nontaxable benefits received on a key man life insurance policy, which occurred
during 2000.
NONINTEREST EXPENSE
Total noninterest expense increased $15.1 million, or 10.6% in the first
nine months of 2001, compared to the same period in 2000. Included in this
amount is $4.3 million as a result of the Barret business combination, primarily
in salaries and employee benefits. Also included in this amount is $2.0 million
related to the establishment of an impairment allowance for mortgage servicing
rights. Excluding these two items, total noninterest expense increased $8.9
million, or 6.2% in the first nine months of 2001, compared to the same period
in 2000. The control of noninterest expense is a management priority. The
primary measure of the effectiveness of noninterest expense control is the
efficiency ratio, which is calculated by dividing total noninterest expense by
tax-equivalent net interest income plus noninterest income. The efficiency ratio
measures the percentage of revenues that are absorbed by costs of production.
For the first nine months of 2001, Trustmark's efficiency ratio, excluding
nonrecurring items, was 53.36%, compared to 52.71% for the same period in 2000.
Salaries and employee benefits were $81.9 million in the first nine months
of 2001, compared to $75.4 million in the same period in 2000, a net increase of
$6.5 million, or 8.7%. Excluding the Barret business combination, this increase
would have been $4.1 million, or 5.4%, and the direct result of increased
incentive based compensation and medical benefit costs.
Services and fees were $21.7 million in the first nine months of 2001,
compared to $19.6 million in the same period in 2000, a net increase of $2.1
million, or 11.0%. This increase is attributable to software and advertising
expenses and other outside services. Excluding the Barret business combination,
this increase would have been $1.7 million, or 8.6%.
Amortization of intangibles increased $4.0 million, or 61.8%, primarily
from the establishment of $2 million impairment allowance and increased
amortization for mortgage servicing. This increased amortization has resulted
from increased prepayment risk during the current falling interest rate
environment.
Other expenses were $23.2 million in the first nine months of 2001,
compared to $21.9 million in the same period in 2000, a net increase of $1.3
million, or 5.8%. Excluding the Barret business combination, this increase would
have been $715 thousand, or 3.3%.
Other categories in noninterest expense remained well controlled as
evidenced by only slight increases during the first nine months of 2001, when
compared to the same period in 2000. Management will continue to closely monitor
the level of noninterest expense as part of its strategic plan effort to improve
the profitability of Trustmark.
INCOME TAXES
For the nine months ended September 30, 2001, Trustmark's combined
effective tax rate was 35.1%, compared with 34.3% for the same period in 2000.
The variation is the result of proceeds received during 2000 from non-taxable
life insurance proceeds, which generated a lower than normal effective tax rate
for the period.
SHAREHOLDERS' EQUITY
Shareholders' equity increased to $679.9 million at September 30, 2001,
from $629.6 million at December 31, 2000, primarily from the Barret business
combination. In order to enhance shareholder value, Trustmark initiated a
capital management plan during 1998. This plan included a number of initiatives
designed to improve earnings per share and return on equity, two of the most
significant factors impacting shareholder value. Two of these initiatives were
the implementation of a common stock repurchase program and the evaluation of
Trustmark's dividend payout ratio. As a result of these initiatives, Trustmark's
return on average equity increased to 16.8% at September 30, 2001, from 15.8% at
September 30, 2000. The utilization of this capital management plan has allowed
Trustmark to increase shareholder value, while maintaining sufficient regulatory
capital levels.
COMMON STOCK REPURCHASE PROGRAM
On October 9, 2001, Trustmark's Board of Directors authorized the newest
plan to repurchase up to 5.0%, or approximately 3.2 million shares of common
stock. During the first nine months of 2001, Trustmark repurchased 3.0 million
shares of common stock totaling over $64.8 million. The capital management
program, which was initially adopted by Trustmark in 1998, has authorized the
repurchase of up to 15.4 million shares of common stock since initial
implementation. Since 1998, Trustmark has purchased approximately 11.9 million
shares of common stock totaling over $237 million and has remaining authority to
purchase 3.5 million shares. The program continues to be subject to market
conditions and management discretion.
DIVIDENDS
Dividends for the first nine months of 2001 were $0.41 per share, an
increase of 8.0%, when compared with dividends of $0.38 per share for the same
period in 2000. Trustmark's dividend payout ratio was 32.1% for the nine months
ended September 30, 2001, and 33.2% for the same period in 2000.
REGULATORY CAPITAL
Trustmark and Trustmark National Bank (TNB) are subject to minimum capital
requirements, which are administered by various Federal regulatory agencies.
These capital requirements, as defined by Federal guidelines, involve
quantitative and qualitative measures of assets, liabilities and certain
off-balance sheet instruments. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements of both Trustmark and TNB.
Management believes, as of September 30, 2001, that Trustmark and TNB meet
all capital adequacy requirements to which they are subject. At September 30,
2001, the most recent notification from the Office of the Comptroller of the
Currency (OCC) categorized TNB as well capitalized. To be categorized in this
manner, TNB must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios (defined in applicable regulations) as set forth in the table
below. There are no significant conditions or events that have occurred since
the OCC's notification that Management believes have affected TNB's present
classification.
Actual and minimum regulatory capital amounts and ratios at September 30,
2001, for Trustmark and TNB are as follows ($ in thousands):
Actual Minimum Regulatory
Regulatory Capital Capital Required
------------------ ------------------
Amount Ratio Amount Ratio
------ ------ -------- ------
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $666,666 15.25% $349,737 8.00%
Trustmark National Bank $646,462 15.16% $341,133 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $611,502 13.99% $174,869 4.00%
Trustmark National Bank $592,980 13.91% $170,567 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $611,502 8.77% $209,126 3.00%
Trustmark National Bank $592,980 8.71% $204,300 3.00%
EARNING ASSETS
Earning assets are comprised of securities, loans, federal funds sold,
securities purchased under resale agreements and trading account assets, which
are the primary revenue streams for Trustmark. At September 30, 2001, earning
assets were $6.388 billion, or 91.3% of total assets, compared with $6.318
billion, or 91.74% of total assets at December 31, 2000, an increase of $70.0
million, or 1.1%. This increase is the direct result of the Barret business
combination, which more than offset the sale of mortgage loans, which was
completed during the first quarter of 2001.
SECURITIES
The securities portfolio is utilized to provide Trustmark with a quality
investment alternative, a stable source of interest income, as well as
collateral for pledges on public deposits and securities sold under agreements
to repurchase. At September 30, 2001, Trustmark's securities portfolio totaled
$2.018 billion, compared to $2.125 billion at December 31, 2000, a decrease of
$106.7 million, or 5.0%. The decrease was offset by the reinvestment from the
previously mentioned sale of mortgage loans ($192 million) and the Barret
business combination ($104 million), which was completed during the second
quarter of 2001. Excluding the reinvestment and business combination, the
portfolio would have decreased by approximately $400 million, primarily from
redemptions in mortgage-backed securities. Management has utilized this
liquidity to reduce wholesale funding reliance, as well as, fund the capital
management plans during a period when market yields have been declining.
AFS securities are carried at their estimated fair value, with unrealized
gains or losses recognized, net of taxes, in accumulated other comprehensive
income, a separate component of shareholders' equity. At September 30, 2001, AFS
securities totaled $1.167 billion, which represented 57.8% of the securities
portfolio, compared to $1.120 billion or 52.7% at December 31, 2000.
HTM securities are carried at amortized cost and represent those securities
that Trustmark both positively intends and has the ability to hold to maturity.
At September 30, 2001, HTM securities totaled $851 million and represented 42.2%
of the total portfolio, compared with $1.005 billion or 47.3% at December 31,
2000. This decrease is the result of scheduled maturities in the HTM portfolio
and the exercise of call options by issuers.
Management continues to stress asset quality as one of the strategic goals
of the securities portfolio, which is evidenced by the investment of over 83% of
the portfolio in U. S. Treasury and U. S. Government agency obligations. The
REMIC and CMO issues held in the securities portfolio are entirely U. S.
Government agency issues. In order to avoid excessive yield volatility from
unexpected prepayments, Trustmark's normal practice is to purchase investment
securities at or near par value to reduce the risk of premium write-offs.
LOANS
Loans, the largest group of earning assets, totaled 68.3% of earning assets
at September 30, 2001, compared with 65.6% at December 31, 2000. At September
30, 2001, loans totaled $4.360 billion compared to $4.144 billion at year-end
2000, an increase of $215.6 million, or 5.2%. The Barret business combination
contributed $307 million in loan growth, which has been offset by the previously
mentioned mortgage loan sale. Excluding these two transactions, loans would have
increased $100.3 million or 2.4%. Loan growth has remained stable, as
traditional consumer lending has contracted, while mortgage and small business
lending have expanded.
Trustmark's lending policies have produced consistently strong asset
quality. One measure of asset quality in the financial services industry is the
level of nonperforming assets. Trustmark's nonperforming assets at September 30,
2001 and December 31, 2000, are shown in the following table ($ in thousands):
Sept. 30, Dec. 31,
Nonperforming Assets 2001 2000
- -------------------- --------- --------
Nonaccrual and restructured loans $ 31,140 $ 15,958
Other real estate (ORE) 4,322 2,280
--------- --------
Total nonperforming assets $ 35,462 $ 18,238
========= ========
Accruing loans past due 90 days or more $ 2,702 $ 2,494
========= ========
Nonperforming assets/total loans and ORE 0.81% 0.44%
========= ========
At September 30, 2001, nonperforming assets and past due loans over 90 days
(as seen in the preceding table) equaled $38.2 million, of which $6.7 million is
related to the Barret business combination. In addition, increases in nonaccrual
loans related to commercial real estate, wholesale equipment sales and the
transportation industry contributed to this change. Management is not aware of
any additional credits, other than those identified above, where serious doubts
as to the repayment of principal and interest exist.
At September 30, 2001, the allowance for loan losses was $72.5 million,
representing 1.66% of total loans outstanding, compared to $65.9 million and
1.59%, respectively, at December 31, 2000. This increase is the direct result of
the Barret business combination. At acquisition date, Barret's allowance for
loan losses equaled $8.7 million. The allowance for loan losses is maintained at
a level that Management and the Board of Directors believe is adequate to absorb
estimated probable losses within the loan portfolio, including losses associated
with off-balance sheet credit instruments such as letters of credit and unfunded
lines of credit. A formal analysis is prepared monthly to assess the risk in the
loan portfolio and to determine the adequacy of the allowance for loan losses.
Specifically, the analysis considers any identified impairment, as well as
historical loss experience in relation to volume and types of loans, volume and
trends in delinquencies and nonaccruals, national and local economic conditions
and other pertinent information. This analysis is presented to the Credit Policy
Committee, with subsequent review and approval by the Board of Directors.
Net charge-offs were $10.6 million or 0.33% of average loans at September
30, 2001, compared with $7.5 million or 0.25% of average loans at September 30,
2000. Trustmark's level of net charge-offs to average loans continues to compare
favorably to those of peer banks.
OTHER EARNING ASSETS
Federal funds sold and securities purchased under reverse repurchase
agreements were $9.8 million at September 30, 2001, a decrease of $38.0 million
when compared with year-end 2000. Trustmark utilizes these products as a
short-term investment alternative whenever it has excess liquidity.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Trustmark's deposit base is its primary source of funding and consists of
core deposits from the communities served by Trustmark. Total deposits were
$4.375 billion at September 30, 2001, compared with $4.058 billion at December
31, 2000, an increase of $317.1 million, or 7.8%. The increase during the first
nine months of 2001 is attributable to the $414 million contributed by the
Barret business combination. Excluding the merger related growth, deposit
balances have declined slightly as brokered CDs have matured. Trustmark
continues to search for reasonably priced funding alternatives by evaluating new
deposit products.
Short-term borrowings, which consist of federal funds purchased, securities
sold under repurchase agreements, FHLB borrowings and the treasury tax and loan
note option account, totaled $1.397 billion at September 30, 2001, a decrease of
$491.0 million, compared with $1.888 billion at December 31, 2000. This
reduction has been funded primarily from liquidity produced by maturing
securities. Long-term FHLB advances have increased by $225 million since
year-end as Management sought to lock-in lower interest rates during the current
interest rate environment. Significant funding remains available through FHLB
borrowings.
ASSET/LIABILITY MANAGEMENT
OVERVIEW
Market risk is the risk of loss arising from adverse changes in market
prices and rates. Trustmark has risk management policies to monitor and limit
exposure to market risk. Trustmark's market risk is comprised primarily of
interest rate risk created by core banking activities. Interest rate risk is the
risk to net interest income represented by the impact of higher or lower
interest rates. 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.
MARKET/INTEREST RATE RISK MANAGEMENT
The primary purpose in managing interest rate risk is to effectively invest
capital and preserve the value created by the core banking business. 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. The primary tool utilized by the
Asset/Liability Committee is a modeling system that provides information used to
evaluate exposure to interest rate risk, project earnings and manage balance
sheet growth. This modeling system utilizes the following scenarios in order to
give Management a method of evaluating Trustmark's interest rate, basis and
prepayment risk under different conditions:
o Rate shocked scenarios of up-and-down 100, 200 and 300 basis
points.
o Yield curve twist of +/- 2 standard deviations of the change
in spread of the three-month Treasury bill and the 10-year
Treasury note yields.
o Basis risk scenarios where federal funds/Libor spread widens
and tightens to the high and low spread determined by using 2
standard deviations.
o Prepayment risk scenarios where projected prepayment speeds in
up-and-down 200 basis point rate scenarios are compared to
current projected prepayment speeds.
A static gap analysis is a tool used mainly for interest rate risk
measurement, which highlights significant short-term repricing volume
mismatches. Management's assumptions related to the prepayment of certain loans
and securities, as well as the maturity for rate sensitive assets and
liabilities are utilized for sensitivity static gap analysis. At September 30,
2001, the balance sheet was liability-sensitive to interest rate movements with
$812 million more liabilities than assets scheduled to reprice within three
months and $488 million scheduled to reprice within one year. Trustmark has
reduced its negative gap position significantly since the end of 2000, in
response to the uncertainty of market conditions and interest rate movements.
Trustmark uses derivatives to hedge interest rate exposures by mitigating
the interest rate risk of mortgage loans held for sale and mortgage loans in
process. Trustmark regularly enters into derivative financial instruments in the
form of forward contracts as part of normal asset/liability management
strategies. Forward contracts, a type of derivative financial instrument, are
agreements to purchase or sell securities or other money market instruments at a
future specified date at a specified price or yield. 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.
During the second half of 2000, Trustmark began a strategy to utilize
interest rate caps and floors, which will be implemented over time. The intent
of utilizing these financial instruments is to reduce the risk associated with
the effects of significant movements in interest rates. Caps and floors, which
have not been designated as hedging instruments, are options that are linked to
a notional principal amount and an underlying indexed interest rate. Exposure to
loss on these options will increase or decrease as interest rates fluctuate.
Trustmark currently has interest rate caps with a notional balance of $200
million (6% strike price based on 3 month Libor) and an interest rate floor with
a notional balance of $100 million (5% strike price based on 3 month Libor).
During the third quarter of 2001, the interest rate floor reached its strike
price and Trustmark received $396 thousand in interest income.
LIQUIDITY
Trustmark's goal is to maintain an adequate liquidity position to satisfy
the cash flow requirements of depositors and borrowers while meeting the cash
flow needs which Trustmark requires for growth. The Asset/Liability Committee is
responsible for managing these needs by establishing and monitoring guidelines
created to ensure adequate funding capacity. Core deposits are Trustmark's
primary source of funding and one of the most stable sources of liquidity for a
bank. The ability to maintain consistent earnings and adequate capital also
enhances Trustmark's liquidity. In addition, liquidity is strengthened by
Trustmark's ready access to a diversified base of wholesale funding sources.
These sources include federal funds lines of credit with upstream
correspondents, brokered CD's and Federal Home Loan Bank advances.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments for the quarter ended September 30,
2001, other than those disclosed in the Notes to Consolidated Financial
Statements and Management's Discussion and Analysis of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. There were no reports on Form 8-K filed during the third quarter of
2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRUSTMARK CORPORATION
BY: /s/ Richard G. Hickson BY: /s/ Gerard R. Host
---------------------- ------------------
Richard G. Hickson Gerard R. Host
President & Chief Treasurer (Principal
Executive Officer Financial Officer)
DATE: November 9, 2001 DATE: November 9, 2001