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 June 30, 2003
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) 208-5111
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of July 31, 2003.
Title Outstanding
Common stock, no par value 58,661,746
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Trustmark Corporation and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
(Unaudited)
June 30, December 31,
2003 2002
----------- ----------
Assets
Cash and due from banks (noninterest-bearing) $ 345,050 $ 357,427
Federal funds sold and securities purchased
under reverse repurchase agreements 19,561 23,957
Securities available for sale (at fair value) 1,536,935 1,262,570
Securities held to maturity (fair value:
$329,991 - 2003; $578,150 - 2002) 312,001 549,197
Loans held for sale 300,717 199,680
Loans 4,525,236 4,417,686
Less allowance for loan losses 74,819 74,771
---------- ----------
Net loans 4,450,417 4,342,915
Premises and equipment 103,767 104,113
Intangible assets 106,770 119,643
Other assets 198,081 179,204
---------- ----------
Total Assets $7,373,299 $7,138,706
========== ==========
Liabilities
Deposits:
Noninterest-bearing $1,306,795 $1,251,240
Interest-bearing 3,659,985 3,435,056
---------- ----------
Total deposits 4,966,780 4,686,296
Federal funds purchased 418,553 319,985
Securities sold under repurchase agreements 557,498 634,993
Short-term borrowings 239,605 275,959
Long-term FHLB advances 457,624 475,000
Other liabilities 68,880 66,939
---------- ----------
Total Liabilities 6,708,940 6,459,172
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 59,014,613 shares -
2003; 60,516,668 shares - 2002 12,296 12,609
Capital surplus 152,981 188,652
Retained earnings 506,401 470,317
Accumulated other comprehensive (loss) income,
net of tax (7,319) 7,956
---------- ----------
Total Shareholders' Equity 664,359 679,534
---------- ----------
Total Liabilities and Shareholders' Equity $7,373,299 $7,138,706
========== ==========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Income
($ in thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Interest Income
Interest and fees on loans $ 71,168 $ 76,083 $141,867 $153,546
Interest on securities:
Taxable 18,390 24,509 38,545 48,678
Tax exempt 2,011 2,236 4,080 4,572
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 94 96 176 195
Other interest income 11 575 23 1,345
-------- -------- -------- --------
Total Interest Income 91,674 103,499 184,691 208,336
Interest Expense
Interest on deposits 15,653 20,020 31,715 41,798
Interest on federal funds purchased and securities
sold under repurchase agreements 3,101 3,229 5,827 6,888
Other interest expense 4,731 5,459 9,763 10,930
-------- -------- -------- --------
Total Interest Expense 23,485 28,708 47,305 59,616
-------- -------- -------- --------
Net Interest Income 68,189 74,791 137,386 148,720
Provision for loan losses 2,649 3,000 5,649 7,307
-------- -------- -------- --------
Net Interest Income After Provision
for Loan Losses 65,540 71,791 131,737 141,413
Noninterest Income
Service charges on deposit accounts 13,070 12,397 25,750 23,821
Other account charges and fees 7,136 7,203 13,761 14,204
Insurance commissions 4,963 3,813 8,750 6,473
Mortgage servicing fees 4,235 4,293 8,561 8,615
Trust service income 2,346 2,492 4,657 5,011
Gains on sales of loans 5,251 2,169 9,144 3,674
Securities gains 4,021 376 12,169 516
Other income 1,064 (2,093) 477 (2,678)
-------- -------- -------- --------
Total Noninterest Income 42,086 30,650 83,269 59,636
Noninterest Expense
Salaries and employee benefits 29,497 28,940 65,421 58,462
Net occupancy - premises 3,160 2,906 6,146 5,695
Equipment expense 3,673 3,864 7,383 7,759
Services and fees 8,011 7,822 15,890 15,627
Amortization/impairment of intangible assets 8,749 2,837 20,404 3,823
Loan expense 2,432 2,389 4,803 4,941
Other expense 4,425 4,956 9,626 9,397
-------- -------- -------- --------
Total Noninterest Expense 59,947 53,714 129,673 105,704
-------- -------- -------- --------
Income Before Income Taxes 47,679 48,727 85,333 95,345
Income taxes 16,515 17,324 29,685 33,613
-------- -------- -------- --------
Net Income $ 31,164 $ 31,403 $ 55,648 $ 61,732
======== ======== ======== ========
Earnings Per Share
Basic $ 0.53 $ 0.50 $ 0.94 $ 0.98
======== ======== ======== ========
Diluted $ 0.53 $ 0.50 $ 0.93 $ 0.98
======== ======== ======== ========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
($ in thousands)
(Unaudited)
2003 2002
--------- ---------
Balance, January 1, $ 679,534 $ 685,444
Comprehensive income:
Net income per consolidated statements of income 55,648 61,732
Net change in fair value of securities available
for sale, net of tax (18,241) 3,636
Net change in fair value of cash flow hedges,
net of tax 2,966 (1,332)
--------- ---------
Comprehensive income 40,373 64,036
Cash dividends paid (19,564) (18,902)
Exercise of stock options and stock compensation expense 1,752 -
Repurchase and retirement of common stock (37,736) (38,645)
--------- ---------
Balance, June 30, $ 664,359 $ 691,933
========= =========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------
2003 2002
-------- --------
Operating Activities
Net income $ 55,648 $ 61,732
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses 5,649 7,307
Depreciation and amortization/impairment 26,326 10,274
Net amortization (accretion) of securities 5,595 (412)
Securities gains (12,169) (516)
Gains on sales of loans (9,144) (3,674)
Deferred income tax (benefit) provision (2,152) 1,927
Proceeds from sales of loans 637,783 438,873
Purchases and originations of loans held for sale (738,820) (387,550)
Net increase in intangible assets (7,531) (7,025)
Net increase in other assets (10,702) (1,099)
Net increase (decrease) in other liabilities 6,745 (773)
Other operating activities, net (175) 56
-------- --------
Net cash (used in) provided by operating activities (42,947) 119,120
Investing Activities
Proceeds from calls and maturities of securities held
to maturity 315,329 134,228
Proceeds from calls and maturities of securities
available for sale 145,545 159,985
Proceeds from sales of securities available for sale 265,904 12,935
Purchases of securities held to maturity (1,551) (2,635)
Purchases of securities available for sale (785,362) (102,067)
Net decrease in federal funds sold and securities
purchased under reverse repurchase agreements 4,396 122,723
Net increase in loans (104,007) (63,344)
Purchases of premises and equipment (4,840) (12,930)
Proceeds from sales of premises and equipment 524 19
Proceeds from sales of other real estate 2,353 1,739
Cash paid in business combinations - (7,799)
-------- --------
Net cash (used in) provided by investing activities (161,709) 242,854
Financing Activities
Net increase (decrease) in deposits 280,484 (14,276)
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements 21,073 (325,740)
Net decrease in other borrowings (36,354) (104,184)
(Maturities of) proceeds from long-term FHLB advances (17,376) 100,000
Cash dividends (19,564) (18,902)
Proceeds from the exercise of stock options 1,752 -
Repurchase and retirement of common stock (37,736) (38,645)
-------- --------
Net cash provided by (used in) financing activities 192,279 (401,747)
-------- --------
Decrease in cash and cash equivalents (12,377) (39,773)
Cash and cash equivalents at beginning of period 357,427 328,779
-------- --------
Cash and cash equivalents at end of period $345,050 $289,006
======== ========
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 accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted
in the United States of America 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) 2002 annual report on Form 10-K.
The consolidated financial statements include Trustmark and its wholly-owned
bank subsidiaries, Trustmark National Bank (TNB) and Somerville Bank & Trust
Company (Somerville). All intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
period amounts to conform with the current period presentation.
NOTE 2 - BUSINESS COMBINATIONS
On June 18, 2003, Trustmark and The Banc Corporation of Birmingham, Alabama,
jointly announced the signing of a definitive purchase and assumption agreement
pursuant to which TNB will acquire seven Florida branches of The Bank, a
subsidiary of The Banc Corporation, for a $46.8 million deposit premium. These
branches, known as the Emerald Coast Division, serve the markets from Destin to
Panama City and have loans and deposits of approximately $221 million and $205
million, respectively. The transaction, which is subject to regulatory approval,
is expected to be completed during the third quarter of 2003.
On June 28, 2002, The Bottrell Insurance Agency, Inc., a wholly-owned subsidiary
of TNB, acquired Chandler-Sampson Insurance, Inc. (CSI) in Jackson, Mississippi.
This business combination, which is not material to Trustmark, was accounted for
under the purchase method of accounting. The shareholders of CSI received $8
million in cash in connection with the merger. Excess cost over tangible net
assets acquired totaled $10 million, of which $3 million and $7 million have
been allocated to other identifiable intangible assets and goodwill,
respectively. Trustmark's financial statements include the results of operations
for the CSI acquisition from the merger date. The pro forma impact of this
acquisition on Trustmark's results of operations is insignificant.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The following table summarizes the activity in the allowance for loan losses for
the six-month periods ended June 30 ($ in thousands):
2003 2002
-------- --------
Balance at beginning of year $ 74,771 $ 75,534
Provision charged to expense 5,649 7,307
Loans charged off (9,982) (11,501)
Recoveries 4,381 4,560
-------- --------
Net charge-offs (5,601) (6,941)
-------- --------
Balance at end of period $ 74,819 $ 75,900
======== ========
At June 30, 2003 and 2002, the carrying amounts of nonaccrual loans were $28.9
million and $41.1 million, respectively. Included in these nonaccrual loans at
June 30, 2003 and 2002, are loans that are considered to be impaired, which
totaled $21.7 million and $33.3 million, respectively. At June 30, 2003, the
total allowance for loan losses related to impaired loans was $5.5 million
compared with $8.1 million at June 30, 2002. The average carrying amounts of
impaired loans during the second quarter of 2003 and 2002 were $21.8 million and
$33.6 million, respectively. No material amounts of interest income were
recognized on impaired loans or nonaccrual loans for the second quarter of 2003
or 2002.
NOTE 4 - INTANGIBLE ASSETS
At June 30, 2003 and December 31, 2002, intangible assets, net of any applicable
amortization or impairment, consisted of the following ($ in thousands):
June 30, December 31,
2003 2002
---------- ----------
Mortgage servicing rights $ 37,680 $ 48,827
Goodwill 48,028 48,028
Other identifiable intangible assets:
Core deposit intangibles 17,837 19,288
Insurance customer relationship intangibles 2,629 2,904
---------- ----------
Total amortizable 20,466 22,192
Pension plan intangible 596 596
---------- ----------
Total other identifiable intangible assets 21,062 22,788
---------- ----------
Total intangible assets $ 106,770 $ 119,643
========== ==========
NOTE 5 - STOCK-BASED COMPENSATION
Prior to January 1, 2003, Trustmark accounted for incentive stock options under
the recognition and measurement provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25,
because the exercise price of Trustmark's stock options equaled the market price
for the underlying stock on the date of grant, no compensation expense was
recognized. Effective January 1, 2003, Trustmark adopted the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." Under the
provisions of these statements, Trustmark will account for incentive stock
options prospectively for all awards granted, modified or settled after January
1, 2003. The following table reflects pro forma net income and earnings per
share for the periods presented, had Trustmark elected to adopt the fair value
approach for all outstanding options prior to January 1, 2003 ($ in thousands
except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $31,164 $31,403 $55,648 $61,732
Add: Total stock-based employee compensation
expense included in reported net income, net
of related tax effects 80 - 80 -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (336) (382) (672) (764)
------- ------- ------- -------
Pro forma net income $30,908 $31,021 $55,056 $60,968
======= ======= ======= =======
Earnings per share:
As reported
Basic $ 0.53 $ 0.50 $ 0.94 $ 0.98
Diluted 0.53 0.50 0.93 0.98
Pro forma
Basic $ 0.52 $ 0.50 $ 0.92 $ 0.97
Diluted 0.52 0.49 0.92 0.96
NOTE 6 - CONTINGENCIES
Standby Letters of Credit
Trustmark issues financial and performance standby letters of credit in the
normal course of business in order to fulfill the financing needs of its
customers. Standby letters of credit are conditional commitments issued by
Trustmark to insure the performance of a customer to a third party. A financial
standby letter of credit is a commitment by Trustmark to guarantee a customer's
repayment of an outstanding loan or debt instrument. Trustmark guarantees a
customer's performance to a third party under a contractual nonfinancial
obligation through the use of a performance standby letter of credit. When
issuing letters of credit, Trustmark uses essentially the same policies
regarding credit risk and collateral which are followed in the lending process.
At June 30, 2003, the maximum potential amount of future payments Trustmark
could be required to make under its standby letters of credit was $70.3 million,
which also represented the maximum credit risk associated with these
commitments. This amount consisted primarily of commitments with maturities of
less than four years. These standby letters of credit have an immaterial
carrying value. Trustmark holds collateral to support standby letters of credit
when deemed necessary. As of June 30, 2003, the fair value of collateral held
was $23.2 million.
Legal Proceedings
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 and Management's
evaluation, 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 7 - 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 partially diluted stock options outstanding during
the period. The following table reflects weighted average shares used to
calculate basic and diluted EPS for the periods presented:
Six Months Ended
June 30,
-------------------------
2003 2002
---------- ----------
Basic 59,512,924 63,026,007
Dilutive shares (related to stock options) 154,459 201,590
---------- ----------
Diluted 59,667,383 63,227,597
========== ==========
NOTE 8 - STATEMENTS OF CASH FLOWS
Trustmark paid income taxes approximating $30.2 million and $15.0 million during
the six months ended June 30, 2003 and 2002, respectively. Interest paid on
deposit liabilities and other borrowings approximated $48.3 million in the first
six months of 2003 and $62.8 million in the first six months of 2002. For the
six months ended June 30, 2003 and 2002, noncash transfers from loans to
foreclosed properties were $2.9 million and $3.4 million, respectively.
NOTE 9 - RECENT PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. The statement applies to three categories of
freestanding financial instruments: 1) certain mandatorily redeemable
instruments, 2) instruments with repurchase obligations and 3) instruments with
obligations to issue a variable number of shares. The statement requires that
previously issued instruments that fall within the scope of the statement must
be reclassified as liabilities, and subsequent changes in the measurements of
the instruments treated as liabilities must flow through to the income
statement. For public companies, this statement became effective for all
freestanding financial instruments entered into or modified after May 31, 2003.
Otherwise it becomes effective at the beginning of the first interim period
beginning after June 15, 2003. Currently, Trustmark does not have any financial
instruments within the scope of this statement.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The effects
of this statement did not have a material impact on Trustmark's consolidated
financial position or results of operations upon adoption on June 30, 2003.
NOTE 10 - SEGMENT INFORMATION
Effective January 1, 2003, Trustmark changed the composition of its reportable
segments to the following: Consumer Division, Commercial Division, Investment
Division and Operations Division. The Consumer Division delivers a full range of
banking, investment and risk management products and services to individuals and
small businesses through Trustmark's extensive branch network. Included in this
segment are products and services for insurance, credit card, mortgage, indirect
automobile financing and student loans. The Commercial Division 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 as well as other specialized lending
services. The Investment Division includes trust and fiduciary services,
discount brokerage services and services for private banking clients. Also
included in this segment is a selection of investment management services
including Trustmark's proprietary mutual fund family. The Operations Division
consists of asset/liability management activities that include the investment
portfolio and the related gains/losses on sales of securities, as well as credit
risk management, bank operations, human resources and the controller's
department. The Operations Division also includes expenses such as corporate
overhead and amortization of intangible assets.
Trustmark evaluates performance and allocates resources based on the profit or
loss of the individual segments. Trustmark utilizes matched maturity transfer
pricing to assign cost of funding to assets and earnings credits to liabilities
with a corresponding offset to the Operations Division. Trustmark allocates
noninterest expense based on various activity-based costing statistics.
Excluding internal funding, Trustmark does not have inter-company revenues or
expenses. Additionally, segment income tax expense is calculated using the
marginal tax rate. The difference between the marginal and effective tax rate is
included in the Operations Division.
The tables on pages 11 and 12 disclose financial information, by segment, for
the periods ended June 30, 2003 and 2002. The prior year period has been
restated to conform to the current presentation.
Trustmark Corporation
Segment Information
($ in thousands)
Consumer Commercial Investment Operations
Division Division Division Division Total
---------- ---------- ---------- ---------- ----------
For the three months ended
June 30, 2003
- ----------------------------------
Net interest income from
external customers $ 41,283 $ 12,876 $ 1,212 $ 12,818 $ 68,189
Internal funding 7,809 (1,725) 12 (6,096) -
---------- ---------- ---------- ---------- ----------
Net interest income 49,092 11,151 1,224 6,722 68,189
Provision for loan losses 2,623 34 (7) (1) 2,649
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 46,469 11,117 1,231 6,723 65,540
Noninterest income 30,188 1,669 4,889 5,340 42,086
Noninterest expense 47,960 3,876 4,403 3,708 59,947
---------- ---------- ---------- ---------- ----------
Income before income taxes 28,697 8,910 1,717 8,355 47,679
Income taxes 10,022 3,074 624 2,795 16,515
---------- ---------- ---------- ---------- ----------
Segment net income $ 18,675 $ 5,836 $ 1,093 $ 5,560 $ 31,164
========== ========== ========== ========== ==========
Selected Financial Information
Average assets $4,057,600 $1,110,821 $ 118,830 $2,059,945 $7,347,196
Depreciation and amortization $ 9,406 $ 108 $ 105 $ 2,075 $ 11,694
For the three months ended
June 30, 2002
- ----------------------------------
Net interest income from
external customers $ 38,998 $ 15,072 $ 1,230 $ 19,491 $ 74,791
Internal funding 7,977 (4,150) (241) (3,586) -
---------- ---------- ---------- ---------- ----------
Net interest income 46,975 10,922 989 15,905 74,791
Provision for loan losses 2,221 (23) (121) 923 3,000
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 44,754 10,945 1,110 14,982 71,791
Noninterest income 24,139 1,798 5,440 (727) 30,650
Noninterest expense 42,708 3,445 4,172 3,389 53,714
---------- ---------- ---------- ---------- ----------
Income before income taxes 26,185 9,298 2,378 10,866 48,727
Income taxes 9,090 3,208 880 4,146 17,324
---------- ---------- ---------- ---------- ----------
Segment net income $ 17,095 $ 6,090 $ 1,498 $ 6,720 $ 31,403
========== ========== ========== ========== ==========
Selected Financial Information
Average assets $3,790,103 $1,090,348 $ 97,007 $1,809,754 $6,787,212
Depreciation and amortization $ 3,594 $ 116 $ 84 $ 2,304 $ 6,098
Trustmark Corporation
Segment Information
($ in thousands)
Consumer Commercial Investment Operations
Division Division Division Division Total
---------- ---------- ---------- ---------- ----------
For the six months ended
June 30, 2003
- ----------------------------------
Net interest income from
external customers $ 81,205 $ 26,084 $ 2,437 $ 27,660 $ 137,386
Internal funding 15,847 (4,313) (21) (11,513) -
---------- ---------- ---------- ---------- ----------
Net interest income 97,052 21,771 2,416 16,147 137,386
Provision for loan losses 5,212 90 (22) 369 5,649
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 91,840 21,681 2,438 15,778 131,737
Noninterest income 55,506 3,608 9,683 14,472 83,269
Noninterest expense 100,014 7,605 8,726 13,328 129,673
---------- ---------- ---------- ---------- ----------
Income before income taxes 47,332 17,684 3,395 16,922 85,333
Income taxes 16,554 6,101 1,247 5,783 29,685
---------- ---------- ---------- ---------- ----------
Segment net income $ 30,778 $ 11,583 $ 2,148 $ 11,139 $ 55,648
========== ========== ========== ========== ==========
Selected Financial Information
Average assets $3,994,627 $1,109,674 $ 118,339 $1,996,228 $7,218,868
Depreciation and amortization $ 21,742 $ 222 $ 210 $ 4,152 $ 26,326
For the six months ended
June 30, 2002
- ----------------------------------
Net interest income from
external customers $ 77,579 $ 29,546 $ 2,469 $ 39,126 $ 148,720
Internal funding 16,087 (8,645) (559) (6,883) -
---------- ---------- ---------- ---------- ----------
Net interest income 93,666 20,901 1,910 32,243 148,720
Provision for loan losses 4,830 1,833 (130) 774 7,307
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 88,836 19,068 2,040 31,469 141,413
Noninterest income 45,611 3,472 10,982 (429) 59,636
Noninterest expense 83,991 6,841 8,349 6,523 105,704
---------- ---------- ---------- ---------- ----------
Income before income taxes 50,456 15,699 4,673 24,517 95,345
Income taxes 17,506 5,416 1,723 8,968 33,613
---------- ---------- ---------- ---------- ----------
Segment net income $ 32,950 $ 10,283 $ 2,950 $ 15,549 $ 61,732
========== ========== ========== ========== ==========
Selected Financial Information
Average assets $3,801,554 $1,083,838 $ 96,670 $1,852,879 $6,834,941
Depreciation and amortization $ 5,292 $ 228 $ 172 $ 4,582 $ 10,274
ITEM 2. 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.
BUSINESS
Trustmark is a multi-bank holding company headquartered in Jackson, Mississippi,
incorporated under the Mississippi Business Corporation Act on August 5, 1968.
Trustmark commenced doing business in November 1968. Through its subsidiaries,
Trustmark operates as a financial services organization providing banking and
financial solutions to corporate, institutional and individual customers
predominantly within the states of Mississippi and Tennessee.
Trustmark National Bank (TNB), Trustmark's wholly-owned subsidiary, accounts for
substantially all of the assets and revenues of Trustmark. Initially chartered
by the State of Mississippi in 1889, TNB is also headquartered in Jackson,
Mississippi. In addition to banking activities, TNB provides investment and
insurance products and services to its customers through three wholly-owned
subsidiaries, Trustmark Financial Services, Inc., Trustmark Investment Advisors,
Inc. and The Bottrell Insurance Agency, Inc.
Trustmark also engages in banking activities through its wholly-owned
subsidiary, Somerville Bank & Trust Company (Somerville), headquartered in
Somerville, Tennessee. Somerville was acquired in a business combination during
2001 and presently has five locations in Somerville, Hickory Withe and
Rossville, Tennessee. In addition to its banking subsidiaries, Trustmark also
owns all of the stock of F. S. Corporation and First Building Corporation, both
inactive nonbank Mississippi corporations. Neither Trustmark nor its
subsidiaries have any foreign activities. As of June 30, 2003, Trustmark and its
subsidiaries employed 2,286 full-time equivalent employees.
Trustmark engages in business through its four reportable segments: Consumer
Division, Commercial Division, Investment Division and Operations Division. The
Consumer Division delivers a full range of banking, investment and risk
management products and services to individuals and small businesses through
Trustmark's extensive branch network. The Commercial Division provides various
financial products and services to corporate and middle-market clients. The
Investment Division includes trust and fiduciary services, discount brokerage
services and services for private banking clients. The Operations Division
consists of asset/liability management activities that include the investment
portfolio and the related gains/losses on sales of securities, as well as credit
risk management, bank operations, human resources and the controller's
department.
FORWARD-LOOKING STATEMENTS
Certain statements contained in Trustmark's Management's Discussion and Analysis
of Financial Condition and Results of Operations are not statements of
historical fact and constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to anticipated future operating and financial performance
measures, including net interest margin, credit quality, business initiatives,
growth opportunities and growth rates, among other things. Words such as
"expects," "anticipates," "believes," "estimates" and other similar expressions
are intended to identify these forward-looking statements. 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. These
risks could cause actual results to differ materially from current expectations
of Management and include the following:
o The level of nonperforming assets, charge-offs and provision expense
can be affected by local, state and national economic and market
conditions as well as Management's judgments regarding collectibility
of loans.
o Material changes in market interest rates can materially affect many
aspects of Trustmark's financial condition and results of operations.
Trustmark is exposed to the potential of losses arising from adverse
changes in market interest rates and prices which can adversely impact
the value of financial products, including securities, loans, deposits,
debt and derivative financial instruments. Factors that may affect the
market interest rates include local, regional and national economic
conditions; utilization and effectiveness of market interest rate
contracts; and the availability of wholesale and retail funding sources
to Trustmark. Many of these factors are outside Trustmark's control.
o Increases in prepayment speeds of mortgage loans resulting from a
declining interest rate environment will have an impact on the fair
value of the mortgage servicing portfolio which can materially affect
Trustmark's results of operations.
o The costs and effects of litigation and of unexpected or adverse
outcomes in such litigation can materially affect Trustmark's results
of operations.
o Competition in loan and deposit pricing, as well as the entry of new
competitors into our markets through de novo expansion and
acquisitions, among other means, could have an effect on Trustmark's
operations in our existing markets.
o Trustmark is subject to regulation by federal banking agencies and
authorities and the Securities and Exchange Commission. Changes in
existing regulations or the adoption of new regulations could make it
more costly for Trustmark to do business or could force changes in the
manner Trustmark does business, which could have an impact on
Trustmark's financial condition or results of operations.
Although Management 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. These statements are representative only
as of the date hereof, and Trustmark does not assume any obligation to update
these forward-looking statements or to update the reasons why actual results
could differ from those projected in the forward-looking statements.
CRITICAL ACCOUNTING POLICIES
Trustmark's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of estimates and assumptions that affect the amounts reported in
those consolidated financial statements. The following is a description of the
accounting policies applied by Trustmark which are deemed "critical." Critical
accounting policies are defined as policies that are important to the portrayal
of Trustmark's financial condition and results of operations and that require
Management's most difficult, subjective or complex judgments. Actual financial
results could differ significantly if different judgments or estimates are
applied in the application of these policies.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level Management and the Board
of Directors believe is adequate to absorb estimated probable losses within the
loan portfolio. 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.
The analysis for loan losses considers any identified impairment as well as
estimates which have been determined by applying specific allowance factors to
the commercial and consumer loan portfolios.
Commercial loans as well as commercial real estate loans carry an internally
assigned risk grade based on a scale of one to ten. An allowance factor is
assigned to each loan grade based on historical loan losses in addition to other
factors such as the level and trend of delinquencies, classified and criticized
loans and nonperforming loans. Other factors are also taken into consideration
such as local, regional and national economic trends, industry and other types
of concentrations and loan loss trends that run counter to historical averages.
All classified loans greater than $500 thousand are reviewed quarterly by the
Asset Review Department to determine if a higher allowance factor should be
applied to the loan based on a greater level of risk and probability of loss.
Consumer loans carry allowance factors applied to pools of homogeneous loans
such as direct and indirect loans, credit cards, home equity loans, other types
of revolving consumer lines of credit and residential mortgage loans. The
allowance factor applied to each pool is based on historical loan loss trends as
well as current and projected trends in loan losses. Also taken into
consideration are trends in consumer delinquencies, consumer bankruptcies and
the effectiveness of Trustmark's collection function as well as economic
conditions and trends referred to above.
Mortgage Servicing Rights
Mortgage servicing rights are rights to service mortgage loans for others,
whether the loans were acquired through purchase or loan origination. Purchased
mortgage servicing rights are capitalized at cost. For loans originated and sold
where the servicing rights have been retained, Trustmark allocates the cost of
the loan and the servicing right based on their relative fair values. In
determining the fair value of mortgage servicing rights, Trustmark relies on
assumptions regarding factors such as mortgage interest rates, discount rates,
mortgage loan prepayment speeds, market trends and industry demands. Any change
in these assumptions could produce different fair values of mortgage servicing
rights. Impairment, if any, for mortgage servicing rights is recognized through
a valuation allowance with a corresponding charge to noninterest expense that is
determined using estimated fair values with the loans stratified by product type
and term. As of June 30, 2003, mortgage servicing rights had a gross carrying
amount of $60.1 million with a valuation allowance of $22.4 million. As of
year-end 2002, mortgage servicing rights had a gross carrying amount of $61.3
million with a valuation allowance of $12.5 million.
Fair Values
Determining the fair value of net assets acquired through business combinations,
including the recognition of intangible assets, involves a high degree of
judgment and complexity. Certain assets, such as loans held for sale, are
accounted for at the lower of cost or fair value. Some of these assets do not
have readily available market quotations and require an estimation of their fair
value. Additionally, certain recorded assets, such as goodwill and core deposit
intangibles, are subject to periodic impairment analysis. As of June 30, 2003,
Trustmark had unamortized goodwill totaling $48.0 million and other identifiable
intangible assets subject to amortization totaling $21.1 million. These
intangible assets are evaluated for impairment periodically. Impairment, if any,
for goodwill and other identifiable intangible assets would be charged to
noninterest expense.
BUSINESS COMBINATIONS
On June 18, 2003, Trustmark and The Banc Corporation of Birmingham, Alabama,
jointly announced the signing of a definitive purchase and assumption agreement
pursuant to which TNB will acquire seven Florida branches of The Bank, a
subsidiary of The Banc Corporation, for a $46.8 million deposit premium. These
branches, known as the Emerald Coast Division, serve the markets from Destin to
Panama City and have loans and deposits of approximately $221 million and $205
million, respectively. The transaction, which is subject to regulatory approval,
is expected to be completed during the third quarter of 2003.
On June 28, 2002, The Bottrell Insurance Agency, Inc., a wholly-owned subsidiary
of TNB, acquired Chandler-Sampson Insurance, Inc. (CSI) in Jackson, Mississippi.
This business combination, which is not material to Trustmark, was accounted for
under the purchase method of accounting. The shareholders of CSI received $8
million in cash in connection with the merger. Excess cost over tangible net
assets acquired totaled $10 million, of which $3 million and $7 million have
been allocated to other identifiable intangible assets and goodwill,
respectively. Trustmark's financial statements include the results of operations
for the CSI acquisition from the merger date. The pro forma impact of this
acquisition on Trustmark's results of operations is insignificant.
FINANCIAL SUMMARY HIGHLIGHTS
Basic earnings per share was $0.53 for the second quarter of 2003, which
represents a 6.0% increase compared to $0.50 for the second quarter of 2002. Net
income for the second quarter of 2003 totaled $31.2 million, compared to $31.4
million for the prior year period, and resulted in a return on average assets of
1.70% and a return on average equity of 18.76%. Basic earnings per share for the
six months ended June 30, 2003, was $0.94 compared to $0.98 for 2002.
Trustmark's net income for the first half of 2003 totaled $55.6 million,
compared to $61.7 million for the prior year period, and resulted in a return on
average assets of 1.55% and a return on average equity of 16.83%. Earnings
during the first quarter of 2003 included an after-tax charge of $4.1 million,
or $0.07 per share, associated with Trustmark's voluntary early retirement
program. At June 30, 2003, Trustmark reported total loans of $4.826 billion,
total assets of $7.373 billion, total deposits of $4.967 billion and
shareholders' equity of $664.4 million.
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 Yield/Rate Analysis
Tables on pages 17 and 18 show the average balances for all assets and
liabilities of Trustmark and the interest income or expense associated 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. Nonaccruing loans 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.
As interest rates remain at historically low levels, Management has been
challenged to position the balance sheet to mitigate the compression of net
interest income. Funds provided from maturities, paydowns and sales of
securities have been used to fund loan growth and purchases of additional
securities to maintain sufficient levels of earning assets. Trustmark also
reduced interest expense on FHLB advances by engaging in various swap agreements
during the second quarter of 2003. Trustmark will continue to manage the overall
risk exposure present during significant movements in interest rates and reduce
the impact of interest rate movement on net interest income. For additional
discussion, see Market/Interest Rate Risk Management beginning on page 27.
Net interest income-FTE for the three-month and six-month periods ended June 30,
2003, decreased $6.8 million, or 8.9%, and $11.7 million, or 7.7%, respectively,
compared to figures one year earlier. The continuing decline in interest rates
experienced during 2003 and 2002 has impacted both assets and liabilities.
Earning asset yields declined at a faster rate than interest-bearing liability
rates, resulting in declines in the NIM of 81 basis points and 64 basis points
when comparing the three-month and six-month periods ended June 30, 2003, with
the same periods in 2002.
- --------------------------------------------------------------------------------
Yield/Rate Analysis Table
($ in thousands)
For the Three Months Ended June 30,
---------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest-earning assets:
Federal funds sold and securities
purchased under reverse
repurchase agreements $ 31,055 $ 94 1.21% $ 22,224 $ 96 1.73%
Securities - taxable 1,782,044 18,390 4.14% 1,485,367 24,509 6.62%
Securities - nontaxable 156,570 3,094 7.93% 173,109 3,440 7.97%
Loans, including loans held for sale 4,742,289 72,157 6.10% 4,488,719 77,749 6.95%
---------- -------- ---------- --------
Total interest-earning assets 6,711,958 93,735 5.60% 6,169,419 105,794 6.88%
Cash and due from banks 306,173 274,572
Other assets 404,207 418,600
Allowance for loan losses (75,142) (75,379)
---------- ----------
Total Assets $7,347,196 $6,787,212
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $3,654,264 15,653 1.72% $3,538,272 20,020 2.27%
Federal funds purchased and
securities sold under
repurchase agreements 1,040,233 3,101 1.20% 768,239 3,229 1.69%
Borrowings 728,779 4,731 2.60% 691,069 5,459 3.17%
---------- -------- ---------- --------
Total interest-bearing liabilities 5,423,276 23,485 1.74% 4,997,580 28,708 2.30%
-------- --------
Noninterest-bearing demand deposits 1,199,182 1,059,806
Other liabilities 58,474 56,167
Shareholders' equity 666,264 673,659
---------- ----------
Total Liabilities and
Shareholders' Equity $7,347,196 $6,787,212
========== ==========
Net Interest Margin 70,250 4.20% 77,086 5.01%
Less tax equivalent adjustment 2,061 2,295
-------- --------
Net Interest Margin per Consolidated
Statements of Income $ 68,189 $ 74,791
======== ========
Average interest-earning assets for the first half of 2003 were $6.583 billion,
compared with $6.213 billion for the first half of 2002, an increase of $370.0
million, or 6.0%. This growth is primarily seen in average loans, which
increased 4.5% during first six months of 2003 from the same period in 2002, as
Trustmark effectively utilized the liquidity from maturing securities to fund
loan growth, which yielded higher returns than securities during this period.
However, yields have been negatively impacted by the declining interest rate
environment as the yield on average earning assets dropped from 6.91% during the
first six months of 2002 to 5.79% for the same period in 2003, a decrease of 112
basis points. As a result, interest income-FTE decreased by $24.1 million, or
11.3%, during the first half of 2003 when compared with the prior year period.
- --------------------------------------------------------------------------------
Yield/Rate Analysis Table
($ in thousands)
For the Six Months Ended June 30,
---------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest-earning assets:
Federal funds sold and securities
purchased under reverse
repurchase agreements $ 30,381 $ 176 1.17% $ 23,415 $ 195 1.68%
Securities - taxable 1,713,404 38,545 4.54% 1,532,684 48,678 6.40%
Securities - nontaxable 158,756 6,277 7.97% 176,631 7,034 8.03%
Loans, including loans held for sale 4,680,028 143,960 6.20% 4,479,874 157,107 7.07%
---------- -------- ---------- --------
Total interest-earning assets 6,582,569 188,958 5.79% 6,212,604 213,014 6.91%
Cash and due from banks 304,283 280,164
Other assets 407,159 417,544
Allowance for loan losses (75,143) (75,371)
---------- ----------
Total Assets $7,218,868 $6,834,941
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $3,602,884 31,715 1.78% $3,529,165 41,798 2.39%
Federal funds purchased and
securities sold under
repurchase agreements 983,534 5,827 1.19% 829,617 6,888 1.67%
Borrowings 722,708 9,763 2.72% 689,358 10,930 3.20%
---------- -------- ---------- --------
Total interest-bearing liabilities 5,309,126 47,305 1.80% 5,048,140 59,616 2.38%
-------- --------
Noninterest-bearing demand deposits 1,179,174 1,049,627
Other liabilities 63,735 62,795
Shareholders' equity 666,833 674,379
---------- ----------
Total Liabilities and
Shareholders' Equity $7,218,868 $6,834,941
========== ==========
Net Interest Margin 141,653 4.34% 153,398 4.98%
Less tax equivalent adjustment 4,267 4,678
-------- --------
Net Interest Margin per Consolidated
Statements of Income $137,386 $148,720
======== ========
- --------------------------------------------------------------------------------
Average interest-bearing liabilities for the six months ended June 30, 2003
totaled $5.309 billion, compared with $5.048 billion for the prior year period,
an increase of $261.0 million, or 5.2%. Average interest-bearing deposits
increased, as well as federal funds purchased, repurchase agreements and
borrowings. Although interest-bearing liabilities have increased, interest
expense has continued to decrease due to the declining interest rate
environment. The average rates on interest-bearing liabilities for the first six
months of 2003 and 2002, were 1.80% and 2.38%, respectively, a decrease of 58
basis points. As a result of these factors, total interest expense for the first
half of 2003 decreased $12.3 million, or 20.7%, when compared with figures from
the prior year.
Trustmark's use of derivative financial instruments positively impacted the NIM
in both 2002 and 2003. Interest rate contracts provided $1.3 million of
additional interest income as the floor reached its strike price during first
half of 2002. During the second quarter of 2003, Trustmark implemented the use
of swap agreements and reduced interest expense by $218 thousand. For additional
discussion, see Market/ Interest Rate Risk Management beginning on page 27.
Provision for Loan Losses
Trustmark's provision for loan losses totaled $2.6 million and $5.6 million,
respectively, for the three- month and six-month periods ended June 30, 2003,
compared with $3.0 million and $7.3 million, respectively, for the same periods
in 2002. As a percentage of average loans, the provision was 0.24% for the first
half of 2003 compared with 0.33% for the prior year period. The provision for
loan losses reflects Management's assessment of the adequacy of the allowance
for loan losses to absorb probable losses inherent in the loan portfolio. The
amount of 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. See further discussion of the Allowance
for Loan Losses in Critical Accounting Policies beginning on page 14, as well as
the discussion of Loans and Allowance for Loan Losses beginning on page 25.
Noninterest Income
Noninterest income (NII) consists of revenues generated from a broad range of
banking and financial services. NII totaled $83.3 million for the first six
months of 2003, an increase of $23.6 million, or 39.6%, from the prior year
period. NII represented 31.1% of total revenues in the six months ended June 30,
2003, versus 22.3% in the first half of 2002. The comparative components of
noninterest income for the six-month periods ended June 30, 2003 and 2002, are
shown in the accompanying table on page 20.
The single largest component of noninterest income continues to be service
charges for deposit products and services, which increased 8.1% in the first
half of 2003 over the prior year period. This increase was primarily the result
of courtesy overdraft protection, which was introduced during the third quarter
of 2002, as well as from increased transaction volume.
Other account charges and fees totaled $13.8 million in the first half of 2003,
a decrease of $443 thousand, or 3.1%, when compared with the prior year period.
Decreasing revenues from market driven products was the primary factor in this
decline as reductions were seen in brokerage and advisory services and
float-related revenues. Offsetting this decrease were increases in bankcard fees
from the repricing of merchant discount rates and increased debit card usage by
individuals.
Insurance commissions were $8.8 million for the first six months of 2003,
compared to $6.5 million in the first half of 2002, an increase of $2.3 million,
or 35.2%. This growth was primarily from the Chandler Sampson Insurance (CSI)
business combination, which was completed on June 28, 2002, as well as
intensified sales efforts and increased pricing by insurance companies.
During the six months ended June 30, 2003, mortgage servicing fees totaled $8.6
million, maintaining the level from the prior year period. Increased prepayments
during the period slowed the overall growth of the mortgage servicing portfolio.
Trustmark serviced mortgage loans with average balances of $3.4 billion in the
first half of 2003 and $3.6 billion in the prior year period.
Trust service income was $4.7 million for the first six months of 2003, a
decrease of $354 thousand when compared with the prior year period, as continued
weakness in capital markets slowed growth in this area. Trustmark, which
continues to be one of the largest providers of asset management services in
Mississippi, held assets under administration of $7.1 billion at June 30, 2003.
Gains on sales of loans were $9.1 million in the six months ended June 30, 2003,
compared with $3.7 million in the prior year period. During the second quarter
of 2003, Trustmark sold $63 million of its student loan portfolio for a gain of
$1.8 million. Intermittently, Trustmark sells delinquent GNMA loans from its
servicing portfolio, which allows Trustmark to eliminate costly collection
efforts. Trustmark has recorded gains of $2.4 million from these sales in the
first half of 2003, compared with $507 thousand in the prior year period.
Excluding the impact of these specific transactions, gains on sales of loans
from secondary marketing activity experienced volume-driven growth of $1.7
million during the first six months of 2003 compared with the same period in
2002 from an increased volume of branch-originated loans and the continued
benefit of a falling interest rate environment.
Noninterest Income
($ in thousands)
Six Months Ended
June 30,
-------------------
2003 2002 $ Change % Change
-------- -------- -------- --------
Service charges on deposit accounts $ 25,750 $ 23,821 $ 1,929 8.1%
Other account charges and fees 13,761 14,204 (443) -3.1%
Insurance commissions 8,750 6,473 2,277 35.2%
Mortgage servicing fees 8,561 8,615 (54) -0.6%
Trust service income 4,657 5,011 (354) -7.1%
Gains on sales of loans 9,144 3,674 5,470 148.9%
Securities gains 12,169 516 11,653 2258.3%
Other income 477 (2,678) 3,155 117.8%
-------- -------- --------
Total Noninterest Income $ 83,269 $ 59,636 $ 23,633 39.6%
======== ======== ========
- --------------------------------------------------------------------------------
Securities gains totaled $12.2 million during the first half of 2003, compared
with $516 thousand during the first half of 2002. During the first six months of
2003, significant price changes in certain available for sale (AFS) portfolio
securities enabled Trustmark to sell securities with a total fair value of
$288.1 million, which provided the opportunity to restructure a portion of the
portfolio to reduce price volatility in an extremely low interest rate cycle.
Management considers the investment portfolio as an integral tool in the
management of interest rate risk.
During the six-month period ended June 30, 2003, other income was $477 thousand,
a $3.2 million increase from the $2.7 million loss recognized in the prior year
period. Valuation adjustments on Trustmark's interest rate caps and floors had
the greatest impact on other income, with losses of $628 thousand and $2.9
million for the first six months of 2003 and 2002, respectively. Although the
intent of interest rate caps and floors is to provide protection against
excessive interest rate movement over a period of years that may be detrimental
to Trustmark's earnings, fair value accounting is used to carry derivative
financial instruments with changes in value recognized currently in earnings as
other income. These noncash charges against income may be reversed, in whole or
in part, if interest rates increase prior to the expiration of the interest rate
caps currently held by Trustmark, which expire in 2006. The fair value of these
interest rate contracts was $102 thousand and $8.1 million at June 30, 2003 and
2002, respectively.
Noninterest Expense
Trustmark's noninterest expense increased $24.0 million, or 22.7%, in the first
six months of 2003 to $129.7 million, compared with $105.7 million in the first
half of 2002. This increase is primarily seen in two categories, salaries and
employee benefits and amortization/impairment of intangible assets. The
comparative components of noninterest expense for the six months ended June 30,
2003 and 2002, are shown in the accompanying table.
- --------------------------------------------------------------------------------
Noninterest Expense
($ in thousands)
Six Months Ended
June 30,
-------------------
2003 2002 $ Change % Change
-------- -------- -------- --------
Salaries and employee benefits $ 65,421 $ 58,462 $ 6,959 11.9%
Net occupancy - premises 6,146 5,695 451 7.9%
Equipment expense 7,383 7,759 (376) -4.8%
Services and fees 15,890 15,627 263 1.7%
Amortization/impairment of intangible
assets 20,404 3,823 16,581 433.7%
Loan expense 4,803 4,941 (138) -2.8%
Other expense 9,626 9,397 229 2.4%
-------- -------- --------
Total Noninterest Expense $129,673 $105,704 $ 23,969 22.7%
======== ======== ========
- --------------------------------------------------------------------------------
Salaries and employee benefits, the largest category of noninterest expense,
were $65.4 million in the first half of 2003 and $58.5 million in the prior year
period, an increase of $7.0 million, or 11.9%. This increase is primarily from
$6.3 million of expense recognized for Trustmark's early retirement program.
This program was accepted by 116 employees, or 4.75% of the workforce, and is
expected to result in significant savings during the remainder of 2003. These
savings should also enhance earnings in 2004.
Amortization/impairment expense associated with intangible assets totaled $20.4
million for the first half of 2003, compared with $3.8 million in the prior year
period. The increase experienced during the 2003 period included $9.9 million
for additional impairment of mortgage servicing rights compared with a $2.0
million impairment reversal in the prior period. Growth in the impairment
allowance results from the continued reduction in long-term mortgage rates and
the related increase in prepayments of mortgage loans, which had a negative
impact on the fair value of Trustmark's mortgage servicing portfolio. This
charge against income may be reversed, in whole or in part, if refinancing slows
or the expected life of the mortgage servicing portfolio lengthens. Amortization
of mortgage servicing rights increased by $4.6 million as a result of increased
refinancings during a period of historically low interest rates, which shortened
the expected life of the mortgage servicing portfolio and required a faster
amortization of existing mortgage servicing rights. The 2003 period also
included $276 thousand of amortization of insurance customer relationship
intangibles from the CSI business combination.
Income Taxes
For the six months ended June 30, 2003, Trustmark's combined effective tax rate
was 34.8%, compared with 35.3% for the first half of 2002. The decrease in
Trustmark's effective tax rate is due to immaterial changes in various permanent
items as a percentage of pretax income.
LIQUIDITY
The liquidity position of Trustmark is monitored on a daily basis by Trustmark's
Treasury department. In addition, the Asset/Liability Committee reviews
liquidity on a regular basis and approves any changes in strategy that are
necessary as a result of anticipated balance sheet or cash flow changes. Also,
on a monthly basis, Management compares Trustmark's liquidity position to
established corporate policies. Trustmark was able to improve overall liquidity
capacity over the last year, as indicated by the reduction in the loan to
deposit ratio and reliance on wholesale funding. The ability to maintain
consistent cash flows from operations as well as adequate capital also enhances
Trustmark's liquidity.
The primary source of liquidity on the asset side of the balance sheet are
maturities and cash flows from both loans and securities, as well as the ability
to sell certain loans and securities. With mortgage rates at historical lows,
increased prepayments on mortgage loans have also provided an additional source
of liquidity for Trustmark. Liquidity on the liability side of the balance sheet
is generated primarily through growth in core deposits. To provide additional
liquidity, Trustmark utilizes economical short-term wholesale funding
arrangements for federal funds purchased and securities sold under repurchase
agreements in both regional and national markets. At June 30, 2003, these
arrangements gave Trustmark approximately $1.426 billion in borrowing capacity,
compared with $1.482 billion as of December 31, 2002. In addition, Trustmark
maintains a borrowing relationship with the FHLB, which provided $125.0 million
in short-term advances and $457.6 million in long-term advances at June 30,
2003, compared with $107.7 million in short-term advances and $475.0 million in
long-term advances at December 31, 2002. These advances are collateralized by a
blanket lien on Trustmark's single-family, multi-family, home equity and
commercial mortgage loans. Under the existing borrowing agreement, Trustmark has
$540.8 million available in unused FHLB advances. Another borrowing source is
the Federal Reserve Discount Window (Discount Window). At June 30, 2003,
Trustmark had approximately $536 million available in borrowing capacity at the
Discount Window from pledges of auto loans and securities, compared with $541
million available at December 31, 2002. In June 2002, Trustmark entered into a
two-year line of credit arrangement enabling borrowings up to $50 million,
subject to certain financial covenants. As of June 30, 2003, Trustmark had not
drawn upon this line of credit.
On April 16, 2003, Trustmark filed a registration statement on Form S-3 with the
Securities and Exchange Commission (SEC) utilizing a "shelf" registration
process, which became effective May 2, 2003. Under this shelf process, Trustmark
may offer from time to time any combination of securities described in the
prospectus in one or more offerings up to a total amount of $200 million. The
securities described in the prospectus include common and preferred stock,
depositary shares, debt securities, junior subordinated debt securities and
trust preferred securities. Net proceeds from the sale of the offered securities
may be used to redeem or repurchase outstanding securities, repay outstanding
debt, finance acquisitions of companies and other assets and provide working
capital.
On April 9, 2002, the shareholders approved a proposal by the Board of Directors
to amend the Articles of Incorporation to authorize the issuance of up to 20
million preferred shares with no par value. The Board of Directors believes that
authorizing preferred shares for potential issuance is advisable and in the best
interests of Trustmark. The ability to issue preferred shares in the future will
provide Trustmark with additional financial and management flexibility. As of
June 30, 2003, no such shares have been issued.
CAPITAL RESOURCES
At June 30, 2003, Trustmark's shareholders' equity was $664.4 million, a
decrease of $15.2 million, or 2.2%, from its level at December 31, 2002. This
decline in shareholders' equity is due primarily to the change in accumulated
other comprehensive income resulting from a decline in the valuation of AFS
securities. Net income for the six months ended June 30, 2003, totaled $55.6
million and was offset by dividends in the amount of $19.6 million and shares
repurchased at a cost of $37.7 million.
Common Stock Repurchase Program
On July 15, 2003, the Board of Directors of Trustmark authorized an additional
plan to repurchase up to 5% of common stock, or approximately 3.0 million
shares, subject to market conditions and management discretion. Collectively,
the capital management plans adopted by Trustmark since 1998 have authorized the
repurchase of 21.5 million shares of common stock. Pursuant to these plans,
Trustmark has repurchased approximately 17.2 million shares for $363.4 million,
including 1.6 million shares during the first half of 2003 for $37.7 million.
The current remaining authorization is approximately 4.3 million shares. On
October 15, 2002, the Board of Directors of Trustmark authorized the transfer of
$200.0 million from retained earnings to surplus to replenish funds used in the
common stock repurchase program.
Dividends
Dividends for the first six months of 2003 were $0.33 per share, increasing
10.0% when compared with dividends of $0.30 per share for the prior-year period.
Trustmark's dividend payout ratio, which is dividends per share divided by
earnings per share, was 35.11% for the first half of 2003, compared with 30.61%
for the same period in 2002.
Regulatory Capital
Trustmark and TNB are subject to minimum capital requirements, which are
administered by various federal regulatory agencies. These capital requirements,
as defined by federal guidelines, involve quantitative and qualitative measures
of assets, liabilities and certain off-balance sheet instruments. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the financial statements of both Trustmark and TNB.
Trustmark aims not only to exceed the minimum capital standards, but also the
well capitalized guidelines for regulatory capital. Management believes, as of
June 30, 2003, that Trustmark and TNB have met or exceeded all of the minimum
capital standards for the parent company and its primary banking subsidiary as
established by regulatory requirements. At June 30, 2003, the most recent
notification from the Office of the Comptroller of the Currency (OCC), TNB's
primary federal banking regulator, categorized TNB as well capitalized. To be
categorized in this manner, TNB must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios (defined in applicable regulations) as set
forth in the table on page 23. There are no significant conditions or events
that have occurred since the OCC's notification that Management believes have
affected TNB's present classification.
- --------------------------------------------------------------------------------
Regulatory Capital
($ in thousands)
June 30, 2003
--------------------------------------------------------------
Minimum Regulatory
Actual Regulatory Minimum Regulatory Provision to be
Capital Capital Required Well Capitalized
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ -------- ------
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $655,400 13.76% $380,934 8.00% - -
Trustmark National Bank 635,793 13.62% 373,464 8.00% $466,830 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $595,690 12.51% $190,467 4.00% - -
Trustmark National Bank 577,271 12.37% 186,732 4.00% $280,098 6.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $595,690 8.19% $218,230 3.00% - -
Trustmark National Bank 577,271 8.10% 213,813 3.00% $356,355 5.00%
- --------------------------------------------------------------------------------
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. At June 30, 2003, earning assets were $6.694 billion,
or 90.79% of total assets, compared with $6.453 billion, or 90.40% of total
assets at December 31, 2002, an increase of $241.4 million, or 3.7%. The primary
component of this growth was a 4.5% increase in loans in a period of low
interest rates.
Securities
The securities portfolio consists primarily of debt securities, which are
utilized to provide Trustmark with a quality investment alternative and a stable
source of interest income, as well as collateral for pledges on public deposits
and repurchase agreements. Additionally, the securities portfolio is used as a
tool to manage risk from movements in interest rates, to support profitability
and to offset risks incurred by business units. When evaluating the performance
of the securities portfolio, Management considers not only interest income but
also the flexibility and liquidity provided by changes in fair value. At June
30, 2003, Trustmark's securities portfolio totaled $1.849 billion, compared to
$1.812 billion at December 31, 2002, an increase of $37.2 million, or 2.1%.
The securities portfolio is a powerful risk management tool that enables
Management to control both the invested balance and the duration of securities.
In addition to first quarter 2003 sales of $99.1 million of securities,
significant price changes in certain portfolio securities enabled Trustmark to
sell securities with a total fair value of $189.0 million during the second
quarter of 2003. Approximately $137.8 million of proceeds from the second
quarter securities sales were reinvested in short-term treasury and agency
securities. Trustmark has continued its strategy of reducing price volatility in
the investment portfolio as indicated by duration. The estimated duration of the
portfolio was measured to be 2.83 years at December 31, 2001, 1.94 years at
December 31, 2002, and 1.54 years at June 30, 2003. By reducing the duration of
the portfolio, Trustmark has reduced exposure to volatile interest rates while
increasing liquidity and flexibility. Management intends to keep the portfolio
near historically low duration levels while the interest rate cycle is in a
stage of lower yields.
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 June 30, 2003, AFS securities
totaled $1.537 billion, which represented 83.1% of the securities portfolio,
compared to $1.263 billion, or 69.7%, at December 31, 2002. At June 30, 2003,
AFS securities consisted of U.S. Treasury and Agency securities, obligations of
states and political subdivisions, mortgage related securities and other
securities, primarily Federal Reserve Bank and FHLB stock. At June 30, 2003,
unrealized losses on AFS securities of $6.8 million, net of $2.6 million of
deferred income tax benefits, were included in accumulated other comprehensive
income, compared with gains of $22.8 million, net of $8.7 million in income
taxes, at December 31, 2002.
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 June 30, 2003, HTM securities totaled $312.0 million and
represented 16.9% of the total portfolio, compared with $549.2 million, or
30.3%, at the end of 2002. This decrease is from calls and maturities of
securities, the proceeds of which were used to purchase shorter duration
mortgage related securities.
Management continues to focus on asset quality as one of the strategic goals of
the securities portfolio, which is evidenced by the investment of over 85% of
the portfolio in U.S. Treasury and U.S. Government agencies obligations.
Loans and Allowance for Loan Losses
Loans, including loans held for sale, represented 72.1% of earning assets at
June 30, 2003, compared with 71.6% at year-end 2002. At June 30, 2003, loans
totaled $4.826 billion, a 4.5% increase from its level of $4.617 billion at
December 31, 2002. Real estate lending continued to be positively impacted by
record low interest rates while other loan areas have been negatively affected
by a weakened economy.
Trustmark makes loans in the normal course of business to certain directors,
including their immediate families and companies in which they are principal
owners. Such loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility at the time of the transaction.
Trustmark's lending policies have resulted in consistently sound asset quality.
One measure of asset quality in the financial services industry is the level of
nonperforming assets. The details of Trustmark's nonperforming assets at June
30, 2003 and December 31, 2002, are shown in the accompanying table.
- --------------------------------------------------------------------------------
Nonperforming Assets
($ in thousands)
June 30, December 31,
2003 2002
------------ ------------
Nonaccrual and restructured loans $ 28,916 $ 31,642
Other real estate (ORE) 7,116 6,298
------------ ------------
Total nonperforming assets $ 36,032 $ 37,940
============ ============
Accruing loans past due 90 days or more $ 2,183 $ 2,946
============ ============
Nonperforming assets/total loans and ORE 0.75% 0.82%
============ ============
- --------------------------------------------------------------------------------
Total nonperforming assets decreased $1.9 million, or 5.0%, during the first
half of 2003. Most of this decline was attributable to loans returned to accrual
status as the result of an intensified review of nonaccrual loans less than $100
thousand. The allowance coverage of nonperforming loans remains strong at 258.7%
at June 30, 2003, compared with 236.3% at December 31, 2002.
At June 30, 2003, the allowance for loan losses was $74.8 million, maintaining
the year-end 2002 level. The allowance for loan losses represented 1.55% of
total loans outstanding at June 30, 2003, compared to 1.62% at December 31,
2002. As of June 30, 2003, Management believes that the allowance for loan
losses provides adequate protection in regards to charge-off experience and the
current level of nonperforming assets.
Net charge-offs were $5.6 million, or 0.24% of average loans, for the six months
ended June 30, 2003, compared with $6.9 million, or 0.31% of average loans, for
the prior year period. This improvement is primarily from gross charge-offs of
commercial purpose loans, which decreased $1.4 million when comparing the first
six months of 2003 and 2002. Charge-offs for the first half of 2002 were
affected by five larger commercial loan losses totaling $2.6 million.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase agreements
were $19.6 million at June 30, 2003, a decrease of $4.4 million when compared
with year-end 2002. 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. Deposits include both
interest-bearing and noninterest-bearing demand accounts, savings, money market,
certificates of deposits and individual retirement accounts. Total deposits were
$4.967 billion at June 30, 2003, compared with $4.686 billion at December 31,
2002, an increase of $280.5 million, or 6.0%. This growth primarily came from
seasonal increases in public interest-bearing demand deposits. During the first
half of 2003, interest-bearing deposits increased $224.9 million, or 6.5%, and
noninterest-bearing deposits increased $55.6 million, or 4.4%. Trustmark's
deposit mix remains favorable with noninterest-bearing deposits representing
26.3% of total deposits at June 30, 2003, compared with 26.7% at year-end 2002.
Trustmark will continue to seek deposits by expanding its presence in higher
growth markets and evaluating additional wholesale deposit funding sources.
Short-term borrowings consist of federal funds purchased, securities sold under
repurchase agreements, FHLB borrowings and the treasury tax and loan note option
account. Short-term borrowings totaled $1.216 billion at June 30, 2003, a
decrease of $15.3 million, compared with $1.231 billion at year-end 2002.
Trustmark has used the liquidity created by maturing securities as well as
increased core deposits to reduce reliance on wholesale funding.
Long-term FHLB advances totaled $457.6 million at June 30, 2003, a decrease of
$17.4 million from December 31, 2002. These totals include $250.0 million in
advances with variable rates adjusting quarterly, while the remaining advances
are fixed rate, primarily maturing from 2004 to 2006. During the second quarter
of 2003, Trustmark implemented the use of swap agreements, effectively
converting $100.0 million of the fixed rate advances to variable rates. For
further discussion, see Market/Interest Rate Risk Management beginning on page
27.
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. In recent years, the
legal environment in Mississippi has been considered by many to be adverse to
business interests in regards to the overall treatment of tort and contract
litigation as well as the award of punitive damages. However, tort reform
legislation that became effective January 1, 2003, may reduce the likelihood of
unexpected sizable awards. At the present time, Management believes, based on
the advice of legal counsel and Management's evaluation, that the final
resolution of pending legal proceedings will not have a material impact on
Trustmark's consolidated financial position or results of operations.
At December 31, 2002, Trustmark's pension plan was underfunded, requiring an
accrual for minimum pension liability of $5.7 million. During the first quarter
of 2003, the Board of Directors approved a tax-deductible contribution to the
pension plan in the amount of $7.0 million. A minimum pension liability of $5.7
million will be reevaluated at the plan's measurement date, October 31, 2003.
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 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.
Management has continued to maintain a balance sheet position that mitigates
adverse effects of rising interest rates. Modeling static balances from June 30,
2003, it is estimated that net interest income may increase, possibly as much as
9.71%, in a one-year, shocked, up 200 basis point rate shift scenario, compared
to a base case, flat rate scenario for the same time period. This is a slight
improvement in exposure to rising rates when compared to December 31, 2002. In a
shocked, down 200 basis point rate shift scenario, net income may decline from
the base case as much as 10.15% in a one-year horizon. Management cannot provide
any assurance about the 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
the remainder of 2003. Management will continue to monitor the balance sheet as
balances change and maintain a proactive stance to manage interest rate risk.
The primary tool utilized by the Asset/Liability Committee is a third-party
modeling system which is widely accepted in the financial institutions industry.
This system 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,
in which the balance sheet amounts as of a certain date are stratified based on
repricing frequency. The assets and liabilities repricing in a certain time
frame are then compared to determine the gap between assets and liabilities for
that period. If assets are greater than liabilities for the specified time
period, then the balance sheet is said to be in an asset gap, or asset
sensitive, position. This analysis is helpful in that it 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. Three-month gap analysis projected at June 30, 2003, reflected an
asset gap of $177 million, an improvement from the liability gap position of
$257 million at June 30, 2002. One-year gap analysis projected at June 30, 2003,
reflected an asset gap of $548 million, an improvement from a liability gap of
$73 million at June 30, 2002. This new static gap analysis indicates that
Trustmark is better positioned for the possibility of a rising interest rate
environment.
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. Forward contracts 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. Effective January 1,
2003, Trustmark has redesignated these derivative instruments as fair value
hedges as permitted by Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivatives Instruments and Hedging Activities," as
amended. Under SFAS No. 133, changes in the values of derivatives designated as
fair value hedges are recognized in earnings. In this case Trustmark would
recognize changes in the values of the designated derivatives in earnings
simultaneously with changes in the values of the designated hedged loans. To the
extent changes in the values of the derivatives are 100% effective in offsetting
changes in the values of hedged loans, the fair value adjustments on the
derivatives and hedged loans would offset one another. In contrast, Trustmark's
previous designation of these derivatives as cash flow hedges resulted in
changes in value being recognized in accumulated other comprehensive income, net
of taxes, a component of Shareholders' Equity, and in earnings. Management
anticipates that this change will help mitigate the potential for earnings
volatility related to the valuation of these hedging instruments in the future.
Trustmark continued a risk controlling strategy utilizing caps and floors, which
may be further implemented over time. As of June 30, 2003, Trustmark was not
utilizing interest rate floors but had interest rate cap contracts with notional
amounts totaling $300 million, which mature in 2006. 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 are not
designated as hedging instruments for accounting purposes, are options 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.
Another tool used for interest rate risk management is interest rate swaps.
Interest rate swaps are derivative contracts under which two parties agree to
make interest payments on a notional principal amount. In a generic swap, one
party pays a fixed interest rate and receives a floating interest rate while the
other party receives a fixed interest rate and pays a floating interest rate.
During April 2003, Trustmark initiated four separate interest rate swaps with a
total notional principal amount of $100 million. During July 2003, Trustmark
added another interest rate swap with a notional principal amount of $25
million. Trustmark initiated these swaps to mitigate the effects of further
changes in the fair value of specific noncallable, nonprepayable, fixed rate
advances from the FHLB by agreeing to pay a floating interest rate tied to
LIBOR. The swap contracts are tied to the maturity of five separate FHLB
advances maturing between 2005 and 2006.
RECENT PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. The statement applies to three categories of
freestanding financial instruments: 1) certain mandatorily redeemable
instruments, 2) instruments with repurchase obligations and 3) instruments with
obligations to issue a variable number of shares. The statement requires that
previously issued instruments that fall within the scope of the statement must
be reclassified as liabilities, and subsequent changes in the measurements of
the instruments treated as liabilities must flow through to the income
statement. For public companies, this statement became effective for all
freestanding financial instruments entered into or modified after May 31, 2003.
Otherwise it becomes effective at the beginning of the first interim period
beginning after June 15, 2003. Currently, Trustmark does not have any financial
instruments within the scope of this statement.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The effects
of this statement did not have a material impact on Trustmark's consolidated
financial position or results of operations upon adoption on June 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in "Market/Interest Rate Risk
Management" (pages 27-28) of "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 4. CONTROLS AND PROCEDURES
For the period ending June 30, 2003, Trustmark evaluated the effectiveness of
the design and operation of its disclosure controls and procedures pursuant to
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended
(Exchange Act), under the supervision and with the participation of its
management, including the Chief Executive Officer and the Treasurer (the
Principal Financial Officer). Based upon this evaluation, the Chief Executive
Officer and the Treasurer concluded that, as of June 30, 2003, Trustmark's
disclosure controls and procedures were adequate to ensure that information
required to be disclosed by Trustmark in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission. Subsequent to this review, there have been no significant changes in
Trustmark's internal controls or in other factors that could significantly
affect these controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments for the quarter ended June 30, 2003, other
than those disclosed in the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of Trustmark's shareholders was held on April 15, 2003. At
this meeting the following matter was voted on by Trustmark's shareholders:
A. Election of Directors
The following individuals were elected to serve as Directors of
Trustmark until the annual meeting of shareholders in 2004 or until
their respective successors are elected and qualified. The vote was
cast as follows:
Votes Cast
Votes Cast in Favor Against/Withheld
--------------------- -------------------
Number % Number %
---------- ------ --------- -----
J. Kelly Allgood 45,281,003 98.56% 662,423 1.44%
Reuben V. Anderson 43,060,575 93.73% 2,882,851 6.27%
John L. Black, Jr. 45,280,816 98.56% 662,610 1.44%
William C. Deviney, Jr. 45,376,676 98.77% 566,750 1.23%
C. Gerald Garnett 45,377,989 98.77% 565,437 1.23%
Richard G. Hickson 45,316,388 98.64% 627,038 1.36%
Matthew L. Holleman III 45,376,844 98.77% 566,582 1.23%
William Neville III 45,375,544 98.76% 567,882 1.24%
Richard H. Puckett 45,282,316 98.56% 661,110 1.44%
Carolyn C. Shanks 45,363,834 98.74% 579,592 1.26%
Kenneth W. Williams 45,282,316 98.56% 661,110 1.44%
William G. Yates, Jr. 45,366,381 98.74% 577,045 1.26%
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The exhibits listed in the Exhibit Index are filed herewith or are
incorporated herein by reference.
B. Reports on Form 8-K
1. On April 16, 2003, Trustmark filed a report on Form 8-K
announcing its financial results for the period ended March 31,
2003.
2. On May 6, 2003, Trustmark filed a report on Form 8-K announcing
that Chairman and Chief Executive Officer Richard G. Hickson was
making a presentation to analysts attending the Gulf South Bank
Conference in New Orleans. The report included the financial data
that was presented at the conference.
3. On May 23, 2003, Trustmark filed a report on Form 8-K announcing
the signing of a Letter of Intent pursuant to which TNB will
acquire seven Florida branches of The Bank, known as the Emerald
Coast Division. This report also announced Trustmark's signing of
a definitive agreement to acquire an existing Florida state bank
charter from an unrelated party.
4. On June 18, 2003, Trustmark filed a report on Form 8-K announcing
the signing of a definitive purchase and assumption agreement
pursuant to which TNB will acquire seven Florida branches of The
Bank, known as the Emerald Coast Division.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRUSTMARK CORPORATION
BY: /s/ Richard G. Hickson BY: /s/ Zach L. Wasson
---------------------- ---------------------
Richard G. Hickson Zach L. Wasson
Chairman of the Board, President Treasurer (Principal
& Chief Executive Officer Financial Officer)
DATE: August 13, 2003 DATE: August 13, 2003
EXHIBIT INDEX
31-a Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31-b Certification by Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32-a Certification by Chief Executive Officer pursuant to 18 U.S.C. ss. 1350.
32-b Certification by Chief Financial Officer pursuant to 18 U.S.C. ss. 1350.
All other exhibits are omitted, as they are inapplicable or not required by the
related instructions.