FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2003.
Title Outstanding
Common stock, no par value 58,459,443
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Trustmark Corporation and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
(Unaudited)
September 30, December 31,
2003 2002
----------- ----------
Assets
Cash and due from banks (noninterest-bearing) $ 284,779 $ 357,427
Federal funds sold and securities purchased
under reverse repurchase agreements 59,500 23,957
Securities available for sale (at fair value) 1,676,969 1,262,570
Securities held to maturity (fair value:
$215,482 - 2003; $578,150 - 2002) 201,052 549,197
Loans held for sale 158,710 199,680
Loans 4,865,500 4,417,686
Less allowance for loan losses 74,486 74,771
---------- ----------
Net loans 4,791,014 4,342,915
Premises and equipment 109,126 104,113
Intangible assets 167,738 119,643
Other assets 184,216 179,204
---------- ----------
Total Assets $7,633,104 $7,138,706
========== ==========
Liabilities
Deposits:
Noninterest-bearing $1,256,697 $1,251,240
Interest-bearing 3,740,256 3,435,056
---------- ----------
Total deposits 4,996,953 4,686,296
Federal funds purchased 397,333 319,985
Securities sold under repurchase agreements 427,377 634,993
Short-term borrowings 635,111 275,959
Long-term FHLB advances 431,068 475,000
Other liabilities 63,164 66,939
---------- ----------
Total Liabilities 6,951,006 6,459,172
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 58,519,206 shares -
2003; 60,516,668 shares - 2002 12,193 12,609
Capital surplus 140,154 188,652
Retained earnings 529,154 470,317
Accumulated other comprehensive income,
net of tax 597 7,956
---------- ----------
Total Shareholders' Equity 682,098 679,534
---------- ----------
Total Liabilities and Shareholders' Equity $7,633,104 $7,138,706
========== ==========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Income
($ in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- -------
Interest Income
Interest and fees on loans $ 71,093 $ 77,554 $212,960 $231,100
Interest on securities:
Taxable 12,065 21,519 50,610 70,197
Tax exempt 1,953 2,175 6,033 6,747
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 60 150 236 345
Other interest income 14 23 37 1,368
-------- -------- -------- --------
Total Interest Income 85,185 101,421 269,876 309,757
Interest Expense
Interest on deposits 14,167 19,634 45,882 61,432
Interest on federal funds purchased and securities
sold under repurchase agreements 2,269 3,058 8,096 9,946
Other interest expense 4,918 5,636 14,681 16,566
-------- -------- -------- --------
Total Interest Expense 21,354 28,328 68,659 87,944
-------- -------- -------- --------
Net Interest Income 63,831 73,093 201,217 221,813
Provision for loan losses 1,771 3,000 7,420 10,307
-------- -------- -------- --------
Net Interest Income After Provision
for Loan Losses 62,060 70,093 193,797 211,506
Noninterest Income
Service charges on deposit accounts 14,304 12,725 40,054 36,546
Other account charges and fees 7,267 7,082 21,028 21,286
Insurance commissions 7,708 7,107 16,458 13,580
Mortgage servicing fees 4,091 4,310 12,652 12,925
Trust service income 2,519 2,402 7,176 7,413
Gains on sales of loans 5,571 2,376 14,715 6,050
Securities gains 57 12,033 12,226 12,549
Other income (1,614) (3,114) (1,137) (5,792)
-------- -------- -------- --------
Total Noninterest Income 39,903 44,921 123,172 104,557
Noninterest Expense
Salaries and employee benefits 31,434 30,568 96,855 89,030
Net occupancy - premises 3,395 3,168 9,541 8,863
Equipment expense 3,721 3,598 11,104 11,357
Services and fees 7,806 8,093 23,696 23,720
Amortization/impairment of intangible assets (1,389) 15,063 19,015 18,886
Loan expense 2,352 2,373 7,155 7,314
Other expense 5,397 5,618 15,023 15,015
-------- -------- -------- --------
Total Noninterest Expense 52,716 68,481 182,389 174,185
-------- -------- -------- --------
Income Before Income Taxes 49,247 46,533 134,580 141,878
Income taxes 16,829 16,471 46,514 50,084
-------- -------- -------- --------
Net Income $ 32,418 $ 30,062 $ 88,066 $ 91,794
======== ======== ======== ========
Earnings Per Share
Basic $ 0.55 $ 0.49 $ 1.49 $ 1.47
======== ======== ======== ========
Diluted $ 0.55 $ 0.49 $ 1.48 $ 1.46
======== ======== ======== ========
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 88,066 91,794
Net change in fair value of securities available
for sale, net of tax (10,325) (1,198)
Net change in fair value of cash flow hedges,
net of tax 2,966 (3,101)
--------- --------
Comprehensive income 80,707 87,495
Cash dividends paid (29,229) (28,166)
Exercise of stock options 1,995 -
Stock compensation expense 266 -
Repurchase and retirement of common stock (51,175) (52,139)
--------- ---------
Balance, September 30, $ 682,098 $ 692,634
========= =========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------
2003 2002
---------- ---------
Operating Activities
Net income $ 88,066 $ 91,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 7,420 10,307
Depreciation and amortization/impairment 28,032 28,414
Net amortization (accretion) of securities 13,886 (750)
Securities gains (12,226) (12,549)
Gains on sales of loans (14,715) (6,050)
Deferred income tax provision (benefit) 977 (5,036)
Proceeds from sales of loans 1,217,389 673,698
Purchases and originations of loans held for sale (1,176,419) (715,427)
Net increase in intangible assets (17,586) (10,385)
Net increase in other assets (6,876) (257)
Net increase (decrease) in other liabilities 689 (1,992)
Other operating activities, net (54) 547
---------- --------
Net cash provided by operating activities 128,583 52,314
Investing Activities
Proceeds from calls and maturities of securities held
to maturity 429,647 198,991
Proceeds from calls and maturities of securities
available for sale 349,382 263,676
Proceeds from sales of securities available for sale 267,895 229,442
Purchases of securities held to maturity (3,978) (19,708)
Purchases of securities available for sale (1,127,658) (361,982)
Net increase in federal funds sold and securities
purchased under reverse repurchase agreements (35,543) (51,535)
Net increase in loans (218,389) (51,728)
Purchases of premises and equipment (5,964) (14,901)
Proceeds from sales of premises and equipment 1,287 19
Proceeds from sales of other real estate 4,510 3,149
Cash paid in business combinations, net (69,802) (7,799)
---------- --------
Net cash (used in) provided by investing activities (408,613) 187,624
Financing Activities
Net increase in deposits 100,839 208,829
Net decrease in federal funds purchased and securities sold
under repurchase agreements (130,268) (313,490)
Net increase (decrease) in other borrowings 359,152 (128,927)
(Maturities of) proceeds from long-term FHLB advances (43,932) 100,000
Cash dividends (29,229) (28,166)
Proceeds from the exercise of stock options 1,995 -
Repurchase and retirement of common stock (51,175) (52,139)
---------- --------
Net cash provided by (used in) financing activities 207,382 (213,893)
---------- --------
(Decrease) increase in cash and cash equivalents (72,648) 26,045
Cash and cash equivalents at beginning of period 357,427 328,779
---------- --------
Cash and cash equivalents at end of period $ 284,779 $354,824
========== ========
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 August 29, 2003, Trustmark acquired seven Florida branches of The Banc
Corporation of Birmingham, Alabama, in a business combination accounted for by
the purchase method of accounting. These branches, known as the Emerald Coast
Division, serve the markets from Destin to Panama City. In connection with the
transaction, Trustmark paid a $46.8 million deposit premium in exchange for
$232.8 million in assets and $209.2 million in deposits and other liabilities.
Assets consisted of $224.3 million in loans, $6.8 million in premises and
equipment and $1.7 million in other assets. These assets and liabilities have
been recorded at fair value based on market conditions and risk characteristics
at the acquisition date. Loans were recorded at a $1.9 million discount,
consisting of a discount for general credit risk of $3.5 million offset by a
market premium of $1.6 million. This net discount will be recognized as interest
income over the estimated life of the loans. Excess costs over tangible net
assets acquired totaled $49.5 million, of which $1.7 million and $47.8 million
have been allocated to core deposits and goodwill, respectively. Trustmark's
financial statements include the results of operations for this acquisition from
the merger date. The pro forma impact of this acquisition on Trustmark's results
of operations is insignificant.
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 $7 million have
been allocated to other identifiable intangible assets and goodwill,
respectively. Trustmark's financial statements include the results of operations
for the CSI acquisition from the merger date. The pro forma impact of this
acquisition on Trustmark's results of operations is insignificant.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The following table summarizes the activity in the allowance for loan losses for
the nine-month periods ended September 30 ($ in thousands):
2003 2002
-------- --------
Balance at beginning of year $ 74,771 $ 75,534
Provision charged to expense 7,420 10,307
Loans charged off (14,675) (17,281)
Recoveries 6,970 6,978
-------- --------
Net charge-offs (7,705) (10,303)
-------- --------
Balance at end of period $ 74,486 $ 75,538
======== ========
At September 30, 2003 and 2002, the carrying amounts of nonaccrual loans were
$26.9 million and $31.0 million, respectively. Included in these nonaccrual
loans at September 30, 2003 and 2002, are loans that are considered to be
impaired, which totaled $19.6 million and $23.7 million, respectively. At
September 30, 2003, the total allowance for loan losses related to impaired
loans was $6.1 million compared with $6.4 million at September 30, 2002. The
average carrying amounts of impaired loans during the third quarter of 2003 and
2002 were $20.4 million and $28.7 million, respectively. No material amounts of
interest income were recognized on impaired loans or nonaccrual loans for the
third quarter of 2003 or 2002.
NOTE 4 - INTANGIBLE ASSETS
At September 30, 2003 and December 31, 2002, intangible assets, net of any
applicable amortization or impairment, consisted of the following ($ in
thousands):
Sept. 30, Dec. 31,
2003 2002
---------- ----------
Mortgage servicing rights $ 48,767 $ 48,827
Goodwill 95,877 48,028
Other identifiable intangible assets:
Core deposit intangibles 18,986 19,288
Insurance customer relationship intangibles 2,491 2,904
Banking charter 1,021 -
---------- ----------
Total amortizable 22,498 22,192
Pension plan intangible 596 596
---------- ----------
Total other identifiable intangible assets 23,094 22,788
---------- ----------
Total intangible assets $ 167,738 $ 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 recognize compensation expense
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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $32,418 $30,062 $88,066 $91,794
Add: Total stock-based employee compensation
expense included in reported net income, net
of related tax effects 87 - 167 -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (336) (382) (1,008) (1,148)
------- ------- ------- -------
Pro forma net income $32,169 $29,680 $87,225 $90,646
======= ======= ======= =======
Earnings per share:
As reported
Basic $ 0.55 $ 0.49 $ 1.49 $ 1.47
Diluted 0.55 0.49 1.48 1.46
Pro forma
Basic $ 0.55 $ 0.48 $ 1.47 $ 1.45
Diluted 0.55 0.48 1.47 1.44
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 September 30, 2003, the maximum potential amount of future payments Trustmark
could be required to make under its standby letters of credit was $73.9 million,
which also represented the maximum credit risk associated with these
commitments. This amount consisted primarily of commitments with maturities of
less than three 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 September 30, 2003, the fair value of collateral
held was $21.5 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:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic 58,626,951 61,786,676 59,214,354 62,608,357
Dilutive shares (related to stock options) 271,346 174,357 191,656 192,152
---------- ---------- ---------- ----------
Diluted 58,898,297 61,961,033 59,406,010 62,800,509
========== ========== ========== ==========
NOTE 8 - STATEMENTS OF CASH FLOWS
Trustmark paid income taxes of $45.3 million and $47.2 million during the nine
months ended September 30, 2003 and 2002, respectively. Interest paid on deposit
liabilities and other borrowings totaled $70.8 million in the first nine months
of 2003 and $92.6 million in the first nine months of 2002. For the nine months
ended September 30, 2003 and 2002, noncash transfers from loans to foreclosed
properties were $4.4 million and $5.5 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 became 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 September 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
September 30, 2003
- ---------------------------------------
Net interest income from
external customers $ 43,196 $ 12,808 $ 1,150 $ 6,677 $ 63,831
Internal funding 9,187 (1,713) 233 (7,707) -
---------- ----------- ---------- ---------- ----------
Net interest income 52,383 11,095 1,383 (1,030) 63,831
Provision for loan losses 1,742 (34) 61 2 1,771
---------- ----------- ---------- ---------- ----------
Net interest income after
provision for loan losses 50,641 11,129 1,322 (1,032) 62,060
Noninterest income 30,963 1,708 5,222 2,010 39,903
Noninterest expense 40,572 3,716 4,825 3,603 52,716
---------- ----------- ---------- ---------- ----------
Income (loss) before income taxes 41,032 9,121 1,719 (2,625) 49,247
Income taxes 14,333 3,147 617 (1,268) 16,829
---------- ----------- ---------- ---------- ----------
Segment net income (loss) $ 26,699 $ 5,974 $ 1,102 $ (1,357) $ 32,418
========== =========== ========== ========== ==========
Selected Financial Information
Average assets $4,235,614 $1,097,256 $ 133,132 $2,033,468 $7,499,470
Depreciation and amortization $ (399) $ 34 $ 100 $ 1,972 $ 1,707
For the three months ended
September 30, 2002
- ---------------------------------------
Net interest income from
external customers $ 41,208 $ 15,094 $ 1,235 $ 15,556 $ 73,093
Internal funding 7,663 (3,750) (180) (3,733) -
---------- ---------- --------- ---------- ----------
Net interest income 48,871 11,344 1,055 11,823 73,093
Provision for loan losses 2,531 614 (11) (134) 3,000
---------- ---------- --------- ---------- ----------
Net interest income after
provision for loan losses 46,340 10,730 1,066 11,957 70,093
Noninterest income 28,039 1,716 5,356 9,810 44,921
Noninterest expense 57,134 3,672 4,358 3,317 68,481
---------- ---------- --------- ---------- ----------
Income before income taxes 17,245 8,774 2,064 18,450 46,533
Income taxes 5,966 3,027 857 6,621 16,471
---------- ---------- --------- ---------- ----------
Segment net income $ 11,279 $ 5,747 $ 1,207 $ 11,829 $ 30,062
========== ========== ========= ========== ==========
Selected Financial Information
Average assets $3,868,615 $1,107,491 $ 124,759 $1,719,484 $6,820,349
Depreciation and amortization $ 15,919 $ 41 $ 83 $ 2,097 $ 18,140
Trustmark Corporation
Segment Information
($ in thousands)
Consumer Commercial Investment Operations
Division Division Division Division Total
---------- ---------- ---------- ---------- ----------
For the nine months ended
September 30, 2003
- ---------------------------------------
Net interest income from
external customers $ 124,401 $ 38,892 $ 3,587 $ 34,337 $ 201,217
Internal funding 25,034 (6,026) 212 (19,220) -
---------- ---------- ---------- ---------- ----------
Net interest income 149,435 32,866 3,799 15,117 201,217
Provision for loan losses 6,954 56 39 371 7,420
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 142,481 32,810 3,760 14,746 193,797
Noninterest income 86,469 5,316 14,905 16,482 123,172
Noninterest expense 140,586 11,321 13,551 16,931 182,389
---------- ---------- ---------- ---------- ----------
Income before income taxes 88,364 26,805 5,114 14,297 134,580
Income taxes 30,887 9,248 1,864 4,515 46,514
---------- ---------- ---------- ---------- ----------
Segment net income $ 57,477 $ 17,557 $ 3,250 $ 9,782 $ 88,066
========== ========== ========== ========== ==========
Selected Financial Information
Average assets $4,075,837 $1,105,490 $ 123,324 $2,008,779 $7,313,430
Depreciation and amortization $ 21,491 $ 107 $ 310 $ 6,124 $ 28,032
For the nine months ended
September 30, 2002
- ---------------------------------------
Net interest income from
external customers $ 118,787 $ 44,640 $ 3,704 $ 54,682 $ 221,813
Internal funding 23,750 (12,395) (739) (10,616) -
---------- ----------- ---------- ---------- ----------
Net interest income 142,537 32,245 2,965 44,066 221,813
Provision for loan losses 7,361 2,447 (141) 640 10,307
---------- ----------- ---------- ---------- ----------
Net interest income after
provision for loan losses 135,176 29,798 3,106 43,426 211,506
Noninterest income 73,650 5,188 16,338 9,381 104,557
Noninterest expense 141,125 10,513 12,707 9,840 174,185
---------- ----------- ---------- ---------- ----------
Income before income taxes 67,701 24,473 6,737 42,967 141,878
Income taxes 23,472 8,443 2,580 15,589 50,084
---------- ----------- ---------- ---------- ----------
Segment net income $ 44,229 $ 16,030 $ 4,157 $ 27,378 $ 91,794
========== =========== ========== ========== ==========
Selected Financial Information
Average assets $3,824,155 $1,091,807 $ 106,136 $1,807,926 $6,830,024
Depreciation and amortization $ 21,357 $ 123 $ 255 $ 6,679 $ 28,414
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, Tennessee and Florida.
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 September 30, 2003, Trustmark
and its subsidiaries employed 2,365 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.
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 based on specific risk characteristics of
the underlying mortgages. During the quarter ended September 30, 2003, Trustmark
expanded its risk characteristics, which had previously included product type
and term, to include interest rates on the underlying mortgages. This change in
estimate was necessary because of the recent volatile interest rate environment.
This change in estimate reduced the impairment recovery during the quarter ended
September 30, 2003, by approximately $2.7 million before tax ($1.7 million after
tax or $0.03 per share). As of September 30, 2003, mortgage servicing rights had
a gross carrying amount of $66.2 million with a valuation allowance of $17.5
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 September 30,
2003, Trustmark had unamortized goodwill totaling $95.9 million and other
identifiable intangible assets subject to amortization totaling $22.5 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 August 29, 2003, Trustmark acquired seven Florida branches of The Banc
Corporation of Birmingham, Alabama, in a business combination accounted for by
the purchase method of accounting. These branches, known as the Emerald Coast
Division, serve the markets from Destin to Panama City. In connection with the
transaction, Trustmark paid a $46.8 million deposit premium in exchange for
$232.8 million in assets and $209.2 million in deposits and other liabilities.
Assets consisted of $224.3 million in loans, $6.8 million in premises and
equipment and $1.7 million in other assets. These assets and liabilities have
been recorded at fair value based on market conditions and risk characteristics
at the acquisition date. Loans were recorded at a $1.9 million discount,
consisting of a discount for general credit risk of $3.5 million offset by a
market premium of $1.6 million. This net discount will be recognized as interest
income over the estimated life of the loans. Excess costs over tangible net
assets acquired totaled $49.5 million, of which $1.7 million and $47.8 million
have been allocated to core deposits and goodwill, respectively. Trustmark's
financial statements include the results of operations for this acquisition from
the merger date. The pro forma impact of this acquisition on Trustmark's results
of operations is insignificant.
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 $0.55 for the third quarter of 2003, which
represents a 12.2% increase compared to $0.49 for the third quarter of 2002. Net
income for the third quarter of 2003 totaled $32.4 million, compared to $30.1
million for the prior year period, and resulted in a return on average assets of
1.71% and a return on average equity of 19.03%. Basic earnings per share for the
nine months ended September 30, 2003, was $1.49 compared to $1.47 for 2002.
Trustmark's net income for the first nine months of 2003 totaled $88.1 million,
compared to $91.8 million for the prior year period, and resulted in a return on
average assets of 1.61% and a return on average equity of 17.58%. 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 September 30, 2003, Trustmark reported total loans of $5.024
billion, total assets of $7.633 billion, total deposits of $4.997 billion and
shareholders' equity of $682.1 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 18 and 19 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, pay downs and sales of
securities have been used to fund loan growth and purchases of additional
securities to maintain sufficient levels of earning assets. Trustmark has also
reduced interest expense on FHLB advances by engaging in various swap agreements
beginning in 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 29.
Net interest income-FTE for the three-month and nine-month periods ended
September 30, 2003, decreased $9.5 million, or 12.6%, and $21.2 million, or
9.3%, respectively, compared to figures one year earlier. The continuing decline
in interest rates experienced during 2003 and 2002 has impacted both assets and
liabilities; however, since Trustmark's cost of funds are driven primarily by
its core deposit base, rates on interest-bearing liabilities have not seen the
same magnitude of decline as earning asset yields. In addition, Trustmark's
third quarter net interest margin decreased by $4.1 million as a result of
premium amortization on mortgage related securities increasing to $7.8 million
for the quarter compared with $3.7 million for the second quarter of 2003.
Mortgages fell to historical lows in June 2003, prompting a significant
refinance boom across the country. As excess principal pay downs occurred during
the third quarter of 2003, net premium amortization accelerated. The combination
of these factors has resulted in declines in the NIM of 103 basis points and 78
basis points when comparing the three-month and nine-month periods ended
September 30, 2003, with the same periods in 2002.
Yield/Rate Analysis Table
($ in thousands)
For the Three Months Ended September 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 $ 20,535 $ 60 1.16% $ 35,001 $ 150 1.70%
Securities - taxable 1,757,429 12,065 2.72% 1,391,978 21,519 6.13%
Securities - nontaxable 154,781 3,005 7.70% 168,603 3,346 7.87%
Loans, including loans held for sale 4,933,252 72,049 5.79% 4,587,012 78,594 6.80%
---------- -------- ---------- --------
Total interest-earning assets 6,865,997 87,179 5.04% 6,182,594 103,609 6.65%
Cash and due from banks 282,239 282,665
Other assets 426,066 431,083
Allowance for loan losses (74,832) (75,993)
---------- ----------
Total Assets $7,499,470 $6,820,349
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $3,645,418 14,167 1.54% $3,519,645 19,634 2.21%
Federal funds purchased and
securities sold under
repurchase agreements 929,774 2,269 0.97% 729,862 3,058 1.66%
Borrowings 918,984 4,918 2.12% 733,051 5,636 3.05%
---------- -------- ---------- --------
Total interest-bearing liabilities 5,494,176 21,354 1.54% 4,982,558 28,328 2.26%
---------- -------- ---------- --------
Noninterest-bearing demand deposits 1,260,135 1,089,755
Other liabilities 69,231 74,127
Shareholders' equity 675,928 673,909
---------- ----------
Total Liabilities and
Shareholders' Equity $7,499,470 $6,820,349
========== ==========
Net Interest Margin 65,825 3.80% 75,281 4.83%
Less tax equivalent adjustment 1,994 2,188
-------- --------
Net Interest Margin per Consolidated
Statements of Income $ 63,831 $ 73,093
======== ========
Average interest-earning assets for the first nine months of 2003 were $6.678
billion, compared with $6.202 billion for the first nine months of 2002, an
increase of $475.6 million, or 7.7%. Without the Emerald Coast branch purchase,
the increase in average interest-earning assets for the first nine months of
2003 is $451.8, or 7.3%. Growth for the first nine months of 2003 is primarily
seen in average loans, which increased 5.5% (5.0% without Emerald Coast) when
compared with the same period in 2002, and average securities, which increased
13.6% when 2003 is compared with 2002. However, yields have been negatively
impacted by the declining interest rate environment as the yield on average
earning assets dropped from 6.83% during the first nine months of 2002 to 5.53%
for the same period in 2003, a decrease of 130 basis points. As a result,
interest income-FTE decreased by $40.5 million, or 12.8%, during the first nine
months of 2003 when compared with the prior year period.
Yield/Rate Analysis Table
($ in thousands)
For the Nine Months Ended September 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 $ 27,063 $ 236 1.17% $ 27,319 $ 345 1.69%
Securities - taxable 1,728,241 50,610 3.92% 1,485,267 70,197 6.32%
Securities - nontaxable 157,416 9,282 7.88% 173,925 10,380 7.98%
Loans, including loans held for sale 4,765,364 216,009 6.06% 4,515,979 235,701 6.98%
---------- -------- ---------- --------
Total interest-earning assets 6,678,084 276,137 5.53% 6,202,490 316,623 6.83%
Cash and due from banks 296,854 281,007
Other assets 413,530 422,107
Allowance for loan losses (75,038) (75,580)
---------- ----------
Total Assets $7,313,430 $6,830,024
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $3,617,219 45,882 1.70% $3,525,957 61,432 2.33%
Federal funds purchased and
securities sold under
repurchase agreements 965,417 8,096 1.12% 796,000 9,946 1.67%
Borrowings 788,852 14,681 2.49% 704,082 16,566 3.15%
---------- -------- ---------- --------
Total interest-bearing liabilities 5,371,488 68,659 1.71% 5,026,039 87,944 2.34%
---------- -------- ---------- --------
Noninterest-bearing demand deposits 1,206,457 1,063,149
Other liabilities 65,587 66,615
Shareholders' equity 669,898 674,221
---------- ----------
Total Liabilities and
Shareholders' Equity $7,313,430 $6,830,024
========== ==========
Net Interest Margin 207,478 4.15% 228,679 4.93%
Less tax equivalent adjustment 6,261 6,866
-------- --------
Net Interest Margin per Consolidated
Statements of Income $201,217 $221,813
======== ========
Average interest-bearing liabilities for the nine months ended September 30,
2003 totaled $5.371 billion, compared with $5.026 billion for the prior year
period, an increase of $345.4 million, or 6.9%. Without the Emerald Coast branch
purchase, the increase in average interest-bearing liabilities for the first
nine months of 2003 is $326.7 million, or 6.5%. 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
nine months of 2003 and 2002, were 1.71% and 2.34%, respectively, a decrease of
63 basis points. As a result of these factors, total interest expense for the
first nine months of 2003 decreased $19.3 million, or 21.9%, 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. Beginning in the second quarter of 2003, Trustmark implemented the
use of swap agreements and has reduced interest expense by $510 thousand. For
additional discussion, see Market/ Interest Rate Risk Management beginning on
page 29.
Provision for Loan Losses
Trustmark's provision for loan losses totaled $1.8 million and $7.4 million,
respectively, for the three-month and nine-month periods ended September 30,
2003, compared with $3.0 million and $10.3 million, respectively, for the same
periods in 2002. As a percentage of average loans, the provision was 0.21% for
the first nine months of 2003 compared with 0.31% 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 26.
Noninterest Income
Noninterest income (NII) consists of revenues generated from a broad range of
banking and financial services. NII totaled $123.2 million for the first nine
months of 2003, an increase of $18.6 million, or 17.8%, from the prior year
period. NII represented 31.3% of total revenues in the nine months ended
September 30, 2003, versus 25.2% in the first nine months of 2002. The
comparative components of noninterest income for the nine-month periods ended
September 30, 2003 and 2002 are shown in the accompanying table on page 21.
Noninterest income contributed by the Emerald Coast branch purchase during the
third quarter of 2003 is considered immaterial.
The single largest component of noninterest income continues to be service
charges for deposit products and services, which increased 9.6% in the first
nine months of 2003 over the prior year period. This increase was primarily the
result of increases in NSF and overdraft charges implemented during the third
quarter of 2003 as well as from increased transaction volume.
Other account charges and fees totaled $21.0 million in the first nine months of
2003, a decrease of $258 thousand, or 1.2%, 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 $16.5 million for the first nine months of 2003,
compared to $13.6 million in the first nine months of 2002, an increase of $2.9
million, or 21.2%. 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 nine months ended September 30, 2003, mortgage servicing fees totaled
$12.7 million, maintaining the level from the prior year period. Increased
prepayments during the period contributed to the decline in the mortgage
servicing portfolio when compared to the prior period. Trustmark serviced
mortgage loans with average balances of $3.3 billion in the first nine months of
2003 and $3.6 billion in the prior year period.
Trust service income was $7.2 million for the first nine months of 2003, a
decrease of $237 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 $6.9 billion at September 30,
2003.
Noninterest Income
($ in thousands)
Nine Months Ended
September 30,
---------------------
2003 2002 $ Change % Change
--------- --------- -------- -------
Service charges on deposit accounts $ 40,054 $ 36,546 $ 3,508 9.6%
Other account charges and fees 21,028 21,286 (258) -1.2%
Insurance commissions 16,458 13,580 2,878 21.2%
Mortgage servicing fees 12,652 12,925 (273) -2.1%
Trust service income 7,176 7,413 (237) -3.2%
Gains on sales of loans 14,715 6,050 8,665 143.2%
Securities gains 12,226 12,549 (323) -2.6%
Other income:
Changes in fair value:
Interest rate contracts (497) (6,027) 5,530 91.8%
Mortgage derivative contracts (1,857) - (1,857) -
Other miscellaneous 1,217 235 982 417.9%
--------- --------- --------
Total other income (1,137) (5,792) 4,655 80.4%
--------- --------- --------
Total Noninterest Income $ 123,172 $ 104,557 $ 18,615 17.8%
========= ========= ========
Gains on sales of loans were $14.7 million in the nine months ended September
30, 2003, compared with $6.1 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 nine months of 2003, compared with $1.1 million 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 $5.5
million during the first nine 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.
Securities gains totaled $12.2 million during the first nine months of 2003,
compared with $12.5 million during the first nine months of 2002. During the
first nine 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 $290.1 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 nine-month period ended September 30, 2003, other income was a loss
of $1.1 million, a $4.7 million increase from the $5.8 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 $497
thousand and $6.0 million for the first nine 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 $233 thousand and
$683 thousand at September 30, 2003 and 2002, respectively. In addition,
valuation adjustments on fair value hedges used in conjunction with Trustmark's
mortgage servicing portfolio were a loss of $1.9 million in the first nine
months of 2003.
Noninterest Expense
($ in thousands)
Nine Months Ended
September 30,
----------------------
2003 2002 $ Change % Change
--------- --------- -------- --------
Salaries and employee benefits $ 96,855 $ 89,030 $ 7,825 8.8%
Net occupancy - premises 9,541 8,863 678 7.6%
Equipment expense 11,104 11,357 (253) -2.2%
Services and fees 23,696 23,720 (24) -0.1%
Amortization:
Core deposits 1,977 2,202 (225) -10.2%
Insurance intangible 418 138 280 202.9%
Mortgage servicing rights 11,621 7,760 3,861 49.8%
Impairment of mortgage
servicing rights 4,999 8,786 (3,787) -43.1%
-------- -------- --------
Total amortization/impairment 19,015 18,886 129 0.7%
Loan expense 7,155 7,314 (159) -2.2%
Other expense 15,023 15,015 8 0.1%
-------- -------- --------
Total Noninterest Expense $182,389 $174,185 $ 8,204 4.7%
======== ======== ========
Noninterest Expense
Trustmark's noninterest expense increased $8.2 million, or 4.7%, in the first
nine months of 2003 to $182.4 million, compared with $174.2 million in the first
nine months of 2002. This increase is primarily seen in one category, salaries
and employee benefits. Noninterest expense contributed by the Emerald Coast
branch purchase during the third quarter of 2003 is considered immaterial. The
comparative components of noninterest expense for the nine months ended
September 30, 2003 and 2002 are shown in the accompanying table.
Salaries and employee benefits, the largest category of noninterest expense,
were $96.9 million in the first nine months of 2003 and $89.0 million in the
prior year period, an increase of $7.8 million, or 8.8%. This increase is
primarily from $6.3 million of expense recognized for Trustmark's early
retirement program, which was accepted by 116 employees, or 4.75% of the
workforce, and an increase in incentive pay based on mortgage production.
Trustmark's full time equivalent employees have dropped from 2,450 at September
30, 2002 to 2,365 at September 30, 2003.
Amortization/impairment expense associated with intangible assets totaled $19.0
million for the first nine months of 2003, compared with $18.9 million in the
prior year period. Amortization/impairment expense of mortgage servicing rights
is the primary component of this category. For 2003, total
amortization/impairment expense for mortgage servicing rights was $16.6 million,
or $11.6 million in amortization expense and $5.0 million in impairment. For
2002, total amortization/impairment expense for mortgage servicing rights was
also $16.6 million but was broken down into $7.8 million in amortization expense
and $8.8 million in impairment. While amortization/impairment expense has
remained the same for both periods, there are recent positive trends that have
slowed the growth of both amortization and impairment of mortgage servicing
rights. During the third quarter of 2003, long-term mortgage rates increased to
the highest point in 2003, which slowed prepayments of mortgage loans and had a
positive impact on the fair value of Trustmark's mortgage servicing portfolio.
This can be seen by a reduction in the impairment allowance from $22.4 million
at June 30, 2003 to $17.5 million at September 30, 2003. While amortization of
mortgage servicing rights increased by $3.9 million as a result of increased
refinancings during the first nine months of 2003, third quarter amortization
expense decreased to $2.9 million from $4.7 million in the second quarter of
2003 indicating that the expected life of the mortgage servicing portfolio has
lengthened in response to slower prepayment speeds. Future changes in the
amortization and impairment of mortgage servicing rights will be continue to be
closely tied to fluctuations in long-term mortgage rates.
Income Taxes
For the nine months ended September 30, 2003, Trustmark's combined effective tax
rate was 34.6%, compared with 35.3% for the first nine months 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 September 30, 2003, these
arrangements gave Trustmark approximately $1.675 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 $300.0 million
in short-term advances and $431.1 million in long-term advances at September 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
$604.5 million available in unused FHLB advances. Another borrowing source is
the Federal Reserve Discount Window (Discount Window). At September 30, 2003,
Trustmark had approximately $532 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 September 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
September 30, 2003, no such shares have been issued.
CAPITAL RESOURCES
At September 30, 2003, Trustmark's shareholders' equity was $682.1 million, an
increase of $2.6 million, or 0.4%, from its level at December 31, 2002. This
increase is primarily related to net income for the nine months ended September
30, 2003, which totaled $88.1 million and was offset by dividends in the amount
of $29.2 million and shares repurchased at a cost of $51.2 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 17.7 million shares for $376.8 million,
including 2.1 million shares during the first nine months of 2003 for $51.2
million. The current remaining authorization is approximately 3.8 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 nine months of 2003 were $0.495 per share, increasing
10.0% when compared with dividends of $0.45 per share for the prior-year period.
Trustmark's dividend payout ratio, which is dividends per share divided by
earnings per share, was 33.22% for the first nine months of 2003, compared with
30.61% for the same period in 2002. During October 2003, the Board of Directors
of Trustmark announced a 15.2% increase in its regular quarterly dividend to
$0.19 per share from $0.165 per share. The Board declared the dividend payable
on December 15 to the shareholders of record as of December 1, 2003. This action
raises the indicated annual dividend rate to $0.76 per share from $0.66 per
share.
Regulatory Capital
($ in thousands)
September 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 $617,903 12.21% $404,740 8.00% - -
Trustmark National Bank 580,389 11.72% 396,116 8.00% $495,145 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $554,524 10.96% $202,370 4.00% - -
Trustmark National Bank 518,371 10.47% 198,058 4.00% $297,087 6.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $554,524 7.52% $221,269 3.00% - -
Trustmark National Bank 518,371 7.17% 217,035 3.00% $361,726 5.00%
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
September 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 September 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 accompanying table. There are no significant
conditions or events that have occurred since the OCC's notification that
Management believes have affected TNB's present classification.
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 September 30, 2003, earning assets were $6.962
billion, or 91.20% of total assets, compared with $6.453 billion, or 90.40% of
total assets at December 31, 2002, an increase of $508.6 million, or 7.9%.
Excluding the Emerald Coast branch purchase, earning assets totaled $6.739
billion, an increase of $286.2 million when compared with December 31, 2002.
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
September 30, 2003, Trustmark's securities portfolio totaled $1.878 billion,
compared to $1.812 billion at December 31, 2002, an increase of $66.3 million,
or 3.7%.
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 utilized a strategy of reducing price volatility in
the investment portfolio as indicated by duration, which has remained relatively
stable throughout 2003. 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 2.04
years at September 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 September 30, 2003, AFS
securities totaled $1.677 billion, which represented 89.3% of the securities
portfolio, compared to $1.263 billion, or 69.7%, at December 31, 2002. At
September 30, 2003, unrealized gains on AFS securities of $6.0 million, net of
$2.3 million of deferred income taxes payable, 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. At September 30, 2003, AFS
securities consisted of U.S. Treasury and Agency securities, obligations of
states and political subdivisions, mortgage related securities, corporate
securities and other securities, primarily Federal Reserve Bank and FHLB stock.
During the third quarter, an allocation of corporate securities was added to AFS
securities as an investment alternative that produces an attractive return and,
at the same time, reduces exposure to mortgage related securities while also
reducing reliance on issues of the various government agencies. This group
currently consists of well-diversified investment grade corporate securities
with a book value of $78.9 million and a noncallable average maturity of 4.5
years. Management expects to continue this strategy as an ongoing part of a
diversified investment approach in the securities portfolio.
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 September 30, 2003, HTM securities totaled $201.1 million and
represented 10.7% of the total portfolio, compared with $549.2 million, or
30.3%, at the end of 2002. This decline in HTM securities as a percentage of the
securities portfolio should continue as Management utilizes the increased
flexibility in AFS securities to manage its investment strategy.
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 90% of
the portfolio in U.S. Treasury, U.S. Government agencies obligations and other
AAA rated securities.
Loans and Allowance for Loan Losses
Loans, including loans held for sale, represented 72.2% of earning assets at
September 30, 2003, compared with 71.6% at year-end 2002. At September 30, 2003,
loans totaled $5.024 billion, an 8.8% increase from its level of $4.617 billion
at December 31, 2002. Excluding the Emerald Coast branch purchase, loan growth
was $184.4 million, or 4.0%. Real estate lending continued to be positively
impacted by record low interest rates while other loan areas have been
negatively affected by a weakened economy.
Trustmark makes loans in the normal course of business to certain directors,
including their immediate families and companies in which they are principal
owners. Such loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility at the time of the transaction.
Trustmark's lending policies have resulted in consistently sound asset quality.
One measure of asset quality in the financial services industry is the level of
nonperforming assets. The details of Trustmark's nonperforming assets at
September 30, 2003 and December 31, 2002, are shown in the accompanying table.
Nonperforming Assets
($ in thousands)
September 30, December 31,
2003 2002
------------- ------------
Nonaccrual and restructured loans $ 26,857 $ 31,642
Other real estate (ORE) 6,434 6,298
------------- ------------
Total nonperforming assets $ 33,291 $ 37,940
============= ============
Accruing loans past due 90 days or more $ 3,283 $ 2,946
============= ============
Nonperforming assets/total loans and ORE 0.66% 0.82%
============= ============
Total nonperforming assets decreased $4.6 million, or 12.25%, during the first
nine months of 2003. This decrease can be attributed to a concerted effort to
address problem loans as well as approximately $1.4 million of 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 277.3% at September 30, 2003, compared with 236.3% at December 31, 2002.
At September 30, 2003, the allowance for loan losses was $74.5 million compared
with $74.8 million at December 31, 2002. The allowance for loan losses
represented 1.48% of total loans outstanding at September 30, 2003, compared to
1.62% at December 31, 2002. This decline in the allowance as a percentage of
total loans is linked primarily to an increase in loans resulting from the
Emerald Coast branch purchase. Loans purchased totaled $224.3 million which
included a $1.9 million discount, consisting of a discount for general credit
risk of $3.5 million offset by a market premium of $1.6 million. As of September
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 $7.7 million, or 0.22% of average loans, for the nine
months ended September 30, 2003, compared with $10.3 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 $2.5 million when
comparing the first nine months of 2003 and 2002. Charge-offs for the first nine
months 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 $59.5 million at September 30, 2003, an increase of $35.5 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
interest-bearing and noninterest-bearing demand accounts, savings, money market,
certificates of deposits, individual retirement accounts and brokered CD's.
Total deposits were $4.997 billion at September 30, 2003, compared with $4.686
billion at December 31, 2002, an increase of $310.7 million, or 6.6%. Excluding
the Emerald Coast branch purchase, deposits increased $100.8 million, or 2.2%,
when compared with December 31, 2002. Trustmark's deposit mix remains favorable
with noninterest-bearing deposits representing 25.1% of total deposits at
September 30, 2003, compared with 26.7% at year-end 2002. During the third
quarter of 2003 Trustmark utilized a brokered CD program to provide additional
low cost deposit funding. 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 $1.460 billion at September 30, 2003, an
increase of $228.9 million, compared with $1.231 billion at year-end 2002. An
increase in term federal funds purchased and short-term FHLB advances were the
primary contributors to this growth as Management sought funding from lower
priced short-term borrowings during this historically low interest rate
environment
Long-term FHLB advances totaled $431.1 million at September 30, 2003, a decrease
of $43.9 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 2005 to 2006. Beginning in the second
quarter of 2003, Trustmark implemented the use of swap agreements and has
effectively converted $125.0 million of the fixed rate advances to variable
rates. For further discussion, see Market/Interest Rate Risk Management
beginning on page 29.
OTHER LIABILITIES
At December 31, 2002, Trustmark's pension plan was underfunded, requiring an
accrual for minimum pension liability of $5.7 million. During 2003, the Board of
Directors approved tax-deductible contributions to the pension plan in the
amount of $10.0 million. At the plan's next measurement date, October 31, 2003,
Management anticipates that the underfunded position of the plan will be
eliminated based on recent improvements in investment returns combined with the
contributions of $10 million.
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.
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
September 30, 2003, it is estimated that net interest income may increase,
possibly as much as 4.33%, 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 12.82% in a one-year horizon.
In this scenario, Trustmark uses the approach of shifting rates the greater of
200 basis points or the amount that implies a near zero rate for each category.
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. Management feels that this method for analyzing interest
rate sensitivity does not provide a complete picture of Trustmark's exposure to
interest rate changes since it illustrates a point-in-time measurement and,
therefore, does not incorporate the effects of future balance sheet trends or
varying interest rate scenarios. This analysis is a relatively straightforward
tool that is helpful in highlighting 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 September 30, 2003, reflected a liability gap of $199
million compared with an asset gap of $177 million at June 30, 2003. One-year
gap analysis projected at September 30, 2003, reflected an asset gap of $47
million compared with an asset gap of $548 million at June 30, 2003. These
changes can be traced to a reduction in mortgage work-in-process when compared
with June 30, 2003 as well as Management's decision to reinvest FHLB advances in
floating rather than fixed rates, thus lowering the overall cost and providing
relief to the compression of net interest income.
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 September 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. These swaps are designated as fair value hedges. 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 became 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 29-30) of "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 4. CONTROLS AND PROCEDURES
For the period ended September 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 September 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 September 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 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 July 15, 2003, Trustmark filed a report on Form 8-K announcing
its financial results for the period ended June 30, 2003.
2. On September 2, 2003, Trustmark filed a report on Form 8-K
announcing that the purchase of Florida's Emerald Coast branches
of The Bank had been completed as of the close of business
Friday, August 29, 2003.
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: November 10, 2003 DATE: November 10, 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.