Exhibit 13
Management's Statement on Responsibility for Financial Reporting
The management of Trustmark is responsible for the content and integrity of the
consolidated financial statements, related disclosures and other information
included in this annual report. The consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States. The financial statements presented include specific amounts
determined using Management's best estimates and judgments.
Management has established, maintains and relies on Trustmark's accounting and
related systems of procedures, disclosure controls and internal controls. These
systems provide reasonable assurance that transactions are properly authorized
and recorded in the consolidated financial statements and safeguard the
Corporation's assets from material loss or misuse. Trustmark maintains an
internal audit staff that monitors compliance with the Corporation's accounting
and internal control systems and reports to the Audit and Finance Committee of
the Board of Directors.
The Audit and Finance Committee of the Board of Directors, composed entirely of
independent directors, meets periodically with Management, internal audit and
the independent auditors to ensure that each is carrying out their
responsibilities. The independent auditors, internal auditors and members of
Management each have full and free access to meet privately as well as together
with the Audit and Finance Committee to discuss internal controls, accounting,
auditing or other financial matters.
The consolidated financial statements of Trustmark have been audited by KPMG
LLP, independent auditors, who were engaged to express an opinion whether the
consolidated financial statements presented in this annual report fairly
present, in all material respects, the financial position, results of operations
and cash flows of Trustmark for the periods presented.
/s/ Richard G. Hickson /s/ Zach L. Wasson
Richard G. Hickson Zach L. Wasson
Chairman and Treasurer
Chief Executive Officer
Independent Auditors' Report
The Board of Directors and Shareholders
Trustmark Corporation:
We have audited the accompanying consolidated balance sheets of Trustmark
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trustmark
Corporation and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Notes 1 and 7 to the consolidated financial statements,
effective January 1, 2002, the Corporation changed its method of accounting for
goodwill and other intangible assets.
/s/ KPMG LLP
Jackson, Mississippi
February 14, 2004
Trustmark Corporation
Consolidated Balance Sheets
($ in thousands)
December 31,
------------------------
2003 2002
---------- ----------
Assets
Cash and due from banks (noninterest-bearing) $ 333,096 $ 357,427
Federal funds sold and securities purchased
under reverse repurchase agreements 37,712 23,957
Securities available for sale (at fair value) 1,933,993 1,262,570
Securities held to maturity (fair value:
$191,146 - 2003; $578,150 - 2002) 178,450 549,197
Loans held for sale 112,560 199,680
Loans 4,920,052 4,417,686
Less allowance for loan losses 74,276 74,771
---------- ----------
Net loans 4,845,776 4,342,915
Premises and equipment, net 108,374 104,113
Intangible assets (including goodwill of
$95,877 - 2003; $48,028 - 2002) 167,505 119,643
Other assets 196,855 179,204
---------- ----------
Total Assets $7,914,321 $7,138,706
========== ==========
Liabilities
Deposits:
Noninterest-bearing $1,329,444 $1,251,240
Interest-bearing 3,760,015 3,435,056
---------- ----------
Total deposits 5,089,459 4,686,296
Federal funds purchased 253,419 319,985
Securities sold under repurchase agreements 674,716 634,993
Short-term borrowings 621,532 275,959
Long-term FHLB advances 531,035 475,000
Other liabilities 54,587 66,939
---------- ----------
Total Liabilities 7,224,748 6,459,172
Commitments and Contingencies
Shareholders' Equity Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 58,246,733 shares - 2003;
60,516,668 shares - 2002 12,136 12,609
Capital surplus 132,383 188,652
Retained earnings 548,521 470,317
Accumulated other comprehensive (loss) income,
net of tax (3,467) 7,956
---------- ----------
Total Shareholders' Equity 689,573 679,534
---------- ----------
Total Liabilities and Shareholders' Equity $7,914,321 $7,138,706
========== ==========
See notes to consolidated financial statements.
Trustmark Corporation
Consolidated Statements of Income
($ in thousands except per share data)
Years Ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Interest Income
Interest and fees on loans $285,684 $305,709 $340,809
Interest on securities:
Taxable 65,332 89,562 123,971
Tax exempt 8,035 8,867 9,463
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 287 424 921
Other interest income 50 1,390 982
-------- -------- --------
Total Interest Income 359,388 405,952 476,146
Interest Expense
Interest on deposits 59,327 79,059 126,356
Interest on federal funds purchased and securities
sold under repurchase agreements 10,255 12,652 42,390
Other interest expense 19,976 22,055 40,496
-------- -------- --------
Total Interest Expense 89,558 113,766 209,242
-------- -------- --------
Net Interest Income 269,830 292,186 266,904
Provision for loan losses 9,771 14,107 13,200
-------- -------- --------
Net Interest Income After Provision
for Loan Losses 260,059 278,079 253,704
Noninterest Income
Service charges on deposit accounts 54,351 50,056 46,769
Other account charges and fees 28,101 28,371 29,473
Insurance commissions 20,567 17,837 11,635
Mortgage servicing fees 16,826 17,247 16,920
Trust service income 9,834 9,962 9,423
Securities gains 12,231 13,568 2,448
Gains on sales of loans 15,938 9,353 9,163
Other income (305) (4,524) 6,159
-------- -------- --------
Total Noninterest Income 157,543 141,870 131,990
Noninterest Expense
Salaries and employee benefits 126,533 119,801 110,540
Net occupancy - premises 12,817 12,088 11,576
Equipment expense 14,989 15,085 15,651
Services and fees 31,283 32,414 30,098
Amortization/impairment of intangible assets 20,874 24,275 14,129
Other expense 29,624 30,178 32,273
--------- -------- --------
Total Noninterest Expense 236,120 233,841 214,267
--------- -------- --------
Income Before Income Taxes 181,482 186,108 171,427
Income taxes 62,952 64,968 60,146
-------- -------- --------
Net Income $118,530 $121,140 $111,281
======== ======== ========
Earnings Per Share
Basic $ 2.01 $ 1.95 $ 1.72
======== ======== ========
Diluted $ 2.00 $ 1.94 $ 1.72
======== ======== ========
See notes to consolidated financial statements.
Trustmark Corporation
Consolidated Statements of Changes in Shareholders' Equity
($ in thousands except per share data)
Common Stock Accumulated
-------------------- Other
Shares Capital Retained Comprehensive
Outstanding Amount Surplus Earnings (Loss) Income Total
----------- ------- -------- -------- ------------- --------
Balance, January 1, 2001 64,755,022 $13,491 $ 94,229 $512,107 $ 9,814 $629,641
Comprehensive income:
Net income per consolidated statements of income - - - 111,281 - 111,281
Net change in fair value of
securities available for sale, net of tax - - - - 7,610 7,610
Net change in fair value of cash flow
hedges, net of tax - - - - 1,277 1,277
-------
Comprehensive income - - - - - 120,168
Cash dividends paid ($0.56 per share) - - - (36,001) - (36,001)
Common stock issued in business combination 2,405,630 501 45,521 - - 46,022
Repurchase and retirement of common stock (3,454,981) (719) (73,667) - - (74,386)
----------- ------- -------- -------- ------------- --------
Balance, December 31, 2001 63,705,671 13,273 66,083 587,387 18,701 685,444
Comprehensive income:
Net income per consolidated statements of income - - - 121,140 - 121,140
Net change in fair value of
securities available for sale, net of tax - - - - (3,845) (3,845)
Net change in fair value of cash flow
hedges, net of tax - - - - (3,771) (3,771)
Net change in unfunded accumulated benefit
obligation, net of tax - - - - (3,129) (3,129)
--------
Comprehensive income - - - - - 110,395
Cash dividends paid ($0.62 per share) - - - (38,210) - (38,210)
Common stock issued, long-term incentive plan 65,712 14 668 - - 682
Repurchase and retirement of common stock (3,254,715) (678) (78,099) - - (78,777)
Transfer to capital surplus - - 200,000 (200,000) - -
----------- ------- -------- -------- ------------- --------
Balance, December 31, 2002 60,516,668 12,609 188,652 470,317 7,956 679,534
Comprehensive income:
Net income per consolidated statements of income - - - 118,530 - 118,530
Net change in fair value of
securities available for sale, net of tax - - - - (17,518) (17,518)
Net change in fair value of cash flow
hedges, net of tax - - - - 2,966 2,966
Net change in unfunded accumulated benefit
obligation, net of tax - - - - 3,129 3,129
--------
Comprehensive income - - - - - 107,107
Cash dividends paid ($0.69 per share) - - - (40,326) - (40,326)
Common stock issued, long-term incentive plan 105,916 22 2,185 - - 2,207
Compensation expense, long-term incentive plan - - 406 - - 406
Repurchase and retirement of common stock (2,375,851) (495) (58,860) - - (59,355)
----------- ------- -------- -------- ------------- --------
Balance, December 31, 2003 58,246,733 $12,136 $132,383 $548,521 $ (3,467) $689,573
=========== ======= ======== ======== ============= ========
See notes to consolidated financial statements.
Trustmark Corporation
Consolidated Statements of Cash Flows
($ in thousands)
Years Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Operating Activities
Net income $ 118,530 $ 121,140 $ 111,281
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 9,771 14,107 13,200
Depreciation and amortization/impairment 33,056 36,871 26,864
Net amortization of securities 19,570 1,062 785
Securities gains (12,231) (13,568) (2,448)
Gains on sales of loans (15,938) (9,353) (9,163)
Deferred income tax provision (benefit) 3,238 (5,104) 3,111
Proceeds from sale of loans held for sale 1,494,278 1,059,396 1,235,114
Purchases and originations of loans held for sale (1,407,158) (1,138,231) (1,099,548)
Net increase in mortgage servicing rights (19,806) (16,859) (25,037)
Net (increase) decrease in other assets (21,203) 22,972 (8,902)
Net decrease in other liabilities (2,225) (7,506) (5,916)
Other operating activities, net (100) 3,726 3,522
---------- ---------- ----------
Net cash provided by operating activities 199,782 68,653 242,863
Investing Activities
Proceeds from calls and maturities of securities held to maturity 452,331 267,055 216,611
Proceeds from calls and maturities of securities available for sale 443,375 440,840 573,765
Proceeds from sales of securities available for sale 267,895 315,597 14,700
Purchases of securities held to maturity (3,978) (21,887) -
Purchases of securities available for sale (1,496,002) (956,684) (407,796)
Net (increase) decrease in federal funds sold and securities
purchased under reverse repurchase agreements (13,755) 113,564 (31,368)
Net increase in loans (274,279) (19,682) (67,359)
Purchases of premises and equipment (7,850) (17,340) (12,892)
Proceeds from sales of premises and equipment 1,306 738 123
Proceeds from sales of other real estate 6,010 4,223 3,676
Net cash paid in business combinations (69,802) (7,799) (62,739)
---------- ---------- ----------
Net cash (used in) provided by investing activities (694,749) 118,625 226,721
Financing Activities
Net increase in deposits 193,345 72,931 7,781
Net decrease in federal funds purchased and securities sold
under repurchase agreements (26,843) (82,528) (229,657)
Net increase (decrease) in other borrowings 345,573 (282,728) (332,193)
Proceeds from long-term FHLB advances 56,035 250,000 225,000
Cash dividends (40,326) (38,210) (36,001)
Proceeds from exercise of stock options 2,207 682 -
Repurchase and retirement of common stock (59,355) (78,777) (74,386)
---------- ---------- ----------
Net cash provided by (used in) financing activities 470,636 (158,630) (439,456)
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents (24,331) 28,648 30,128
Cash and cash equivalents at beginning of year 357,427 328,779 298,651
---------- ---------- ----------
Cash and cash equivalents at end of year $ 333,096 $ 357,427 $ 328,779
========== ========== ==========
See notes to consolidated financial statements.
NOTE 1 - BUSINESS, BASIS OF FINANCIAL STATEMENT PRESENTATION, SIGNIFICANT
ACCOUNTING POLICIES AND RECENT PRONOUNCEMENTS
BUSINESS
Trustmark Corporation (Trustmark) is a multi - bank holding company
headquartered in Jackson, Mississippi. Through its subsidiaries, Trustmark
operates as a financial services organization providing banking and financial
solutions to corporate institutions and individual customers through over 140
offices in Mississippi, Tennessee and Florida.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Trustmark and its
wholly-owned subsidiaries, Trustmark National Bank (TNB) and Somerville Bank &
Trust Company. All intercompany accounts and transactions have been eliminated
in consolidation.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
Management is required to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the valuation of mortgage
servicing rights.
Certain reclassifications have been made to prior periods to conform to the
current year presentation.
SIGNIFICANT ACCOUNTING POLICIES
Trading Account Securities
Trading account securities are purchased and held for resale in anticipation of
short-term market movements. Trading account securities typically consist of
debt securities and are carried at fair value. Gains and losses, both realized
and unrealized, are classified as other income.
Securities Available for Sale and Held to Maturity
Management determines the appropriate classification of securities at the time
of purchase. Debt securities are classified as held to maturity when Trustmark
has the intent and ability to hold the security to maturity. Securities held to
maturity are stated at amortized cost.
Securities not classified as held to maturity or trading are classified as
available for sale and are stated at fair value. Unrealized gains and losses,
net of tax, on these securities are recorded in shareholders' equity as
accumulated other comprehensive (loss) income. Securities classified as
available for sale include securities that may be used as part of the
asset/liability strategy or that may be sold in response to interest rate
movements, liquidity needs, changes in prepayment expectations or for other
business purposes.
The amortized cost of securities available for sale and held to maturity is
adjusted for amortization of premiums and accretion of discounts to maturity,
determined using the interest method. Such amortization and accretion is
included in interest income on securities. The specific identification method is
used to determine realized gains and losses on sales of securities, which are
reported as securities gains (losses) in noninterest income.
Loans Held for Sale
Mortgage loans held for sale in the secondary market that are hedged using fair
value hedges are carried at estimated fair value on an aggregate basis.
Substantially all mortgage loans held for sale are hedged. These loans are
primarily first-lien mortgage loans originated or purchased by Trustmark.
Adjustments to reflect market value and realized gains and losses upon ultimate
sale of the loans are classified as other income. Deferred loan fees and costs
are reflected in the basis of loans held for sale, and as such, impacts the
resulting gain or loss when loans are sold.
Loans
Loans are stated at the amount of unpaid principal, adjusted for the net amount
of direct costs and nonrefundable loan fees associated with lending. The net
amount of nonrefundable loan origination fees and direct costs associated with
the lending process, including commitment fees, is deferred and accreted to
interest income over the lives of the loans using a method that approximates the
interest method. Interest on loans is accrued and recorded as interest income
based on the outstanding principal balance.
A loan is classified as nonaccrual and the accrual of interest on such loan is
discontinued when the contractual payment of principal or interest becomes 90
days past due or if Management has serious doubts about further collectibility
of principal or interest, even though the loan is currently performing. A loan
may remain on accrual status if it is in the process of collection and is either
guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid
interest is reversed against interest income. Interest received on nonaccrual
loans is applied against principal. Loans are restored to accrual status when
the obligation is brought current or has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
A loan is considered impaired when, based on current information and events, it
is probable that Trustmark will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Loans classified as nonaccrual, excluding residential mortgages,
consumer and other homogeneous loans, are considered impaired loans. Specific
allowances for impaired loans are based on comparisons of the recorded carrying
values of the loans to the present value of these loans' estimated cash flows at
each loan's original effective interest rate, the fair value of the collateral
or the loans' observable market prices. The policy for recognizing income on
impaired loans is consistent with the nonaccrual policy.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for estimated
loan losses charged against earnings. Loans deemed to be uncollectible are
charged against the allowance for loan losses, and subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb estimated probable loan losses. Management's periodic
evaluation of the adequacy of the allowance is based on identified loan
impairments, Trustmark's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is inherently subjective,
as it requires material estimates, including the amounts and timing of future
cash flows expected to be received on impaired loans that may be susceptible to
significant change.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to expense over the estimated useful lives
of the assets, which are up to thirty-nine years for buildings and three to
seven years for furniture and equipment. Leasehold improvements are amortized
over the terms of the respective leases, or the estimated useful lives of the
improvements, whichever is shorter. Depreciation and amortization expenses are
computed using both straight-line and accelerated methods. Trustmark continually
evaluates whether events and circumstances have occurred that indicate that such
long-lived assets have been impaired. Measurement of any impairment of such
long-lived assets is based on those assets' fair values. There were no
impairment losses on premises and equipment recorded during 2003, 2002 or 2001.
Intangible Assets
Intangible assets consist of goodwill, identifiable intangible assets and
mortgage servicing rights. Effective January 1, 2002, Trustmark adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets." This statement requires that goodwill no
longer be amortized, while amortizing other identifiable intangibles over their
respective useful lives to their estimated residual values and measuring these
assets for possible impairment. Included in Note 7 - "Intangible Assets" are the
specific carrying values, amortization and pro forma disclosures as required by
SFAS No. 142.
Goodwill, which represents the excess of cost over the fair value of the net
assets of an acquired business, was amortized on a straight-line method up to
twenty years prior to the adoption of SFAS No. 142. Effective January 1, 2002,
goodwill is no longer amortized but tested for impairment annually.
Identifiable intangible assets, comprised primarily of core deposit intangibles
and insurance customer relationship intangibles, represent the net present value
of the future economic benefits related to the use of an acquired deposit and
insurance base. These assets are being amortized on a straight-line method up to
fifteen years. The results of straight-line amortization are not materially
different from an accelerated method. In addition, during the third quarter of
2003, Trustmark purchased a banking charter for $1.0 million in order to
facilitate its entry into the state of Florida. This identifiable intangible
asset is being amortized over 20 years.
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. Mortgage
servicing rights are amortized over the estimated period of the related net
servicing income.
Impairment of goodwill, core deposit intangibles and insurance customer
relationship intangibles are evaluated annually or whenever events or changes in
circumstances indicate that the carrying amount should be assessed. 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
and reduced income before income taxes during 2003 by approximately $2.7 million
($1.7 million after tax or $0.03 per share).
Other Real Estate Owned
Other real estate owned includes assets that have been acquired in satisfaction
of debt through foreclosure. Other real estate owned is reported in other assets
and is recorded at the lower of cost or estimated fair value less the estimated
cost of disposition. Valuation adjustments required at foreclosure are charged
to the allowance for loan losses. Subsequent to foreclosure, losses on the
periodic revaluation of the property are charged to current period earnings as
other expense. Costs of operating and maintaining the properties, net of related
income and gains (losses) on their disposition, are charged to other expense as
incurred. Improvements made to properties are capitalized if the expenditures
are expected to be recovered upon the sale of the property.
Derivative Financial Instruments
Trustmark utilizes various derivative financial instruments as part of its risk
management strategy. Trustmark is also required to recognize certain contracts
and commitments as a derivative when the characteristics of those contracts and
commitments meet the definition of a derivative. Trustmark's derivative
financial instruments consist of mortgage related instruments, interest rate
swaps and interest rate floors/caps.
Under the guidelines of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended, all derivative instruments are required to be
carried at fair value on the balance sheet. SFAS No. 133 also provides special
hedge accounting provisions. Derivative instruments designated in a hedge
relationship to mitigate exposure to changes in the fair value of an asset,
liability, or firm commitment attributable to a particular risk, such as
interest rate risk, are considered fair value hedges under SFAS No. 133.
Derivative instruments designated in a hedge relationship to mitigate exposure
to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges.
Fair value hedges are accounted for by recording the fair value of the
derivative instrument and the fair value related to the risk being hedged on the
hedged asset or liability on the balance sheet with corresponding offsets
recorded in other income. The adjustment to the hedged asset or liability is
included in the basis of the hedged item, while the fair value of the derivative
is recorded as a freestanding asset or liability.
Cash flow hedges are accounted for by recording the fair value of the derivative
instrument on the balance sheet as either a freestanding asset or liability,
with a corresponding offset recorded in other comprehensive (loss) income within
shareholders' equity, net of tax. Amounts are reclassified from other
comprehensive (loss) income to the income statement in the period the hedged
forecasted transaction affects net income.
Under both the fair value and cash flow hedge methods, derivative gains and
losses not effective in hedging the change in fair value or expected cash flows
of the hedged item are recognized immediately in other income.
Income Taxes
Trustmark accounts for deferred income taxes using the liability method.
Deferred tax assets and liabilities are based on temporary differences between
the financial statement carrying amounts and tax basis of Trustmark's assets and
liabilities. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled.
Stock - Based Compensation
Effective January 1, 2003, Trustmark adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" prospectively to all awards granted, modified or settled after
January 1, 2003. Under the provisions of this statement, compensation expense is
recognized by the straight line method for grants issued after January 1, 2003,
utilizing the fair value of the grants over the vesting period. This change did
not have a material impact on Trustmark's consolidated financial statements.
Trustmark estimates the fair value of each option granted using the
Black-Scholes option-pricing model. 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. 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):
2003 2002 2001
-------- -------- --------
Net income,
as reported $118,530 $121,140 $111,281
Add: Total stock-based employee compensation
expense included in reported net income,
net of related tax effects 256 - -
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (1,344) (1,530) (1,315)
-------- -------- --------
Pro forma net income $117,442 $119,610 $109,966
======== ======== ========
Earnings per share:
As reported
Basic $ 2.01 $ 1.95 $ 1.72
Diluted 2.00 1.94 1.72
Pro forma
Basic $ 1.99 $ 1.92 $ 1.70
Diluted 1.98 1.92 1.70
The following table reflects the fair value of stock options at their grant date
and the weighted average assumptions which were utilized in the Black-Scholes
option-pricing model.
2003 2002 2001
-------- -------- --------
Fair value of options $ 6.45 $ 8.51 $ 7.54
Risk-free investment rate 4.01% 5.21% 5.24%
Expected volatility 24.71% 27.04% 30.60%
Expected dividend yield 2.72% 2.40% 2.63%
Expected life (in years) 10 10 10
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks. Trustmark paid income taxes approximating $59.1
million in 2003, $70.4 million in 2002 and $55.6 million in 2001. Interest paid
on deposit liabilities and other borrowings approximated $91.1 million in 2003,
$119.2 million in 2002 and $222.9 million in 2001. For the years ended December
31, 2003, 2002 and 2001, noncash transfers from loans to foreclosed properties
were $5.3 million, $6.8 million and $5.2 million, respectively. Assets acquired
during 2003 as a result of business combinations totaled $233 million, while
liabilities assumed totaled $209 million. Assets acquired during 2001 as a
result of business combinations totaled $671 million, while liabilities assumed
totaled $573 million. During 2003, $50 million of long-term FHLB advances were
transferred to short-term borrowings compared with $100 million in 2002.
Per Share Data
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average shares of common stock outstanding. Diluted EPS is computed by
dividing net income by the weighted average shares of common stock outstanding,
adjusted for the effect of potentially dilutive stock options outstanding during
the period. The following table reflects weighted average shares used to
calculate basic and diluted EPS for the periods presented (in thousands):
Years Ended December 31,
------------------------
2003 2002 2001
------ ------ ------
Basic shares 59,009 62,251 64,755
Dilutive shares (due to stock options) 235 165 122
------ ------ ------
Diluted shares 59,244 62,416 64,877
====== ====== ======
RECENT PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (as
revised). This interpretation addresses consolidation by business enterprises of
variable interest entities, which have one or more of the following
characteristics: 1) the equity investment at risk is not sufficient to permit
the entity to finance its activities without additional subordinated financial
support provided by any parties including the equity holders; 2) the equity
investors lack one or more of the essential characteristics of a controlling
financial interest and 3) the equity investors have voting rights that are not
proportionate to their economic interests, and the activities of the entity
involve or are conducted on behalf of an investor with a disproportionately
small voting interest. Application of this interpretation is required in
financial statements of public entities that have interests in variable interest
entities or potential variable interest entities for periods ending after
December 15, 2003. Currently, Trustmark does not have any interests in variable
interest entities as defined by this interpretation.
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.
In May 2003, the 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 the following 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. Currently, Trustmark does not have any financial
instruments within the scope of this statement.
NOTE 2 - BUSINESS COMBINATIONS
On December 9, 2003, Trustmark and Allied Houston Bank, Houston, Texas,
announced the signing of a definitive Branch Purchase and Assumption Agreement
pursuant to which Trustmark National Bank will acquire five branches of Allied
Houston Bank serving the greater Houston market for a $10 million deposit
premium. The Agreement contemplates the assumption of selected deposit accounts
of approximately $160 million, the purchase of selected loan accounts of
approximately $158 million and the operation of five Allied Houston Bank branch
locations. At November 30, 2003, Allied Houston Bank deposits and loans totaled
approximately $199 million and $178 million, respectively. The proposed
transaction, which is subject to the approval of regulatory authorities and
Allied Houston shareholders, is expected to close during the first quarter of
2004.
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.
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. 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.
On December 14, 2001, Nashoba Bancshares, Inc. (Nashoba) in Germantown,
Tennessee, was merged with Trustmark in a business combination accounted for by
the purchase method of accounting. Nashoba was the holding company for Nashoba
Bank, and at the merger date, Nashoba had $10 million in securities, $147
million in total loans, $163 million in total assets and $132 million in total
deposits. The shareholders of Nashoba received $28 million in cash in connection
with the merger. Excess cost over tangible net assets acquired totaled $17
million, of which $3 million and $14 million have been allocated to core
deposits and goodwill, respectively.
On April 6, 2001, Barret Bancorp, Inc. (Barret) in Barretville, Tennessee, was
merged with Trustmark in a business combination accounted for by the purchase
method of accounting. Barret was the holding company for Peoples Bank in
Barretville, Tennessee, and Somerville Bank & Trust Company in Somerville,
Tennessee. At the merger date, Barret had $104 million in securities, $307
million in total loans, $508 million in total assets and $414 million in total
deposits. The shareholders of Barret received approximately 2.4 million shares
of Trustmark's common stock along with $51 million in cash. Excess cost over
tangible net assets acquired totaled $27 million, of which $11 million and $16
million have been allocated to core deposits and goodwill, respectively.
Trustmark's financial statements include the results of operations for the above
purchase business combinations from the respective merger dates. The pro forma
impact of these acquisitions on Trustmark's results of operations is immaterial.
NOTE 3 - CASH AND DUE FROM BANKS
Trustmark is required to maintain average reserve balances with the Federal
Reserve Bank based on a percentage of deposits. The average amounts of those
reserves for the years ended December 31, 2003 and 2002, were $36.8 million and
$15.2 million, respectively.
NOTE 4 - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
A summary of the amortized cost and estimated fair value of securities available
for sale and held to maturity at December 31, 2003 and 2002, follows ($ in
thousands):
Securities Available for Sale Securities Held to Maturity
---------------------------------------------- --------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value Cost Gains (Losses) Value
---------- ---------- ---------- ---------- --------- ---------- ---------- ---------
2003
- ----
U.S. Treasury and other U.S.
Government agencies $ 301,857 $ 1,033 $ (3,858) $ 299,032 $ - $ - $ - $ -
Obligations of states and
political subdivisions 72,243 4,439 (6) 76,676 142,169 12,374 (2) 154,541
Mortgage-backed securities 1,382,136 6,143 (14,111) 1,374,168 36,181 369 (45) 36,505
Corporate debt securities 107,418 448 (753) 107,113 - - - -
Other securities 75,955 1,049 - 77,004 100 - - 100
---------- ---------- ---------- ---------- --------- ---------- ---------- ---------
Total $1,939,609 $ 13,112 $ (18,728) $1,933,993 $ 178,450 $ 12,743 $ (47) $ 191,146
========== ========== ========== ========== ========= ========== ========== =========
2002
- ----
U.S. Treasury and other U.S.
Government agencies $ 182,219 $ 9,960 $ (125) $ 192,054 $ - $ - $ - $ -
Obligations of states and
political subdivisions 71,544 5,458 - 77,002 153,707 13,662 - 167,369
Mortgage-backed securities 937,753 9,082 (1,620) 945,215 395,390 15,379 (88) 410,681
Other securities 48,299 - - 48,299 100 - - 100
---------- ---------- ---------- ---------- --------- ---------- ---------- ---------
Total $1,239,815 $ 24,500 $ (1,745) $1,262,570 $ 549,197 $ 29,041 $ (88) $ 578,150
========== ========== ========== ========== ========= ========== ========== =========
Temporarily Impaired Securities
The primary components that determine a security's fair value are its coupon
rate, maturity and credit characteristics. When the fair value of a security
falls below amortized cost it becomes temporarily impaired with an unrealized
loss. The table below ($ in thousands) includes securities with unrealized
losses at December 31, 2003.
Held Less than 12 Months Held 12 Months or More Total
------------------------ ---------------------- ----------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ---------- ---------- ---------- ---------- ----------
U.S. Treasury and other U.S.
Government agencies $ 161,295 $ 3,858 $ - $ - $ 161,295 $ 3,858
Obligations of states and
political subdivisions 2,413 8 - - 2,413 8
Mortgage-backed securities 1,132,374 14,096 1,954 60 1,134,328 14,156
Corporate debt securities 62,106 753 - - 62,106 753
Other securities - - 100 - 100 -
---------- ---------- ---------- ---------- ---------- ----------
Total $1,358,188 $ 18,715 $ 2,054 $ 60 $1,360,242 $ 18,775
========== ========== ========== ========== ========== ==========
The fair market value of all securities were impacted by an upward trend in
interest rates during the second half of 2003. Current conditions indicate that
the contractual principal value, or the expected maturity, of these securities
has not been altered to the extent that these unrealized losses are considered
anything but temporary in nature. All of the securities held with unrealized
losses that have continued for longer than twelve months are expected to mature,
at full principal value, during 2004.
Security Gains and Losses
Gross gains as a result of calls and dispositions of securities available for
sale were $12.2 million in 2003, $13.6 million in 2002 and $1.5 million in 2001.
During 2003, gross losses on calls and dispositions of these securities were $61
thousand, while there were none in 2002 and $28 thousand realized in 2001.
During 2003, 2002 and 2001, there were no sales of securities held to maturity.
Gross gains of $75 thousand, $7 thousand and $968 thousand were realized on
calls of these securities during 2003, 2002 and 2001, respectively.
Securities Pledged
Securities with a carrying value of $1.7 billion and $1.3 billion at December
31, 2003 and 2002, respectively, were pledged to collateralize public deposits
and securities sold under agreements to repurchase, and for other purposes as
required or permitted by law.
Contractual Maturities
The amortized cost and estimated fair value of securities available for sale and
held to maturity at December 31, 2003, by contractual maturity, are shown below
($ in thousands). Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Securities Securities
Available for Sale Held to Maturity
----------------------- -----------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
Due in one year or less $ 10,061 $ 10,243 $ 8,929 $ 9,188
Due after one year through five years 420,963 421,961 44,306 48,072
Due after five years through ten years 95,225 95,258 52,316 56,964
Due after ten years 31,224 32,363 36,718 40,417
---------- ---------- ---------- ----------
557,473 559,825 142,269 154,641
Mortgage-backed securities 1,382,136 1,374,168 36,181 36,505
---------- ---------- ---------- ----------
Total $1,939,609 $1,933,993 $ 178,450 $ 191,146
========== ========== ========== ==========
NOTE 5 - LOANS
At December 31, 2003 and 2002, loans consisted of the following ($ in
thousands):
2003 2002
---------- ----------
Real estate loans:
Construction and land development $ 406,257 $ 286,500
Secured by 1-4 family residential properties 1,663,915 1,330,604
Secured by nonfarm, nonresidential properties 858,708 811,289
Other 156,524 112,923
Loans to finance agricultural production 30,815 37,452
Commercial and industrial 787,094 776,510
Consumer 787,316 833,384
Obligations of states and political subdivisions 173,296 162,644
Other loans 56,127 66,380
---------- ----------
Loans 4,920,052 4,417,686
Less allowance for loan losses 74,276 74,771
---------- ----------
Net loans $4,845,776 $4,342,915
========== ==========
Trustmark does not have any loan concentrations other than those reflected in
the preceding table which exceed 10% of total loans. At December 31, 2003,
Trustmark's geographic loan distribution was concentrated primarily in its
Mississippi, Tennessee and Florida markets.
Changes in the allowance for loan losses were as follows ($ in thousands):
2003 2002 2001
------- ------- -------
Balance at January 1 $74,771 $75,534 $65,850
Provision charged to expense 9,771 14,107 13,200
Loans charged off (19,208) (24,035) (22,698)
Recoveries 8,942 9,165 7,604
------- ------- -------
Net charge-offs (10,266) (14,870) (15,094)
Allowance applicable to loans
of acquired banks - - 11,578
------- ------- -------
Balance at December 31 $74,276 $74,771 $75,534
======= ======= =======
At December 31, 2003 and 2002, the carrying amounts of nonaccrual loans were
$23.9 million and $31.6 million, respectively. Included in these nonaccrual
loans at December 31, 2003 and 2002, are loans that are considered to be
impaired, which totaled $16.5 and $24.2 million, respectively. At December 31,
2003, the total allowance for loan losses related to impaired loans was $4.9
million compared with $6.8 million at December 31, 2002. The average carrying
amounts of impaired loans during 2003, 2002 and 2001 were $21.3 million, $29.9
million and $22.7 million, respectively. No material amounts of interest income
were recognized on impaired loans or nonaccrual loans for each of the years in
the three-year period ended December 31, 2003.
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 collectability at the time of the transaction. At December 31, 2003 and
2002, total loans to these persons were $80.5 million and $62.2 million,
respectively. During 2003, $772.6 million of new loan advances were made while
repayments were $754.3 million. No loans were reclassified as a result of
directors' retirements or changes in position of executive officers during the
year.
NOTE 6 - PREMISES AND EQUIPMENT
At December 31, 2003 and 2002, premises and equipment are summarized as follows
($ in thousands):
2003 2002
-------- --------
Land $ 24,725 $ 22,059
Buildings and leasehold improvements 111,037 105,422
Furniture and equipment 103,983 108,130
-------- --------
Total cost of premises and equipment 239,745 235,611
Less accumulated depreciation and amortization 131,371 131,498
-------- --------
Premises and equipment, net $108,374 $104,113
======== ========
NOTE 7 - INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill (all within the Consumer Division
segment) for the years ended December 31, 2003, 2002 and 2001, are as follows ($
in thousands):
2003 2002 2001
------- ------- -------
Balance as of January 1 $48,028 $41,004 $11,913
Additions from business combinations 47,849 6,638 30,492
Purchase accounting adjustments - 386 (69)
Amortization - - (1,332)
------- ------- -------
Balance as of December 31 $95,877 $48,028 $41,004
======= ======= =======
Effective January 1, 2003, Trustmark changed the composition of its reportable
segments and as a result, the Consumer Division segment now contains all
goodwill reportable by Trustmark. Within this segment, the carrying amount by
reporting unit at December 31, 2003, includes Retail Banking ($74.0 million),
Bottrell Insurance Agency ($17.5 million) and Somerville Bank and Trust Company
($4.4 million). Trustmark performed an impairment test on its goodwill assets
during 2003 and 2002 which indicated that no impairment charge was required.
The following table sets forth net income and earnings per share excluding
goodwill amortization for the years ended December 31, 2003, 2002 and 2001 ($ in
thousands, except per share data):
2003 2002 2001
-------- -------- --------
Net income as reported $118,530 $121,140 $111,281
Goodwill amortization, net of tax - - 866
-------- -------- --------
Pro forma net income $118,530 $121,140 $112,147
======== ======== ========
Earnings per share:
As reported
Basic $ 2.01 $ 1.95 $ 1.72
Diluted 2.00 1.94 1.72
Pro forma
Basic $ 2.01 $ 1.95 $ 1.73
Diluted 2.00 1.94 1.73
Other Identifiable Intangible Assets
At December 31, 2003 and 2002, other identifiable intangible assets consisted of
the following ($ in thousands):
2003 2002
---------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Core deposit intangibles $ 40,225 $ 21,665 $ 38,549 $ 19,261
Insurance intangibles 3,180 827 3,180 276
Banking charter 1,025 17 - -
-------------- ------------ -------------- -----------
Total amortizable 44,430 22,509 41,729 19,537
Pension plan intangible - - 596 -
-------------- ------------ -------------- -----------
Total $ 44,430 $ 22,509 $ $42,325 $ 19,537
============== ============ ============== ===========
During 2003, Trustmark acquired $1.7 million of core deposit intangible assets
resulting from the Emerald Coast branch purchase, which have a weighted average
amortization period of 10 years. In order to facilitate its entry into Florida,
Trustmark acquired an existing Florida state bank charter for $1.0 million from
an unrelated party. This bank charter has an amortization period of 20 years.
During 2002, Trustmark recorded an intangible asset related to the unrecognized
prior service cost of the pension plan in the amount of $596 thousand. During
2003, this unamortized asset was reviewed and subsequently reversed based on the
value of the pension plan's assets compared with its accumulated benefit
obligation. During 2003 and 2002, Trustmark recorded $3.0 million and $3.2
million, respectively, of amortization of other identifiable intangible assets.
Trustmark estimates that amortization expense for intangible assets will be $2.1
million in 2004 and $1.9 million in 2005, 2006, 2007 and 2008.
Mortgage Servicing Rights
The changes in the carrying amount of mortgage servicing rights for the years
ended December 31, 2003, 2002 and 2001, are as follows ($ in thousands):
Gross Net
Carrying Valuation Carrying
Amount Allowance Amount
-------- --------- --------
Balance as of January 1, 2001 $ 43,153 $ - $ 43,153
Additions 20,523 - 20,523
Amortization / impairment (8,205) (2,000) (10,205)
-------- --------- --------
Balance as of December 31, 2001 55,471 (2,000) 53,471
Additions 17,376 - 17,376
Amortization / impairment (11,540) (10,480) (22,020)
-------- --------- --------
Balance as of December 31, 2002 61,307 (12,480) 48,827
Additions 18,782 - 18,782
Amortization / impairment (14,515) (3,387) (17,902)
-------- --------- --------
Balance as of December 31, 2003 $ 65,574 $ (15,867) $ 49,707
======== ========= ========
NOTE 8 - DEPOSITS
At December 31, 2003 and 2002, deposits consisted of the following ($ in
thousands):
2003 2002
---------- ----------
DDA, NOW, MMDA $2,543,694 $2,193,422
Savings 828,256 744,386
Time 1,717,509 1,748,488
---------- ----------
Total deposits $5,089,459 $4,686,296
========== ==========
The aggregate amount of time deposits of $100,000 or more at December 31, 2003,
was $454.3 million.
The maturities of interest-bearing deposits at December 31, 2003, are as follows
($ in thousands):
2004 $1,221,380
2005 332,726
2006 89,601
2007 47,246
2008 and thereafter 26,556
----------
Total time deposits 1,717,509
Interest-bearing deposits with no stated maturity 2,042,506
----------
Total interest-bearing deposits $3,760,015
==========
NOTE 9 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At December 31, 2003 and 2002, the carrying values of securities sold under
repurchase agreements, by contractual maturity, are as follows ($ in thousands):
2003 2002
-------- --------
Demand/In one day $472,040 $554,253
Term up to 30 days 45,006 27,741
Term of 30 to 90 days 93,198 10,999
Term of 90 days and over 64,472 42,000
-------- --------
Total $674,716 $634,993
======== ========
The weighted average interest rates for these repurchase agreements were 0.89%
and 1.12% at December 31, 2003 and 2002, respectively. Specific U.S. Treasury
and other U.S. Government agencies securities with carrying values of $916
million at December 31, 2003, and $784 million at December 31, 2002,
collateralize the repurchase agreements. The fair value of this collateral
approximated $913 million at December 31, 2003, and $800 million at December 31,
2002.
NOTE 10 - BORROWINGS
Short-Term Borrowings
At December 31, 2003 and 2002, short-term borrowings consisted of the following
($ in thousands):
2003 2002
-------- --------
Term federal funds purchased $252,000 $100,000
FHLB advances 300,000 107,710
Treasury tax and loan note option account 46,687 45,985
Other 22,845 22,264
-------- --------
Total $621,532 $275,959
======== ========
Trustmark has received advances from the FHLB, which are classified as
short-term and are collateralized by a blanket lien on Trustmark's
single-family, multi-family, home equity and commercial mortgage loans. Four of
these advances have fixed rates and range in size from $25 million to $100
million with interest rates from 1.06% to 5.30% and maturities from January to
September 2004. An additional floating rate advance of $100 million, which
matures in August 2004, currently has an interest rate of 1.14%, which is reset
quarterly based on the three-month LIBOR.
The treasury tax and loan note option account, which is collateralized by a
pledge of U.S. Treasury, U.S. Government agencies and state, county and
municipal securities as required by the Department of the Treasury, is an
open-ended interest-bearing note maintained at the Federal Reserve Bank.
Interest is charged at the weekly Federal Funds rate minus 25 basis points.
Long-Term Federal Home Loan Bank Advances
Trustmark has received noncallable advances totaling $531 million at December
31, 2003, and $475 million at December 31, 2002, which are collateralized by a
blanket lien on Trustmark's single-family, multi-family, home equity and
commercial mortgage loans. Advances totaling $450 million mature in 2005, $75.2
million in 2006, $4.3 million in 2008 and $1.5 million in 2009. These advances
have interest rates ranging from 1.11% to 6.80%. Interest rates on two advances
are reset quarterly based on the three-month LIBOR. At December 31, 2003,
Trustmark had $442.6 million available in unused FHLB advances.
Line of Credit
In June 2002, Trustmark entered into a two-year line of credit arrangement
enabling borrowings up to $50 million, subject to certain financial covenants.
At December 31, 2003, Trustmark had not utilized this line of credit.
NOTE 11 - INCOME TAXES
The income tax provision included in the statements of income is as follows ($
in thousands):
2003 2002 2001
------- ------- -------
Current
Federal $51,802 $60,969 $49,992
State 7,912 9,103 7,043
Deferred
Federal 2,825 (4,364) 2,782
State 413 (740) 329
------- ------- -------
Income tax provision $62,952 $64,968 $60,146
======= ======= =======
The income tax provision differs from the amount computed by applying the
statutory federal income tax rate of 35% to income before income taxes as a
result of the following ($ in thousands):
2003 2002 2001
------- ------- -------
Income tax computed at statutory tax rate $63,519 $65,138 $59,999
Tax exempt interest (5,217) (5,753) (6,384)
Nondeductible interest expense 246 357 703
State income taxes, net 5,410 5,436 4,792
Other (1,006) (210) 1,036
------- ------- -------
Income tax provision $62,952 $64,968 $60,146
======= ======= =======
Temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities give rise to the following net deferred tax
assets at December 31, 2003 and 2002, which are included in other assets ($ in
thousands):
2003 2002
------- -------
Deferred tax assets
Allowance for loan losses $28,336 $28,467
Deferred compensation 7,449 6,860
Unrealized losses on available for sale securities 2,148 -
Interest rate contracts 1,832 1,642
Pension plan - 814
Other 6,117 4,194
------- -------
Gross deferred tax asset 45,882 41,977
------- -------
Deferred tax liabilities
Premises and equipment 6,291 4,965
Goodwill and other identifiable intangibles 5,978 5,045
Pension plan 3,325 -
Securities 3,077 1,100
Mortgage servicing rights 2,431 890
Unrealized gains on available for sale securities - 8,704
Other 1,477 861
------- -------
Gross deferred tax liability 22,579 21,565
------- -------
Net deferred tax asset $23,303 $20,412
======= =======
Trustmark has evaluated the need for a valuation allowance and, based on the
weight of the available evidence, has determined that it is more likely than not
that all deferred tax assets will be realized.
NOTE 12 - ASSOCIATE BENEFIT PLANS
Early Retirement Program
In February 2003, Trustmark announced a voluntary early retirement program for
associates ages 58 and above with ten or more years of service. This program was
accepted by 116 associates, or 4.75% of Trustmark's workforce. The cost of this
program, which is included in salaries and benefits, includes a charge of $2.9
million in salaries, $2.0 million in net periodic pension costs and $1.2 million
in other employee benefits.
Pension Plan
Trustmark maintains a defined noncontributory pension plan which covers
substantially all associates with more than one year of service. The plan
provides pension benefits that are based on the length of credited service and
final average compensation as defined in the plan. Trustmark's policy is to fund
amounts allowable for federal income tax purposes.
The following tables present information regarding the benefit obligation, plan
assets, funded status of the plan, accumulated benefit obligation and net
periodic pension costs ($ in thousands):
December 31,
-------------------
2003 2002
------- -------
Change in projected benefit obligation
Benefit obligation, beginning of year $72,229 $64,201
Service cost 2,571 2,781
Interest cost 4,569 4,862
Actuarial loss 3,947 4,706
Benefit payments (15,057) (4,580)
Prior service cost (473) 259
------- -------
Projected benefit obligation, end of year 67,786 72,229
Change in plan assets
Fair value of plan assets, beginning of year 55,233 58,751
Actual return on plan assets 7,417 (1,277)
Employer contributions 10,000 2,339
Benefit payments (15,057) (4,580)
------- -------
Fair value of plan assets, end of year 57,593 55,233
------- -------
Funded status of plan assets
Plan assets less than projected benefit obligation (10,193) (16,996)
Unrecognized prior service cost (2,498) 596
Unrecognized net loss 21,383 19,338
------- -------
Prepaid pension assets recorded in balance sheets $ 8,692 $ 2,938
======= =======
Amounts recognized in the balance sheets
Prepaid pension asset recorded in balance sheets $ 8,692 $ 2,938
Accrued minimum pension liability - (5,663)
Intangible asset - 596
Accumulated other comprehensive income - 5,067
------- -------
Prepaid pension assets recorded in balance sheets $ 8,692 $ 2,938
======= =======
Accumulated benefit obligation
Projected benefit obligation $67,786 $72,229
Accumulated benefit obligation 57,424 57,958
Fair value of plan assets 57,593 55,233
Years Ended December 31,
--------------------------
2003 2002 2001
------ ------ ------
Net periodic pension cost
Service cost - benefits earned during
the period $2,571 $2,781 $3,042
Interest cost on projected benefit obligation 4,569 4,862 4,194
Expected return on plan assets (5,514) (5,935) (5,721)
Amortization of prior service cost 242 212 262
Amortization of net obligation at transition - (213) (364)
Recognized net loss due to settlement 2,378 - -
------ ------ ------
Net periodic benefit cost $4,246 $1,707 $1,413
====== ====== ======
Weighted-average assumptions as of end of year 2003 2002 2001
------ ------ ------
Discount rate for benefit obligations 6.50% 7.00% 7.50%
Discount rate for net periodic benefit cost 7.00% 7.50% 7.75%
Expected long-term return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.00% 4.00% 4.00%
Plan Assets
Trustmark's pension plan weighted-average asset allocations at December 31, 2003
and 2002, by asset category are as follows:
2003 2002
------ ------
Fixed income securities 37.2% 40.2%
Equity mutual funds 61.7% 55.6%
Other 1.1% 4.2%
------ ------
Total 100.0% 100.0%
====== ======
The strategic objective of the plan focuses on capital growth with moderate
income. The plan is managed on a total return basis with the return objective
set as a reasonable actuarial rate of return on plan assets net of investment
management fees. Moderate risk is assumed given the average age of plan
participants and the need to meet the required rate of return. Equity and fixed
income securities are utilized to allow for capital appreciation while fully
diversifying the portfolio with more conservative fixed income investments. The
target asset allocation range for the portfolio is 0-15% Cash & Equivalents,
25-45% Fixed Income, 35-65% Domestic Equity, and 0-20% International Equity.
Changes in allocations are a result of tactical asset allocation decisions and
fall within the aforementioned percentage range for each major asset class.
Trustmark selects the expected long-term rate-of-return-on-assets assumption in
consultation with their investment advisors and actuary, and with concurrence
from their auditors. This rate is intended to reflect the average rate of
earnings expected to be earned on the funds invested or to be invested to
provide plan benefits. Historical performance is reviewed, especially with
respect to real rates of return (net of inflation), for the major asset classes
held or anticipated to be held by the trust, and for the trust itself. Undue
weight is not given to recent experience, that may not continue over the
measurement period, with higher significance placed on current forecasts of
future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not
reduced for taxes. Further, solely for this purpose, the plan is assumed to
continue in force and not terminate during the period in which assets are
invested. However, consideration is given to the potential impact of current and
future investment policy, cash flow into and out of the trust, and expenses
(both investment and non-investment) typically paid from plan assets (to the
extent such expenses are not explicitly estimated within periodic cost).
Contributions
The acceptable range of contributions to the plan is determined each year by the
plan's actuary. In 2004, Trustmark's minimum required contribution is expected
to be zero; however, Trustmark's management and Board of Directors plan to make
a contribution of up to $7 million. The actual amount of the contribution will
be determined based on the plan's funded status and return on plan assets as of
the measurement date, which is October 31st.
Estimated Future Pension Benefit Payments
The following pension plan benefit payments, which reflect expected future
service, are expected to be paid:
2004 $5,651,708
2005 5,510,722
2006 5,133,349
2007 5,513,491
2008 6,249,023
2009 - 2013 35,194,830
Post Retirement Benefits
Trustmark does not provide post-retirement or post-employment benefits to
associates at normal retirement other than pension benefits.
Defined Contribution Plan
Trustmark provides associates with a self-directed 401(k) retirement plan which
allows associates to contribute a percentage of base pay, within limits provided
by the Internal Revenue Code and accompanying regulations, into the plan.
Trustmark's contributions to this plan were $2.8 million in 2003, $3.0 million
in 2002 and $2.7 million in 2001.
Supplemental Retirement Program
Trustmark provides a deferred compensation plan covering directors, key
executives and senior officers. Participants in the deferred compensation plan
can defer a portion of their compensation for payment after retirement. Life
insurance contracts have been purchased which may be used to fund payments under
the plan. Net expenses related to this plan were $1.4 million in 2003, $761
thousand in 2002 and $1.6 million in 2001.
Long-Term Incentive Plan
Trustmark's incentive stock plan provides for the granting of incentive stock
options and nonqualified stock options. Stock options are granted at an exercise
price equal to the market value of the stock at the date of grant and are
exercisable for a period not to exceed ten years from the date of grant. The
maximum number of shares that can be granted under this plan is 7.0 million
shares. The following tables summarize Trustmark's option activities for 2003,
2002 and 2001:
2003 2002 2001
-------------------- -------------------- --------------------
Average Average Average
Option Option Option
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding, beginning of year 1,450,161 $ 21.85 1,232,100 $ 20.27 880,500 $ 19.70
Granted 371,200 24.32 392,350 25.43 371,100 21.68
Exercised (109,128) 20.97 (114,414) 17.08 (11,500) 21.67
Forfeited (102,063) 22.89 (59,875) 22.13 (8,000) 20.68
--------- --------- ---------
Outstanding, end of year 1,610,170 22.41 1,450,161 21.85 1,232,100 20.27
========= ========= =========
Exercisable, end of year 759,797 21.11 583,401 20.57 423,101 19.32
========= ========= =========
Options Outstanding Options Exercisable
- ------------------------------------------------------------- ----------------------
Weighted Weighted
Outstanding Weighted Average Average Exercisable Average
Range of December 31, Remaining Years Exercise December 31, Exercise
Exercise Prices 2003 to Expiration Price 2003 Price
- --------------- ------------ ----------------- -------- ----------- --------
$11.76 - $14.70 49,197 3.4 $ 13.53 49,197 $ 13.53
$17.64 - $20.58 258,863 6.3 18.06 178,892 18.06
$20.58 - $23.52 612,385 6.1 22.19 452,117 22.37
$23.52 - $26.46 663,225 8.8 24.77 79,591 25.46
$26.46 - $29.40 26,500 9.7 27.23 - -
--------- -------
1,610,170 7.2 22.41 759,797 21.11
========= =======
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Lending Related
Trustmark makes commitments to extend credit and issues standby and commercial
letters of credit in the normal course of business in order to fulfill the
financing needs of its customers.
Commitments to extend credit are agreements to lend money to customers pursuant
to certain specified conditions. Commitments generally have fixed expiration
dates or other termination clauses. Since many of these commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Trustmark applies the same
credit policies and standards as it does in the lending process when making
these commitments. The collateral obtained is based upon the assessed
creditworthiness of the borrower. At December 31, 2003 and 2002, Trustmark had
commitments to extend credit of $1.2 billion and $1.1 billion, respectively.
Standby and commercial letters of credit are conditional commitments issued by
Trustmark to insure the performance of a customer to a third party. 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. 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 December 31, 2003 and 2002, Trustmark's maximum exposure to credit
loss in the event of nonperformance by the other party for standby and
commercial letters of credit was $73.6 million and $70.4 million, respectively.
These amounts consist primarily of commitments with maturities of less than
three years, which have an immaterial carrying value. Trustmark holds collateral
to support standby letters of credit when deemed necessary. As of December 31,
2003, the fair value of collateral held was $22.0 million.
Lease Commitments
Trustmark currently has lease commitments for banking premises and equipment,
which expire from 2004 to 2020. These commitments contain renewal options, which
extend the base lease from 5 to 20 years. Rental expense approximated $3.9
million in 2003, $3.7 million in 2002 and $3.6 million in 2001.
At December 31, 2003, future minimum rental commitments under noncancellable
leases for banking premises and general offices and equipment are as follows ($
in thousands):
2004 $ 2,729
2005 1,750
2006 1,208
2007 973
2008 816
Thereafter 8,944
-------
Total $16,420
=======
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, that the final
resolution of pending legal proceedings will not have a material impact on
Trustmark's consolidated financial position or results of operations; however,
Management is unable to estimate a range of potential loss on these matters
because of the nature of the legal environment in states where Trustmark
conducts business.
NOTE 14 - SHAREHOLDERS' EQUITY
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 Trustmark and TNB.
Management believes, as of December 31, 2003, that Trustmark and TNB have met
all capital adequacy requirements to which they are subject. At December 31,
2003, the most recent notification from the Office of the Comptroller of the
Currency (OCC) categorized TNB as well capitalized. To be categorized as well
capitalized, TNB must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios (defined in applicable regulations) as set forth in the
table below. There are no significant conditions or events that have occurred
since the OCC's notification that Management believes have affected TNB's
present classification.
Trustmark's and TNB's actual regulatory capital amounts and ratios are presented
in the table below ($ in thousands):
Minimum Regulatory
Actual Minimum Regulatory Provision to be
Regulatory Capital Capital Required Well Capitalized
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ----- -------- ------
At December 31, 2003:
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $634,995 12.29% $413,472 8.00% - -
Trustmark National Bank 601,800 11.90% 404,683 8.00% $505,853 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $570,271 11.03% $206,736 4.00% - -
Trustmark National Bank 538,460 10.64% 202,341 4.00% $303,512 6.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $570,271 7.53% $227,050 3.00% - -
Trustmark National Bank 538,460 7.26% 222,456 3.00% $370,760 5.00%
At December 31, 2002:
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $651,612 13.99% $372,504 8.00% - -
Trustmark National Bank 632,096 13.86% 364,835 8.00% $456,043 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $593,204 12.74% $186,252 4.00% - -
Trustmark National Bank 574,910 12.61% 182,417 4.00% $273,626 6.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $593,204 8.72% $204,044 3.00% - -
Trustmark National Bank 574,910 8.64% 199,562 3.00% $332,603 5.00%
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 2.9 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 18.0 million shares for $385.0 million,
including 2.4 million shares during 2003 for $59.4 million. The current
remaining authorization is approximately 3.5 million shares.
Shelf Registration
On April 16, 2003, Trustmark filed a registration statement of 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.
Authorization of Preferred Shares
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 for
general corporate and acquisition purposes. As of December 31, 2003, no such
shares have been issued.
Dividends
Dividends paid by Trustmark are substantially funded from dividends received
from TNB. Approval by TNB's regulators is required if the total of all dividends
declared in any calendar year exceeds the total of its net income for that year
combined with its retained net income of the preceding two years. TNB will have
available in 2004 approximately $8.2 million plus its net income for that year
to pay as dividends.
Comprehensive Income
Comprehensive income is the change in equity during a period from transactions
and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners.
In addition to net income, Trustmark has identified changes related to other
nonowner transactions in the Consolidated Statements of Changes in Shareholders'
Equity. Changes in other nonowner transactions consist of changes in the fair
value of securities available for sale, cash flow hedges and a minimum pension
liability.
In the calculation of comprehensive income, certain reclassification adjustments
are made to avoid duplicating items that are displayed as part of net income and
other comprehensive income in that period or earlier periods. The following
table reflects the reclassification amounts and the related tax effects of
changes in fair value of securities available for sale, cash flow hedges and a
minimum pension liability for the years ended December 31, 2003, 2002 and 2001
($ in thousands):
Accumulated
Other
Before-Tax Tax Comprehensive
Amount Effect (Loss) Income
Accumulated other comprehensive (loss) income: ---------- ------- -------------
Balance, January 1, 2001 $ 15,925 $(6,111) $ 9,814
Net change in fair value of securities available for sale 14,772 (5,650) 9,122
Net change in fair value of cash flow hedges 2,068 (791) 1,277
Less adjustment for net gains included in net income (2,448) 936 (1,512)
---------- ------- -------------
Balance, December 31, 2001 30,317 (11,616) 18,701
Net change in fair value of securities available for sale 7,341 (2,808) 4,533
Net change in fair value of cash flow hedges (6,107) 2,336 (3,771)
Minimum pension liability adjustment (5,067) 1,938 (3,129)
Less adjustment for net gains included in net income (13,568) 5,190 (8,378)
---------- -------- -------------
Balance, December 31, 2002 12,916 (4,960) 7,956
Net change in fair value of securities available (16,138) 6,173 (9,965)
Net change in fair value of cash flow hedges 4,803 (1,837) 2,966
Minimum pension liability adjustment 5,067 (1,938) 3,129
Less adjustment for net gains included in net income (12,231) 4,678 (7,553)
---------- -------- -------------
Balance, December 31, 2003 $ (5,583) $ 2,116 $ (3,467)
========== ======== =============
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial instruments at
December 31, 2003 and 2002, are as follows ($ in thousands):
2003 2002
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
Financial Assets:
Cash and short-term investments $ 370,808 $ 370,808 $ 381,384 $ 381,384
Securities available for sale 1,933,993 1,933,993 1,262,570 1,262,570
Securities held to maturity 178,450 191,146 549,197 578,150
Loans held for sale 112,560 112,560 199,680 199,680
Net loans 4,845,776 4,984,690 4,342,915 4,436,602
Derivative assets 273 273 730 730
Financial Liabilities:
Deposits 5,089,459 5,109,044 4,686,296 4,713,394
Short-term liabilities 1,549,667 1,549,667 1,230,937 1,230,937
Long-term FHLB advances 531,035 541,355 475,000 507,031
The methodology and significant assumptions used in estimating the fair values
presented above are as follows:
In cases where quoted market prices are not available, fair values are generally
based on estimates using present value techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
for those assets or liabilities cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. The estimated fair value of financial instruments
with immediate and shorter-term maturities (generally 90 days or less) is
assumed to be the same as the recorded book value. All nonfinancial instruments,
by definition, have been excluded from these disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of Trustmark.
Cash and Short-Term Investments
The carrying amounts for cash and due from banks and short-term investments
(federal funds sold and securities purchased under reverse repurchase
agreements) approximate fair values due to their immediate and shorter-term
maturities.
Securities
Estimated fair values for securities available for sale and securities held to
maturity are based on quoted market prices where available. If quoted market
prices are not available, estimated fair values are based on quoted market
prices of comparable instruments.
Loans Held for Sale
The fair value of loans held for sale is based primarily on quoted market
prices.
Loans
The fair values of loans are estimated for portfolios of loans with similar
financial characteristics. For variable rate loans that reprice frequently with
no significant change in credit risk, fair values are based on carrying values.
The fair values of certain mortgage loans, such as 1-4 family residential
properties, are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The fair values of other types of loans are estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Derivative Assets
The fair value of derivative assets including interest rate contracts, such as
caps and floors and interest rate swaps, is based on standard pricing
methodology using current market rates and volatility.
Deposits
The fair values of deposits with no stated maturity, such as noninterest-bearing
demand deposits, NOW accounts, MMDA products and savings accounts are, by
definition, equal to the amount payable on demand which is the carrying value.
Fair values for certificates of deposit are based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
Short-Term Liabilities
The carrying amounts for federal funds purchased, securities sold under
repurchase agreements and other borrowings approximate their fair values.
Long-Term FHLB Advances
Fair values for long-term FHLB advances are based on the discounted value of
contractual cash flows.
Off-Balance Sheet Instruments
The fair values of loan commitments and letters of credit approximate the fees
currently charged for similar agreements or the estimated cost to terminate or
otherwise settle similar obligations. The fees associated with these financial
instruments, or the estimated cost to terminate, as applicable, are immaterial.
NOTE 16 - DERIVATIVE FINANCIAL INSTRUMENTS
As part of Trustmark's risk management strategy in the mortgage banking area,
derivative instruments such as interest rate lock commitments and forward sales
contracts are utilized. Rate lock commitments are residential mortgage loan
commitments with customers, which guarantee a specified interest rate for a
specified time period. Trustmark's obligations under forward contracts consist
of commitments to deliver mortgage loans, originated and/or purchased, in the
secondary market at a future date. These derivative instruments are designated
as fair value hedges. Trustmark's off-balance sheet obligations under these
derivative instruments totaled $232.2 million, with a valuation adjustment of
($1.3) million as of December 31, 2003, compared to $426.5 million, with a
valuation adjustment of ($3.7) million as of December 31, 2002. Prior to January
1, 2003, Trustmark accounted for these derivative instruments as cash flow
hedges. The impact of the redesignation decreased other income in 2003 by $1.1
million ($653 thousand after tax or $0.01 per share).
Interest rate swaps are derivative instruments 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. As of December 31, 2003, these swap contracts had carrying values totaling
$38.9 thousand.
Trustmark utilizes an interest rate risk strategy that includes caps and floors.
The intent of utilizing these derivative 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, 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. At
December 31, 2003, Trustmark had $300 million notional amount of interest rate
caps with carrying values totaling $234 thousand. These caps mature in 2006 and
are linked to the three-month LIBOR, with a strike rate of 6%. During 2002 and
2001, Trustmark received payments of $1.3 million and $982 thousand,
respectively, on the interest rate floor as the interest rate floor contract
reached its strike price. These payments have been recorded as other interest
income. No such payments were received in 2003, as Trustmark did not hold any
interest rate floor contracts during the year.
NOTE 17 - MANAGED LOANS
During 2003, Trustmark sold $1.481 billion of residential mortgage loans in
securitization transactions compared with $1.049 billion in 2002. Pretax gains
on these sales totaled $13.6 million in 2003 compared with $8.4 million in 2002
and were recorded in other income. Trustmark receives annual servicing fee
income approximating 0.36% of the outstanding balance of the underlying loans.
Mortgage servicing rights are discussed further in Note 7 - "Intangible Assets."
The investors and the securitization trusts have no recourse to the assets of
Trustmark for failure of debtors to pay when due.
In the determination of the value of mortgage servicing rights at the dates of
securitization, certain key economic assumptions are made. During 2003, mortgage
servicing rights were added based on discount rates ranging from 7% to 10%,
prepayment rates ranging from 7% to 30% CPR and weighted average lives ranging
from four to eight years.
At December 31, 2003, the fair value of mortgage servicing rights was $49.7
million, with a weighted average life of approximately five years. Based on this
information, the following table illustrates the sensitivity of the fair value
of mortgage servicing rights to immediate 10% and 20% adverse changes in the
following key assumptions ($ in thousands):
Impact on Fair Value
(Adverse Change)
---------------------
Assumptions Range 10% 20%
- --------------- ------------ -------- --------
Discount Rate 8% - 16% $(2,040) $(3,740)
Prepayment Rate 6% - 28% CPR (2,380) (4,420)
These sensitivities are hypothetical and should not be considered to predict
actual future performance. As changes in assumptions and changes in fair value
may not be linear, it is not possible to extrapolate the impact of other
scenarios from these projections. Also, changes in one assumption may result in
changes in other assumptions, which might magnify or counteract the
sensitivities.
NOTE 18 - SEGMENT INFORMATION
Effective January 1, 2003, Trustmark changed the composition of its reportable
segments to the following: Consumer Division, Commercial Division, Wealth
Management Division and Operations Division. Segment reclassifications have been
made to prior periods to conform to the current year presentation. 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 Wealth
Management 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 including 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 following table discloses financial information by segment for the years
ended December 31, 2003, 2002 and 2001 ($ in thousands):
Consumer Commercial Wealth Mgmt. Operations
Division Division Division Division Total
---------- ---------- ------------ ---------- ----------
2003
- ----
Net interest income from external customers $ 169,068 $ 52,395 $ 4,723 $ 43,644 $ 269,830
Internal funding 33,141 (8,108) 277 (25,310) -
---------- ---------- ------------ ---------- ----------
Net interest income 202,209 44,287 5,000 18,334 269,830
Provision for loan losses 8,933 467 26 345 9,771
---------- ---------- ------------ ---------- ----------
Net interest income after provision for loan losses 193,276 43,820 4,974 17,989 260,059
Noninterest income 112,625 6,942 19,891 18,085 157,543
Noninterest expense 183,851 15,070 18,161 19,038 236,120
---------- ---------- ------------ ---------- ----------
Income before income taxes 122,050 35,692 6,704 17,036 181,482
Income taxes 42,310 12,314 2,369 5,959 62,952
---------- ---------- ------------ ---------- ----------
Segment net income $ 79,740 $ 23,378 $ 4,335 $ 11,077 $ 118,530
========== ========== ============ ========== ==========
Selected Financial Information
Average assets $4,120,751 $1,115,958 $ 122,872 $2,049,041 $7,408,622
Depreciation and amortization $ 24,500 $ 140 $ 416 $ 8,000 $ 33,056
2002
- ----
Net interest income from external customers $ 159,923 $ 59,157 $ 4,962 $ 68,144 $ 292,186
Internal funding 31,888 (15,294) (795) (15,799) -
---------- ---------- ------------ ---------- ----------
Net interest income 191,811 43,863 4,167 52,345 292,186
Provision for loan losses 10,709 3,040 (153) 511 14,107
---------- ---------- ------------ ---------- ----------
Net interest income after provision for loan losses 181,102 40,823 4,320 51,834 278,079
Noninterest income 101,915 6,898 21,368 11,689 141,870
Noninterest expense 189,427 14,102 17,053 13,259 233,841
---------- ---------- ------------ ---------- ----------
Income before income taxes 93,590 33,619 8,635 50,264 186,108
Income taxes 32,602 11,598 3,211 17,557 64,968
---------- ---------- ------------ ---------- ----------
Segment net income $ 60,988 $ 22,021 $ 5,424 $ 32,707 $ 121,140
========== ========== ============ ========== ==========
Selected Financial Information
Average assets $3,849,519 $1,092,870 $ 109,564 $1,789,839 $6,841,792
Depreciation and amortization $ 27,557 $ 163 $ 340 $ 8,811 $ 36,871
2001
- ----
Net interest income from external customers $ 127,293 $ 66,128 $ 5,946 $ 67,537 $ 266,904
Internal funding 52,817 (26,821) (1,962) (24,034) -
---------- ---------- ------------ ---------- ----------
Net interest income 180,110 39,307 3,984 43,503 266,904
Provision for loan losses 11,924 822 89 365 13,200
---------- ---------- ------------ ---------- ----------
Net interest income after provision for loan losse 168,186 38,485 3,895 43,138 253,704
Noninterest income 92,894 7,561 20,851 10,684 131,990
Noninterest expense 170,701 12,766 16,979 13,821 214,267
---------- ---------- ------------ ---------- ----------
Income before income taxes 90,379 33,280 7,767 40,001 171,427
Income taxes 31,809 11,482 2,410 14,445 60,146
---------- ---------- ------------ ---------- ----------
Segment net income $ 58,570 $ 21,798 $ 5,357 $ 25,556 $ 111,281
========== ========== ============ ========== ==========
Selected Financial Information
Average assets $3,553,815 $1,101,026 $ 92,268 $2,240,751 $6,987,860
Depreciation and amortization $ 16,024 $ 156 $ 368 $ 10,316 $ 26,864
NOTE 19 - TRUSTMARK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
($ in thousands):
BALANCE SHEETS
December 31,
--------------------
2003 2002
-------- --------
Assets
Investment in banks $669,555 $673,426
Other assets 20,018 6,254
-------- --------
Total Assets $689,573 $679,680
======== ========
Liabilities and Shareholders' Equity
Accrued expense $ - $ 146
Shareholders' equity 689,573 679,534
-------- --------
Total Liabilities and Shareholders' Equity $689,573 $679,680
======== ========
STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
2003 2002 2001
-------- --------- --------
Revenue
Dividends received from banks $110,410 $118,215 $187,570
Earnings of subsidiaries over (under) distributions 8,200 2,616 (77,202)
Other income 152 697 1,418
-------- -------- --------
Total Revenue 118,762 121,528 111,786
Expense 232 388 505
-------- -------- --------
Net Income $118,530 $121,140 $111,281
======== ======== ========
STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------
2003 2002 2001
-------- -------- --------
Operating Activities
Net income $118,530 $121,140 $111,281
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) decrease in investment in
subsidiaries (8,200) (2,616) 77,202
Other 182 (85) 24
-------- -------- --------
Net cash provided by operating activities 110,512 118,439 188,507
Investing Activities
Net cash paid in business combinations - - (78,026)
Purchase of securities available for sale (15,008) - -
Proceeds from sales of securities available for sale - 813 1,546
Purchases of premises and equipment - (4,077) -
-------- -------- --------
Net cash used in investing activities (15,008) (3,264) (76,480)
Financing Activities
Cash dividends (40,326) (38,210) (36,001)
Common stock transactions, net (57,148) (78,095) (74,386)
-------- -------- --------
Net cash used in financing activities (97,474) (116,305) (110,387)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,970) (1,130) 1,640
Cash and cash equivalents at beginning of year 2,755 3,885 2,245
-------- -------- --------
Cash and cash equivalents at end of year $ 785 $ 2,755 $ 3,885
======== ======== ========
Trustmark (parent company only) paid income taxes of approximately $59.1 million
in 2003, $70.4 million in 2002 and $55.6 million in 2001. No interest was paid
during 2003, 2002 and 2001.
SELECTED FINANCIAL DATA
($ in thousands except per share data)
Years Ended December 31, 2003 2002 2001 2000 1999
- ----------------------------------------------- ---------- ---------- ---------- ---------- ----------
Consolidated Statements of Income
Total interest income $ 359,388 $ 405,952 $ 476,146 $ 488,176 $ 447,481
Total interest expense 89,558 113,766 209,242 255,196 205,079
---------- ---------- ---------- ---------- ----------
Net interest income 269,830 292,186 266,904 232,980 242,402
Provision for loan losses 9,771 14,107 13,200 10,401 9,072
Noninterest income 157,543 141,870 131,990 124,540 101,943
Noninterest expense 236,120 233,841 214,267 188,794 186,043
---------- ---------- ---------- ---------- ----------
Income before income taxes and
cumulative effect of a change in
accounting principle 181,482 186,108 171,427 158,325 149,230
Income taxes 62,952 64,968 60,146 54,124 51,236
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of a change in accounting principle 118,530 121,140 111,281 104,201 97,994
Cumulative effect of a change in
accounting principle (net of tax) - - - (2,464) -
---------- ---------- ---------- ---------- ----------
Net Income $ 118,530 $ 121,140 $ 111,281 $ 101,737 $ 97,994
========== ========== ========== ========== ==========
Per Share Data
Basic earnings per share before
cumulative change $ 2.01 $ 1.95 $ 1.72 $ 1.53 $ 1.36
Cumulative effect of a change
in accounting principle - - - (0.03) -
---------- ---------- ---------- ---------- ----------
Basic earnings per share $ 2.01 $ 1.95 $ 1.72 $ 1.50 $ 1.36
========== ========== ========== ========== ==========
Diluted earnings per share before
cumulative change $ 2.00 $ 1.94 $ 1.72 $ 1.53 $ 1.36
Cumulative effect of a change
in accounting principle - - - (0.03) -
---------- ---------- ---------- ---------- ----------
Diluted earnings per share $ 2.00 $ 1.94 $ 1.72 $ 1.50 $ 1.36
========== ========== ========== ========== ==========
Cash dividends per share $ 0.69 $ 0.62 $ 0.56 $ 0.51 $ 0.44
========== ========== ========== ========== ==========
December 31, 2003 2002 2001 2000 1999
- ---------------------------------------------- ---------- ---------- ---------- ---------- ----------
Consolidated Balance Sheets
Total assets $7,914,321 $7,138,706 $7,180,339 $6,886,988 $6,743,404
Securities 2,112,443 1,811,767 1,853,547 2,125,098 2,174,201
Gross loans (including loans held for sale) 5,032,612 4,617,366 4,524,366 4,143,933 4,014,935
Deposits 5,089,459 4,686,296 4,613,365 4,058,418 3,924,796
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
(unaudited)
($ in thousands except per share data)
2003 1st 2nd 3rd 4th
- ---------------------------------------------- ---------- ---------- ---------- ----------
Interest income $ 93,017 $ 91,674 $ 85,185 $ 89,512
Net interest income 69,197 68,189 63,831 68,613
Provision for loan losses 3,000 2,649 1,771 2,351
Income before income taxes 37,654 47,679 49,247 46,902
Net income 24,484 31,164 32,418 30,464
Earnings per share
Basic and Diluted 0.41 0.53 0.55 0.52
2002 1st 2nd 3rd 4th
- ---------------------------------------------- ---------- ---------- ---------- ----------
Interest income $ 104,837 $ 103,499 $ 101,421 $ 96,195
Net interest income 73,929 74,791 73,093 70,373
Provision for loan losses 4,307 3,000 3,000 3,800
Income before income taxes 46,618 48,727 46,533 44,230
Net income 30,329 31,403 30,062 29,346
Earnings per share
Basic and Diluted 0.48 0.50 0.49 0.48
PRINCIPAL MARKETS AND PRICES OF TRUSTMARK'S STOCK
Stock Prices
Dividends -----------------------
Per Share High Low
--------- ---------- ----------
2003
- ----------
4th Quarter $ 0.190 $ 30.000 $ 27.050
3rd Quarter 0.165 28.000 25.030
2nd Quarter 0.165 27.000 23.540
1st Quarter 0.165 24.800 22.560
2002
- ----------
4th Quarter $ 0.165 $ 24.300 $ 20.350
3rd Quarter 0.150 26.150 21.290
2nd Quarter 0.150 27.140 24.560
1st Quarter 0.150 25.500 23.380
Trustmark's common stock is listed for trading on the NASDAQ stock market as
stock symbol TRMK.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. 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 Securities, Inc. (formerly 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 December 31, 2003, Trustmark and
its subsidiaries employed 2,356 full-time equivalent employees.
Trustmark engages in business through its four reportable segments: Consumer
Division, Commercial Division, Wealth Management 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 Wealth Management Division includes trust and fiduciary services, 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. See Note 18 of the Consolidated Financial Statements for additional
financial information on Trustmark's reportable segments.
FORWARD-LOOKING STATEMENTS
Certain statements contained in Management's Discussion and Analysis 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 collectability
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 an
historically low interest rate environment would have an impact on the
fair value of the mortgage servicing portfolio. In addition, premium
amortization on mortgage related securities included in Trustmark's
securities portfolio would also be accelerated as prepayment of the
mortgage loans securing these securities occurs. The combination of
these events could 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 AND ESTIMATES
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. Critical accounting policies and
estimates 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 are applied to these
policies and estimates.
Fair Value Accounting Estimates
Generally accepted accounting principles require the use of fair values in
determining the carrying values of assets and liabilities, as well as, for
specific disclosures. The most significant include securities, derivative
instruments, loans held for sale, mortgage servicing rights and net assets
acquired in a business combination. Certain of these assets do not have a
readily available market to determine fair value and require an estimate based
on specific parameters. When market prices are unavailable, Trustmark determines
fair values utilizing parameters, which are constantly changing, including
interest rates, duration, prepayment speeds and other specific conditions. In
most cases, these specific parameters require a significant amount of judgment
by Management.
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 and estimates
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
and reduced income before income taxes during 2003 by approximately $2.7 million
before tax ($1.7 million after tax or $0.03 per share). As of December 31, 2003,
mortgage servicing rights had a gross carrying amount of $65.6 million with a
valuation allowance of $15.9 million. As of December 31, 2002, mortgage
servicing rights had a gross carrying amount of $61.3 million with a valuation
allowance of $12.5 million.
Contingent Liabilities
Trustmark estimates its contingent liabilities based on Management's evaluation
of the probability of outcomes and their ability to estimate the range of
exposure. As stated by Statement of Financial Accounting Standards (SFAS) No. 5,
"Accounting for Contingencies," a liability is contingent if the amount is not
presently known, but may become known in the future as a result of the
occurrence of some uncertain future event. Accounting standards require that a
liability be recorded if Management determines that it is probable that a loss
has occurred and the loss can be reasonably estimated. In addition, it must be
probable that the loss will be confirmed by some future event. As part of the
estimation process, Management is required to make assumptions about matters
that are, by their nature, highly uncertain. The assessment of contingent
liabilities, including legal contingencies and income tax liabilities, involves
the use of critical estimates, assumptions and judgments. Management's estimates
are based on their belief that future events will validate the current
assumptions regarding the ultimate outcome of these exposures. However, there
can be no assurance that future events, such as court decisions or Internal
Revenue Service positions, will not differ from Management's assessments.
Whenever practicable, Management consults with outside experts (attorneys,
independent accountants, claims administrators, etc.) to assist with the
gathering and evaluation of information related to contingent liabilities.
EXECUTIVE SUMMARY
Trustmark is an integrated provider of banking financial solutions with over 140
branches and 175 ATMs throughout Mississippi, Tennessee and Florida. Net income
for the year ended December 31, 2003, totaled $118.5 million compared with
$121.1 million for 2002 and $111.3 million for 2001. Basic earnings per share
were $2.01 for 2003, an increase of 3.1% when compared with $1.95 for 2002.
Basic earnings per share were $1.72 for 2001. Diluted earnings per share were
$2.00 for 2003, $1.94 for 2002 and $1.72 for 2001. Earnings during 2003 included
an after-tax charge of $4.1 million, or $0.07 per share, associated with
Trustmark's Voluntary Early Retirement Program. At December 31, 2003, Trustmark
reported gross loans, including loans held for sale, of $5.033 billion, total
assets of $7.914 billion, total deposits of $5.089 billion and shareholders'
equity of $689.6 million.
Management utilizes certain financial ratios to gauge Trustmark's performance.
Trustmark achieved a return on average assets of 1.60% and a return on average
equity of 17.56% for the year ended December 31, 2003. These compared with 2002
ratios of 1.77% for return on average assets and 17.93% for return on average
equity, while in 2001 the return on average assets was 1.59% and the return on
average equity was 16.98%.
For 2004, Trustmark's strategic focus will center primarily on investing in
higher growth markets to become a regional financial services provider,
maximizing profitability in lower growth markets, integrating the Wealth
Management Division throughout the organization, making prudent investments to
support revenue growth and continuing to build shareholder value.
BUSINESS COMBINATIONS
On December 9, 2003, Trustmark and Allied Houston Bank, Houston, Texas,
announced the signing of a definitive Branch Purchase and Assumption Agreement
pursuant to which Trustmark National Bank will acquire five branches of Allied
Houston Bank serving the greater Houston market for a $10 million deposit
premium. The Agreement contemplates the assumption of selected deposit accounts
of approximately $160 million, the purchase of selected loan accounts of
approximately $158 million and the operation of five Allied Houston Bank branch
locations. At November 30, 2003, Allied Houston Bank deposits and loans totaled
approximately $199 million and $178 million, respectively. The proposed
transaction, which is subject to the approval of regulatory authorities and
Allied Houston shareholders, is expected to close during the first quarter of
2004.
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.
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.
On December 14, 2001, Nashoba Bancshares, Inc. (Nashoba) in Germantown,
Tennessee, was merged with Trustmark in a business combination accounted for by
the purchase method of accounting. Nashoba was the holding company for Nashoba
Bank, and at the merger date, had $10 million in securities, $147 million in
total loans, $163 million in total assets and $132 million in total deposits.
The shareholders of Nashoba received $28 million in cash in connection with the
merger. Excess cost over tangible net assets acquired totaled $17 million, of
which $3 million and $14 million have been allocated to core deposits and
goodwill, respectively.
On April 6, 2001, Barret Bancorp (Barret) in Barretville, Tennessee, was merged
with Trustmark in a business combination accounted for by the purchase method of
accounting. Barret was the holding company for Peoples Bank in Barretville,
Tennessee, and Somerville Bank & Trust Company in Somerville, Tennessee. At the
merger date, Barret had $104 million in securities, $307 million in total loans,
$508 million in total assets and $414 million in total deposits. The
shareholders of Barret received approximately 2.4 million shares of Trustmark's
common stock along with $51 million in cash. Excess cost over tangible net
assets acquired totaled $27 million, of which $11 million and $16 million have
been allocated to core deposits and goodwill, respectively.
Trustmark's financial statements include the results of operations for the above
purchase business combinations from the respective merger dates. The pro forma
impact of these acquisitions on Trustmark's results of operations is immaterial.
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 page 51 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. Trading accounts
with average balances of $11 thousand in 2002 and $69 thousand in 2001 have been
included in federal funds sold and securities purchased under reverse repurchase
agreements. 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 63.
Net interest income-FTE for 2003, decreased $23.1 million, or 7.7%, when
compared with 2002. Excluding the Emerald Coast business combination, this
decrease was $26.8 million, or 8.9%. 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. Additional items impacting this
decline in NIM during 2003 include increased premium amortization on mortgage
related securities. Interest rates on mortgages fell to historical lows in 2003,
prompting a significant refinance boom across the country. As excess principal
pay downs occurred, net premium amortization on mortgage related securities
accelerated. Premium amortization during 2003 on mortgage related securities
increased by $18.1 million, or 254.2%, when compared with 2002. The combination
of these factors resulted in declines in the NIM during 2003 of 74 basis points
when compared with 2002.
Yield/Rate Analysis Table
($ in thousands)
Years Ended December 31,
----------------------------------------------------------
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 $ 25,174 $ 287 1.14% $ 26,275 $ 424 1.61%
Securities available for sale:
Taxable 1,518,170 45,566 3.00% 885,070 50,426 5.70%
Nontaxable 67,188 5,280 7.86% 81,883 6,522 7.97%
Securities held to maturity:
Taxable 236,994 19,766 8.34% 588,193 39,136 6.65%
Nontaxable 90,755 7,082 7.80% 89,698 7,120 7.94%
Loans, net of unearned income 4,822,350 289,672 6.01% 4,544,611 311,376 6.85%
---------- -------- ---------- --------
Total interest-earning assets 6,760,631 367,653 5.43% 6,215,730 415,004 6.68%
Cash and due from banks 296,724 280,543
Other assets 426,157 421,037
Allowance for loan losses (74,890) (75,518)
---------- ----------
Total Assets $7,408,622 $6,841,792
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $1,134,243 $ 11,938 1.05% $ 957,410 $ 11,991 1.25%
Savings deposits 832,490 3,429 0.41% 735,885 4,840 0.66%
Time deposits 1,676,700 43,960 2.62% 1,819,130 62,228 3.42%
Federal funds purchased and securities
sold under repurchase agreements 947,050 10,255 1.08% 788,618 12,652 1.60%
Short-term borrowings 391,366 6,041 1.54% 384,481 8,206 2.13%
Long-term FHLB advances 472,819 13,935 2.95% 327,054 13,849 4.23%
---------- -------- ---------- --------
Total interest-bearing liabilities 5,454,668 89,558 1.64% 5,012,578 113,766 2.27%
Noninterest-bearing demand deposits 1,216,523 -------- 1,086,487 --------
Other liabilities 62,288 66,996
Shareholders' equity 675,143 675,731
---------- ----------
Total Liabilities and Shareholders' Equity $7,408,622 $6,841,792
========== ==========
Net Interest Margin 278,095 4.11% 301,238 4.85%
Less tax equivalent adjustments:
Investments 4,327 4,775
Loans 3,938 4,277
-------- --------
Net Interest Margin per Annual Report $269,830 $292,186
======== ========
Year Ended December 31,
----------------------------
2001
----------------------------
Average Yield/
Balance Interest Rate
---------- -------- ------
Assets
Interest-earning assets:
Federal funds sold and securities purchased
under reverse repurchase agreements $ 24,698 $ 921 3.73%
Securities available for sale:
Taxable 1,078,519 68,174 6.32%
Nontaxable 91,750 7,289 7.94%
Securities held to maturity:
Taxable 835,946 55,797 6.67%
Nontaxable 90,867 7,269 8.00%
Loans, net of unearned income 4,302,485 346,571 8.06%
---------- --------
Total interest-earning assets 6,424,265 486,021 7.57%
Cash and due from banks 258,776
Other assets 376,469
Allowance for loan losses (71,650)
----------
Total Assets $6,987,860
==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 795,890 $ 19,864 2.50%
Savings deposits 637,973 7,759 1.22%
Time deposits 1,895,677 98,733 5.21%
Federal funds purchased and securities
sold under repurchase agreements 1,117,059 42,390 3.79%
Short-term borrowings 495,607 22,167 4.47%
Long-term FHLB advances 351,301 18,329 5.22%
---------- --------
Total interest-bearing liabilities 5,293,507 209,242 3.95%
Noninterest-bearing demand deposits 966,437 --------
Other liabilities 72,478
Shareholders' equity 655,438
----------
Total Liabilities and Shareholders' Equity $6,987,860
==========
Net Interest Margin 276,779 4.31%
Less tax equivalent adjustments:
Investments 5,095
Loans 4,780
--------
Net Interest Margin per Annual Report $266,904
========
Net interest income-FTE for the year ended December 31, 2002, increased $24.5
million, or 8.8%, when compared with 2001. Excluding business combinations, this
increase would have been $17.5 million, or 6.6%. The continuing decline in
interest rates experienced during 2002 had a greater impact on the cost of
interest-bearing liabilities as Trustmark benefited from being liability
sensitive for a large portion of the year. This interest sensitivity position
illustrates that Trustmark was generally able to increase net interest income in
a declining rate environment, since a greater proportion of liabilities was tied
to short-term rates than assets. This combination resulted in an overall
positive impact to the NIM of 54 basis points, when comparing 2002 to 2001.
Additionally, during 2002, Trustmark's use of interest rate caps and floors
provided $1.3 million of additional interest income as the floor reached its
strike price during a falling interest rate environment, compared to $982
thousand during 2001.
Average interest-earning assets for 2003 were $6.761 billion, compared with
$6.216 billion for 2002, an increase of $544.9 million, or 8.8%. Without the
Emerald Coast branch purchase, the increase in average interest-earning assets
for 2003 is $474.7 million, or 7.6%. Growth for 2003 is primarily seen in
average loans, which increased 6.1% (4.6% without Emerald Coast) when compared
with 2002, and average securities, which increased 16.3% when 2003 is compared
with 2002. However, the declining interest rate environment has negatively
impacted yields as the yield on average earning assets dropped from 6.68% during
2002 to 5.43% for 2003, a decrease of 125 basis points. As a result, interest
income-FTE decreased by $47.4 million, or 11.4%, during 2003 when compared with
2002.
Average interest-bearing liabilities for 2003 totaled $5.455 billion, compared
with $5.013 billion for 2002, an increase of $442.1 million, or 8.8%. Without
the Emerald Coast branch purchase, the increase in average interest-bearing
liabilities for 2003 is $381.2 million, or 7.6%. Average interest-bearing
deposits increased, as well as federal funds purchased, repurchase agreements
and borrowings. Although interest-bearing liabilities increased during 2003,
interest expense continued to decrease due to the declining interest rate
environment. The average rates on interest-bearing liabilities for 2003 and
2002, were 1.64% and 2.27%, respectively, a decrease of 63 basis points. As a
result of these factors, total interest expense for 2003 decreased $24.2
million, or 21.3%, when compared with 2002.
Average interest-earning assets for 2002 were $6.216 billion, compared with
$6.424 billion in 2001, a decrease of $208.5 million, or 3.2%. This decrease
resulted from Management's utilization of liquidity provided by maturing
securities to reduce Trustmark's reliance on wholesale funding sources. In
addition, a positive impact to the NIM when comparing 2002 with 2001 was
realized from the change in mix of interest earning assets as Trustmark
effectively utilized the liquidity from maturing lower yielding securities to
fund loan growth. The yield on average earning assets dropped from 7.57% during
2001 to 6.68% in 2002, a decrease of 89 basis points. The combination of a
decrease in the earning asset base and declining yields resulted in a decrease
in interest income-FTE during 2002 of $71.0 million, or 14.6%, when compared
with 2001.
Average interest-bearing liabilities for 2002 totaled $5.013 billion, compared
with $5.294 billion for 2001, a decrease of $280.9 million, or 5.3%. Average
interest-bearing deposits increased while federal funds purchased, repurchase
agreements and borrowings decreased, continuing the trend from the prior year.
This change in mix proved beneficial in reducing interest expense through the
growth of lower cost core deposits versus borrowings. The average rates on
interest-bearing liabilities for 2002 and 2001, were 2.27% and 3.95%,
respectively, a decrease of 168 basis points. As a result of these factors,
total interest expense for 2002 decreased $95.5 million, or 45.6%, when compared
with 2001.
Provision for Loan Losses
Trustmark's provision for loan losses totaled $9.8 million in 2003, $14.1
million in 2002 and $13.2 million in 2001. During 2003, the provision for loan
losses equaled 95% of net charge-offs compared with 95% in 2002 and 87% in 2001.
As a percentage of average loans, the provision was 0.20% for 2003 compared with
0.31% for both 2002 and 2001. The provision for loan losses reflects
Management's assessment of the adequacy of the allowance for loan losses to
absorb probable losses inherent in the loan portfolio. The amount of provision
for each period is dependent upon many factors including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
Management's assessment of loan portfolio quality, the value of collateral and
general economic factors. See further discussion of the Allowance for Loan
Losses in Critical Accounting Policies and Estimates beginning on page 47, as
well as the discussion of Loans beginning on page 59.
Noninterest Income
($ in thousands)
2003 2002 2001
------------------- ------------------- -------------------
Amount % Change Amount % Change Amount % Change
-------- -------- -------- -------- -------- --------
Service charges on deposit
accounts $ 54,351 8.6% $ 50,056 7.0% $ 46,769 11.7%
Other account charges and fees 28,101 -1.0% 28,371 -3.7% 29,473 -8.9%
Insurance commissions 20,567 15.3% 17,837 53.3% 11,635 15.9%
Mortgage servicing fees 16,826 -2.4% 17,247 1.9% 16,920 14.5%
Trust service income 9,834 -1.3% 9,962 5.7% 9,423 -4.9%
Securities gains 12,231 -9.9% 13,568 454.2% 2,448 -73.9%
Gains on sales of loans 15,938 70.4% 9,353 2.1% 9,163 207.7%
Other income (305) 93.3% (4,524) -173.5% 6,159 92.5%
-------- -------- --------
Total Noninterest Income $157,543 11.0% $141,870 7.5% $131,990 6.0%
======== ======== ========
Noninterest Income
Noninterest income (NII) consists of revenues generated from a broad range of
banking and financial services. NII totaled $157.5 million in 2003 compared with
$141.9 million in 2002 and $132.0 million in 2001. NII represented 30.5% of
total revenues in 2003 versus 25.9% in 2002 and 21.7% in 2001. The components of
noninterest income for the years ended December 31, 2003, 2002 and 2001, and the
percentage change from the prior year are shown in the accompanying table above.
Noninterest income contributed by the Emerald Coast branch purchase during 2003
is considered immaterial.
The single largest component of noninterest income continues to be service
charges for deposit products and services, which increased 8.6% in 2003 after an
increase of 7.0% in 2002. Increases in service charges for 2003 and 2002 are
primarily attributed to an increase in fees charged for NSF and overdrafts
combined with increased transaction volumes during both years.
Other account charges and fees totaled $28.1 million in 2003, a decrease of $270
thousand, or 1.0%, when compared with 2002. Similar circumstances were seen when
comparing 2002 to 2001 as other account charges and fees decreased $1.1 million,
or 3.7%. In both years, decreasing revenues from market driven products was the
primary factor in the decline as reductions were seen in cash management,
brokerage and advisory services and float-related revenues. Offsetting this
decrease in both years were bankcard fees, which increased $1.1 million in 2003
and $1.2 million in 2002 primarily from changes in the pricing of merchant
discount rates and growth in debit card usage by individuals and businesses.
Insurance commissions were $20.6 million in 2003 compared with $17.8 million in
2002 and $11.6 million in 2001. The growth in 2003 and 2002 is primarily from
the CSI business combination which was completed on June 28, 2002. In addition,
2002 growth can also be linked to growth in sales of fixed annuity products.
During 2003, mortgage servicing fees totaled $16.8 million, compared to $17.2
million in 2002 and $16.9 million in 2001. Increased prepayments during the
period resulting from historical low interest rates on mortgage loans
contributed to the decline in the mortgage servicing portfolio when compared to
2002. Trustmark serviced mortgage loans with average balances of $3.3 billion in
2003, $3.6 billion in 2002 and $3.5 billion in 2001.
Trust service income was $9.8 million for 2003, a decrease of $128 thousand when
compared with 2002, as continued weakness in capital markets slowed growth in
this area. Uncertain market conditions contributed to a decline in valuation of
assets managed, which directly impacted corporate trust fees and advisory fees.
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 December 31, 2003.
Gains on sales of loans were $15.9 million in 2003, $9.4 million in 2002 and
$9.2 million in 2001. 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 $3.0 million from these sales in 2003, compared
with $1.1 million in 2002 and $1.2 million in 2001. In addition, during 2001 a
gain of $3.9 million was realized from the sale of $191 million in mortgage
loans with significant prepayment risk. Remaining gains on sales of loans from
secondary marketing activities totaled $11.1 million in 2003, $8.3 million in
2002 and $4.1 million in 2001, with growth primarily attributed to an increased
volume of branch-originated loans and the continued benefit of a falling
interest rate environment during those periods.
Other income was a loss of $305 thousand and $4.5 million for 2003 and 2002,
respectively, compared with a gain of $6.2 million in 2001. During these years,
valuation adjustments on Trustmark's interest rate caps and floors had the
greatest impact on other income, with losses of $496 thousand and $6.0 million
for 2003 and 2002, respectively, compared with a recorded gain of $4.9 million
in 2001. 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 $234 thousand at
December 31, 2003, $730 thousand at December 31, 2002 and $9.3 million at
December 31, 2001. In addition, valuation adjustments on fair value hedges used
in conjunction with Trustmark's mortgage servicing portfolio were a loss of $1.5
million in 2003 compared with a gain of $1.1 million in 2002.
Securities gains totaled $12.2 million during 2003, compared with $13.6 million
during 2002 and $2.4 million during 2001. During 2003, significant price changes
in certain available for sale (AFS) securities enabled Trustmark to sell
securities with a 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. The increase experienced during 2002 is
primarily from sales of $216.5 million in available for sale (AFS) securities.
These securities were sold as significant price increases provided the
opportunity to restructure a portion of the portfolio to reduce price volatility
in an extremely low interest rate cycle. In addition, securities sold had
performed exceedingly well during a bond rally, but also had features that would
have exposed Trustmark to excessive downside price risk during a period of
rising interest rates. Management considers the investment portfolio as an
integral tool in the management of interest rate risk.
Noninterest Expense
($ in thousands)
2003 2002 2001
------------------- -------------------- --------------------
Amount % Change Amount % Change Amount % Change
-------- -------- -------- -------- -------- --------
Salaries and employee benefits $126,533 5.6% $119,801 8.4% $110,540 10.3%
Net occupancy - premises 12,817 6.0% 12,088 4.4% 11,576 11.3%
Equipment expense 14,989 -0.6% 15,085 -3.6% 15,651 0.9%
Services and fees 31,283 -3.5% 32,414 7.7% 30,098 14.8%
Amortization/impairment of
intangible assets 20,874 -14.0% 24,275 71.8% 14,129 63.9%
Other expense 29,624 -1.8% 30,178 -6.5% 32,273 16.1%
-------- -------- --------
Total Noninterest Expense $236,120 1.0% $233,841 9.1% $214,267 13.5%
======== ======== ========
Noninterest Expense
Trustmark's noninterest expense increased $2.3 million, or 1.0%, in 2003 to
$236.1 million, compared with $233.8 million in 2002 and $214.3 million in 2001.
The increase for 2003 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 increase in 2002
relates primarily to $2.8 million from the CSI business combination that was
consummated on June 28, 2002 and $4.4 million from business combinations
completed during 2001. This increase in noninterest expense is also attributable
to Trustmark's recognition of $10.5 million in impairment allowance for mortgage
servicing rights in 2002 compared with $2.0 million for 2001. Growth in the
impairment allowance results from the continued reduction in long-term mortgage
rates experienced during 2002 and the related increase in prepayments of
mortgage loans which had a negative impact on the value of Trustmark's mortgage
servicing portfolio. The comparative components of noninterest expense for 2003,
2002 and 2001 are shown in the accompanying table above.
Salaries and employee benefits, the largest category of noninterest expense,
were $126.5 million in 2003, $119.8 million in 2002 and $110.5 million in 2001.
This increase is primarily from $6.1 million of expense recognized for
Trustmark's early retirement program, which was accepted by 116 employees, or
4.75% of the workforce. The benefit of this program can be seen in the decline
in Trustmark's full-time equivalent employees from 2,443 at December 31, 2002 to
2,356 at December 31, 2003. For 2002, salaries and benefits increased $9.3
million, or 8.4%. Excluding business combinations, the increase was $5.0
million, or 4.7%. During 2002, Trustmark changed its discretionary contribution
to the employee 401(k) plan to a matching plan. The impact of this change along
with normal annual merit increases and an increase in the cost of health
benefits were the major factors behind the rise in salaries and the cost of
employee benefits during 2002.
During 2003, net occupancy-premises expense increased $729 thousand, or 6.0%,
following a 4.4% increase during 2002. The increase during 2003 can be traced to
additional maintenance on existing premises, higher utility costs and increased
taxes due to property reassessment. Business combinations accounted for over 99%
of the increase during 2002.
Equipment expense totaled $15.0 million in 2003, $15.1 million in 2002 and $15.7
million in 2001. Trustmark has been able to control expenses in this category by
integrating new technology into various aspects of its operations, which allows
for improved productivity and efficiency while increasing customer satisfaction.
Services and fees for 2003 totaled $31.3 million compared to $32.4 million for
2002 and $30.1 million for 2001. Projects related to human resource and revenue
enhancements, that were completed during 2002, allowed for more controlled
growth during 2003. In addition, higher costs for software-related expense,
legal and audit-related fees contributed to the increase experienced during
2002.
Amortization/impairment expense associated with intangible assets totaled $20.9
million in 2003 compared with $24.3 million in 2002 and $14.1 million in 2001.
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 $17.9 million, or $14.5 million in amortization
expense and $3.4 million in impairment. For 2002, total amortization/impairment
expense for mortgage servicing rights was $22.0 million but was broken down into
$11.5 million in amortization expense and $10.5 million in impairment. While
mortgage servicing rights amortization increased during 2003, impairment was
reduced during the year. However, a closer look at amortization and impairment
during 2003 shows 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
$15.9 million at December 31, 2003. While amortization of mortgage servicing
rights during 2003 increased by $3.0 million as a result of increased
refinancings, amortization expense decreased from $8.7 million in the first half
of the year to $5.8 million for the second half 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 continue to be closely tied to fluctuations in
long-term mortgage rates.
When compared with 2001, the increase during 2002 included $10.5 million for
additional impairment of mortgage servicing rights compared with $2.0 million
for the prior period. Amortization of mortgage servicing rights increased by
$3.3 million as a result of increased refinancings during a period of
historically low interest rates, which shortened the expected life of the
mortgage servicing portfolio and required a faster amortization of existing
mortgage servicing rights. The growth in amortization of core deposit
intangibles and insurance customer relationship intangibles is attributable to
business combinations completed during 2002 and 2001. These increases were
partially offset by the $1.3 million reduction in goodwill amortization as the
result of Trustmark's adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets," which required Trustmark to discontinue amortization of goodwill
effective January 1, 2002.
Other expense totaled $29.6 million in 2003 compared with $30.2 million for 2002
and $32.3 million for 2001. The decrease in 2003 and 2002 is attributable to the
impact of Management's expense control efforts over various controllable expense
categories, such as travel and entertainment. In addition, more stringent
security measures, along with centralized recovery efforts, led to a decrease in
operational losses during both 2003 and 2002.
Income Taxes
For the year ended December 31, 2003, Trustmark's combined effective tax rate
was 34.7%, compared with 34.9% for 2002 and 35.1% for 2001. The slight decrease
in Trustmark's effective tax rate for 2003 is due to immaterial changes in
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 December 31, 2003, these
arrangements gave Trustmark approximately $1.668 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 $531.0 million in long-term advances at December 31,
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
$442.6 million available in unused FHLB advances. Another borrowing source is
the Federal Reserve Discount Window (Discount Window). At December 31, 2003,
Trustmark had approximately $539.9 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 December 31, 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
December 31, 2003, no such shares have been issued.
CAPITAL RESOURCES
At December 31, 2003, Trustmark's shareholders' equity was $689.6 million, an
increase of $10.0 million, or 1.5%, from its level at December 31, 2002. This
increase is primarily related to net income for 2003, which totaled $118.5
million, being offset by dividends of $40.3 million, shares repurchased at a
cost of $59.4 million and net reductions in accumulated other comprehensive
income of $11.4 million. Trustmark continues to improve shareholder value by
utilizing strategic capital management plans designed to improve earnings per
share and return on equity while maintaining sufficient regulatory capital
levels. Since implementation of these plans in 1998, Trustmark's return on
average equity increased to 17.56% in 2003 from 13.53% in 1998, while basic
earnings per share have risen from $1.14 in 1998 to $2.01 in 2003, an increase
of 76.3%.
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 2.9 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 18.0 million shares for $385.0 million,
including 2.4 million shares during 2003 for $59.4 million. The current
remaining authorization is approximately 3.5 million shares.
Dividends
Another strategy designed to enhance shareholder value has been to maintain a
consistent dividend payout ratio, which is dividends per share divided by
earnings per share. For 2003, Trustmark increased dividends per share for the
twentieth consecutive year. Dividends for 2003 were $0.69 per share, increasing
11.3% when compared with dividends of $0.62 per share in 2002. Dividends per
share have increased 23.2% since 2001. Trustmark's dividend payout ratio was
34.1% for 2003, compared with 31.5% for 2002 and 32.3% for 2001. During October
2003, the Board of Directors announced a 15.2% increase in the regular quarterly
dividend to $0.19 per share from $0.165 per share. The Board declared the
dividend payable on December 15 to shareholders of record as of December 1,
2003. This action raised the indicated annual dividend to $0.76 per share from
$0.66 per share.
Regulatory Capital Table
($ in thousands)
December 31, 2003
------------------------------------------------------------
Minimum Regulatory
Actual Minimum Regulatory Provision to be
Regulatory Capital Capital Required Well Capitalized
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ----- -------- ------
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $634,995 12.29% $413,472 8.00% - -
Trustmark National Bank 601,800 11.90% 404,683 8.00% $505,853 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $570,271 11.03% $206,736 4.00% - -
Trustmark National Bank 538,460 10.64% 202,341 4.00% $303,512 6.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $570,271 7.53% $227,050 3.00% - -
Trustmark National Bank 538,460 7.26% 222,456 3.00% $370,760 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
December 31, 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 December 31, 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 on page 57. 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 December 31, 2003, earning assets were $7.183
billion, or 90.8% of total assets, compared with $6.453 billion, or 90.4% of
total assets at December 31, 2002, an increase of $730.0 million, or 11.3%.
Excluding the Emerald Coast branch purchase, earning assets totaled $6.967
billion, an increase of $514.1 million, or 8.0%, 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
December 31, 2003, Trustmark's securities portfolio totaled $2.112 billion,
compared to $1.812 billion at December 31, 2002, an increase of $300.7 million,
or 16.6%.
The securities portfolio is a powerful risk management tool that enables
Management to control both the invested balance and the duration of 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 2.30
years at December 31, 2003, 1.94 years at December 31, 2002 and 2.83 years at
December 31, 2001. 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 December 31, 2003, AFS securities
totaled $1.934 billion, which represented 91.6% of the securities portfolio,
compared to $1.263 billion, or 69.7%, at December 31, 2002. At December 31,
2003, unrealized losses on AFS securities of $5.6 million, net of $2.1 million
of deferred income taxes, were included in accumulated other comprehensive
income, compared with gains of $22.8 million, net of $8.7 million in deferred
income taxes, at December 31, 2002. At December 31, 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 of 2003, 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 $107.4 million and a noncallable average maturity of 4.3
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 December 31, 2003, HTM securities totaled $178.4 million and
represented 8.4% 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 70.1% of earning assets at
December 31, 2003, compared with 71.6% at year end 2002. At December 31, 2003,
loans totaled $5.033 billion, a 9.0% increase from its level of $4.617 billion
at December 31, 2002. Excluding the Emerald Coast branch purchase, loan growth
was $200 million, or 4.3%. Real estate lending continued to be positively
impacted by record low interest rates while other loan areas have been
negatively affected by a weakened economy.
Trustmark makes loans in the normal course of business to certain directors,
including their immediate families and companies in which they are principal
owners. Such loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility at the time of the transaction.
Trustmark's lending policies have resulted in consistently sound asset quality.
One measure of asset quality in the financial services industry is the level of
nonperforming assets. The details of Trustmark's nonperforming assets at
December 31, 2003 and December 31, 2002, are shown in the accompanying table.
Nonperforming Assets
($ in thousands)
December 31,
------------------
2003 2002
------- -------
Nonaccrual and restructured loans $23,921 $31,642
Other real estate (ORE) 5,929 6,298
------- -------
Total nonperforming assets $29,850 $37,940
======= =======
Accruing loans past due 90 days or more $ 2,606 $ 2,946
======= =======
Nonperforming assets/total loans and ORE 0.59% 0.82%
======= =======
Total nonperforming assets decreased $8.1 million, or 21.3%, during 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 310.5% at December
31, 2003, compared with 236.3% at December 31, 2002.
At December 31, 2003, the allowance for loan losses was $74.3 million compared
with $74.8 million at December 31, 2002. The allowance for loan losses
represented 1.48% of total loans outstanding at December 31, 2003, compared to
1.62% at December 31, 2002. This decline in the allowance as a percentage of
total loans is the result of an increase in loans 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 December 31, 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 $10.3 million, or 0.21% of average loans, for 2003,
compared with $14.9 million, or 0.33% of average loans, for the prior year
period. This improvement can primarily be attributed to the 20.1% decline in
charge-offs recorded during 2003. Supporting this reduction were gross
charge-offs of commercial purpose loans, which decreased $3.7 million when
comparing 2003 and 2002.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase agreements
were $37.7 million at December 31, 2003, an increase of $13.8 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 deposit, individual retirement accounts and brokered CDs. Total
deposits were $5.089 billion at December 31, 2003, compared with $4.686 billion
at December 31, 2002, an increase of $403.2 million, or 8.6%. Excluding the
Emerald Coast branch purchase, deposits increased $182.3 million, or 3.9%, when
compared with December 31, 2002. The primary area of growth in deposits during
2003 was accounts that were transactional in nature such as demand deposit, NOW
and MMDA. When compared to year-end 2002, transaction accounts increased $350.3
million, or 16.0%. Historically low rates for certificates of deposit, as well
as uncertain market conditions, have resulted in more growth in traditional
deposit products. During the third quarter of 2003, Trustmark began a brokered
CD program to provide additional low cost deposit funding which totaled $98.9
million at December 31, 2003. 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 $1.550 billion at December 31, 2003, an
increase of $318.7 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 $531.0 million at December 31, 2003, an increase
of $56.0 million from December 31, 2002. These totals include $350.0 million in
advances with interest rates adjusting quarterly, while the remaining advances
are fixed rate, primarily maturing in 2005 and 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 63.
LEGAL ENVIRONMENT
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 during 2003, may reduce the likelihood of
unexpected sizable awards. At the present time, Management believes, based on
the advice of legal counsel, that the final resolution of pending legal
proceedings will not have a material impact on Trustmark's consolidated
financial position or results of operations; however, Management is unable to
estimate a range of potential loss on these matters because of the nature of the
legal environment in states where Trustmark conducts business.
PENSION PLAN
Trustmark's defined noncontributory benefit pension plan (the Plan) is accounted
for using SFAS No. 87, "Employers' Accounting for Pensions." Under this
statement, pension expense is recognized on an accrual basis over employees'
approximate service periods. Pension expense calculated under SFAS No. 87 is
generally independent of funding decisions or requirements. Trustmark recognized
expense related to the Plan in the amount of $4.2 million, $1.7 million and $1.4
million in 2003, 2002 and 2001, respectively. In February 2003, Trustmark
announced a voluntary early retirement program for associates ages 58 and above
with ten or more years of service. This program was accepted by 116 associates
and increased net periodic pension costs by $2.0 million during 2003. The
calculation of pension expense and liabilities is based on actuarial assumptions
including rates of termination, retirement, disability, mortality and salary
increases. While these assumptions have been chosen to individually represent
the best estimate of a particular event as required by SFAS No. 87 and SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
actual experience may differ from the assumptions. Any changes in the actuarial
assumptions may produce changes in the pension expense and plan liabilities.
Trustmark's pension plan has historically performed well and was fully funded
through 2001. At October 31, 2002, Trustmark's pension plan became under-funded
for the first time in plan history as the accumulated benefit obligation
(pension liability) exceeded plan assets by $2.7 million. Because of these
factors, Management and the Board of Directors spent many hours evaluating
numerous scenarios regarding historical and future pension expense. Based on
these evaluations, Trustmark's Board of Directors made a one-time special $10
million contribution to the plan during 2003. This contribution eliminated the
under-funded accumulated benefit obligation at October 31, 2003. In addition,
the Board of Directors adopted amendments to the pension plan during the fourth
quarter of 2003 to ensure the plan will continue to provide meaningful benefits
for associates in retirement while maintaining a consistent and affordable trend
in the overall cost of associate benefits. As a result, pension expense is
expected to be $1.9 million in 2004 instead of $4.2 million as originally
projected. The amendments listed below will become effective January 1, 2004,
and will have no impact on benefits associates have earned prior to that date.
o Future pension equity credits for each plan year will be reduced by
15%.
o The period for determining final average compensation will be
increased from three to five years.
o Plan compensation will exclude pay for incentives, bonuses, and
commissions.
Trustmark discounted future pension benefit obligations using a rate of 6.5% at
December 31, 2003, compared to 7.0% at December 31, 2002, and 7.5% at December
31, 2001. Trustmark determines the appropriate discount rate each year based on
current rates such as Moody's AA Bond Index with the discount rate typically set
0.25% to 0.50% above that rate. The discount rate for 2004 will be determined as
of the October 31 measurement date.
The fair value of plan assets increased from $55.2 million at December 31, 2002,
to $57.6 million at December 31, 2003. Trustmark's pension plan weighted-average
asset allocations at December 31, 2003 and 2002, by asset category are as
follows:
2003 2002
------ ------
Fixed income securities 37.2% 40.2%
Equity mutual funds 61.7% 55.6%
Other 1.1% 4.2%
------ ------
Total 100.0% 100.0%
====== ======
The strategic objective of the plan focuses on capital growth with moderate
income. The plan is managed on a total return basis with the return objective
set as a reasonable actuarial rate of return on plan assets net of investment
management fees. Moderate risk is assumed given the average age of plan
participants and the need to meet the required rate of return. Equity and fixed
income securities are utilized to allow for capital appreciation while fully
diversifying the portfolio with more conservative fixed income investments. The
target asset allocation range for the portfolio is 0-15% Cash & Equivalents,
25-45% Fixed Income, 35-65% Domestic Equity, and 0-20% International Equity.
Changes in allocations are a result of tactical asset allocation decisions and
fall within the aforementioned percentage range for each major asset class.
Trustmark selects the expected long-term rate-of-return-on-assets assumption in
consultation with their investment advisors and actuary, and with concurrence
from their independent accountants. This rate is intended to reflect the average
rate of earnings expected to be earned on the funds invested or to be invested
to provide plan benefits. Historical performance is reviewed - especially with
respect to real rates of return (net of inflation), for the major asset classes
held or anticipated to be held by the trust, and for the trust itself. Undue
weight is not given to recent experience, that may not continue over the
measurement period, with higher significance placed on current forecasts of
future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not
reduced for taxes. Further, solely for this purpose, the plan is assumed to
continue in force and not terminate during the period during which assets are
invested. However, consideration is given to the potential impact of current and
future investment policy, cash flow into and out of the trust, and expenses
(both investment and non-investment) typically paid from plan assets (to the
extent such expenses are not explicitly estimated within periodic cost).
A market related value of assets is used to determine the annual pension
expense. The market related value is determined by recognizing the difference
between the expected market value of assets (based on the assumed long-term rate
of return) and the actual market value over a period of five years. The effect
of using this method is a smoothing of fluctuations in pension expense - expense
will neither increase during a down market nor decrease during an up market as
rapidly as it might if actual market values were used. Through the duration of a
complete market cycle, the impact on expense should be negligible.
Trustmark contributed $10.0 million in cash to the Plan during 2003. The
acceptable range of contributions to the plan is determined each year by the
plan's actuary. In 2004, Trustmark's minimum required contribution is expected
to be zero; however, Trustmark's Management and Board of Directors plan to make
a contribution of up to $7 million. The actual amount of the contribution will
be determined based on the plan's funded status and return on plan assets as of
the measurement date, which is October 31.
OFF-BALANCE SHEET ARRANGEMENTS
Trustmark makes commitments to extend credit and issues standby and commercial
letters of credit in the normal course of business in order to fulfill the
financing needs of its customers. These loan commitments and letters of credit
are off-balance sheet arrangements.
Commitments to extend credit are agreements to lend money to customers pursuant
to certain specified conditions. Commitments generally have fixed expiration
dates or other termination clauses. Since many of these commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Trustmark applies the same
credit policies and standards as it does in the lending process when making
these commitments. The collateral obtained is based upon the assessed
creditworthiness of the borrower. At December 31, 2003 and 2002, Trustmark had
commitments to extend credit of $1.2 billion and $1.1 billion, respectively.
Standby and commercial letters of credit are conditional commitments issued by
Trustmark to insure the performance of a customer to a third party. When issuing
letters of credit, Trustmark uses essentially the same policies regarding credit
risk and collateral which are followed in the lending process. At December 31,
2003 and 2002, Trustmark's maximum exposure to credit loss in the event of
nonperformance by the other party for letters of credit was $73.6 million and
$70.4 million, respectively. These amounts consist primarily of commitments with
maturities of less than three years. Trustmark holds collateral to support
certain letters of credit when deemed necessary.
CONTRACTUAL OBLIGATIONS
Trustmark is obligated under certain contractual arrangements. The amount of
payments due under those obligations is shown below ($ in thousands):
Less than One to Three to After
One Year Three Years Five Years Five Years Total
---------- ----------- ---------- ---------- ----------
Long-term FHLB advances $ - $ 525,179 $ 4,356 $ 1,500 $ 531,035
Operating lease obligations 2,729 2,958 1,789 8,944 16,420
Time deposits 1,221,380 422,327 71,998 1,804 1,717,509
Securities sold under
repurchase agreements 674,716 - - - 674,716
---------- ----------- ---------- ---------- ----------
Total $1,898,825 $ 950,464 $ 78,143 $ 12,248 $2,939,680
========== =========== ========== ========== ==========
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. Asset sensitivity has been positively
impacted with increases in floating rate commercial lending and by controlling
the duration of the securities portfolio. While our growth in core deposits also
improved asset sensitivity, added short borrowings and securities growth offset
this with the result being a lower, albeit slightly positive, sensitivity to
rising rates. Modeling static balances from December 31, 2003, it is estimated
that net interest income may increase, possibly as much as 0.95%, 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. In a shocked, down 200 basis point rate
shift scenario, net interest income may decline from the base case as much as
12.22% 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 2004. 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,
repricing behavior of certain deposit products 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 December
31 2003, reflected a liability gap of $691 million compared with an asset gap of
$52 million at December 31, 2002. One-year gap analysis projected at December
31, 2003, reflected a liability gap of $352 million compared with an asset gap
of $321 million at December 31, 2002. These changes in Trustmark's static gap
position can be traced to a reduction in mortgage work-in-process, fewer
securities with remaining maturities under three months, as well as Management's
decision to reallocate wholesale borrowings into floating, rather than fixed
rates. This effectively lowers the current funding cost and provides 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 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 recognizes
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 December 31, 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 December 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (as
revised). This interpretation addresses consolidation by business enterprises of
variable interest entities, which have one or more of the following
characteristics: 1) the equity investment at risk is not sufficient to permit
the entity to finance its activities without additional subordinated financial
support provided by any parties including the equity holders; 2) the equity
investors lack one or more of the essential characteristics of a controlling
financial interest and 3) the equity investors have voting rights that are not
proportionate to their economic interests, and the activities of the entity
involve or are conducted on behalf of an investor with a disproportionately
small voting interest. Application of this interpretation is required in
financial statements of public entities that have interests in variable interest
entities or potential variable interest entities for periods ending after
December 15, 2003. Currently, Trustmark does not have any interests in variable
interest entities as defined by this interpretation.
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.
In May 2003, the 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 the following 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. Currently, Trustmark does not have any financial
instruments within the scope of this statement.
Interest Rate Sensitivity Table
($ in thousands)
Estimated
December 31, 2003 2004 2005 2006 2007 2008 Thereafter Total Fair Value
- ----------------- ---------- -------- -------- -------- -------- ---------- ---------- ----------
Loans, Net
Fixed Rate $1,247,926 $724,102 $523,633 $335,475 $260,850 $312,161 $3,404,147 $3,543,061
Average Int Rate 5.89% 6.32% 6.25% 5.81% 5.65% 5.47% 5.97%
Floating Rate $ 820,608 $157,792 $119,067 $119,175 $111,859 $225,688 $1,554,189 $1,554,189
Average Int Rate 4.21% 4.44% 4.63% 4.42% 4.34% 4.95% 4.40%
Investment Securities
Fixed Rate $ 509,354 $485,489 $262,640 $445,690 $212,585 $196,058 $2,111,816 $2,124,512
Average Int Rate 0.97% 2.95% 3.67% 3.12% 4.17% 3.81% 2.80%
Floating Rate $ 189 $ 126 $ 90 $ 65 $ 48 $ 109 $ 627 $ 627
Average Int Rate 3.53% 3.55% 3.53% 3.51% 3.50% 3.49% 3.52%
Other Earning Assets
Floating Rate $ 37,712 - - - - - $ 37,712 $ 37,712
Average Int Rate 0.95% - - - - - 0.95%
Interest-Bearing Deposits
Fixed Rate $1,223,415 $326,841 $ 88,388 $ 46,026 $ 23,794 $ 1,716 $1,710,180 $1,729,765
Average Int Rate 1.85% 2.83% 3.64% 4.61% 3.29% 5.15% 2.24%
Floating Rate $ 724,367 $332,177 $332,177 $332,177 $328,937 - $2,049,835 $2,049,835
Average Int Rate 0.63% 0.62% 0.62% 0.62% 0.62% - 0.62%
Other Interest-Bearing Liabilities
Fixed Rate $ 119,114 $100,000 $ 75,179 - $ 4,356 $ 1,500 $ 300,149 $ 310,469
Average Int Rate 1.94% 5.49% 5.60% - 5.33% 6.05% 4.22%
Floating Rate $1,430,553 $350,000 - - - - $1,780,553 $1,780,553
Average Int Rate 0.68% 1.18% - - - - 0.78%
Estimated
December 31, 2002 2003 2004 2005 2006 2007 Thereafter Total Fair Value
- ----------------- ---------- -------- -------- -------- -------- ---------- ---------- ----------
Loans, Net
Fixed Rate $1,283,674 $683,449 $436,074 $266,986 $165,721 $270,216 $3,106,120 $3,199,807
Average Int Rate 6.64% 7.24% 7.35% 6.78% 6.51% 6.38% 6.84%
Floating Rate $ 647,862 $168,279 $126,153 $108,939 $113,253 $271,989 $1,436,475 $1,436,475
Average Int Rate 3.90% 3.29% 3.37% 3.27% 3.49% 3.06% 3.54%
Investment Securities
Fixed Rate $ 674,209 $339,747 $318,475 $204,734 $ 85,336 $187,916 $1,810,417 $1,839,370
Average Int Rate 7.08% 3.94% 3.72% 3.97% 4.21% 4.32% 5.13%
Floating Rate $ 887 $ 169 $ 106 $ 67 $ 42 $ 79 $ 1,350 $ 1,350
Average Int Rate 2.56% 4.21% 4.22% 4.22% 4.23% 4.23% 3.13%
Other Earning Assets
Floating Rate $ 23,957 - - - - - $ 23,957 $ 23,957
Average Int Rate 1.41% - - - - - 1.41%
Interest-Bearing Deposits
Fixed Rate $1,279,358 $265,831 $114,833 $ 37,109 $ 43,708 $ 1,840 $1,742,679 $1,769,777
Average Int Rate 2.58% 3.75% 4.71% 5.09% 4.65% 5.21% 3.02%
Floating Rate $ 601,275 $273,440 $273,440 $273,440 $270,782 - $1,692,377 $1,692,377
Average Int Rate 0.81% 0.73% 0.73% 0.73% 0.73% - 0.76%
Other Interest-Bearing Liabilities
Fixed Rate $ 69,771 $ 50,000 $100,000 $ 75,243 - $ 5,945 $ 300,959 $ 332,990
Average Int Rate 2.90% 4.65% 5.49% 5.60% - 5.53% 4.78%
Floating Rate $1,404,978 - - - - - $1,404,978 $1,404,978
Average Int Rate 1.00% - - - - - 1.00%