UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-3683
TRUSTMARK CORPORATION
(Exact name of Registrant as specified in its charter)
Mississippi 64-0471500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
248 East Capitol Street, Jackson, Mississippi 39201
(Address of principal executive offices) (Zip Code)
(601) 208-5111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of October 20, 2004.
Title Outstanding
Common stock, no par value 57,822,833
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Trustmark Corporation and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
(Unaudited)
September 30, December 31,
2004 2003
------------ ------------
Assets
Cash and due from banks (noninterest-bearing) $ 273,385 $ 333,096
Federal funds sold and securities purchased
under reverse repurchase agreements 16,290 37,712
Securities available for sale (at fair value) 1,916,093 1,933,993
Securities held to maturity (fair value:
$157,490 - 2004; $191,146 - 2003) 147,214 178,450
Loans held for sale 104,389 112,560
Loans 5,283,953 4,920,052
Less allowance for loan losses 74,179 74,276
------------ ------------
Net loans 5,209,774 4,845,776
Premises and equipment 113,511 108,374
Mortgage servicing rights 51,199 49,707
Identifiable intangible assets 21,173 21,921
Goodwill 110,271 95,877
Other assets 187,328 196,855
------------ ------------
Total Assets $ 8,150,627 $ 7,914,321
============ ============
Liabilities
Deposits:
Noninterest-bearing $ 1,242,612 $ 1,329,444
Interest-bearing 4,044,919 3,760,015
------------ ------------
Total deposits 5,287,531 5,089,459
Federal funds purchased 294,232 253,419
Securities sold under repurchase agreements 560,254 674,716
Short-term borrowings 855,214 621,532
Long-term FHLB advances 355,926 531,035
Other liabilities 63,236 54,587
------------ ------------
Total Liabilities 7,416,393 7,224,748
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 57,822,833 shares -
2004; 58,246,733 shares - 2003 12,048 12,136
Capital surplus 121,282 132,383
Retained earnings 603,316 548,521
Accumulated other comprehensive loss, net of tax (2,412) (3,467)
------------ ------------
Total Shareholders' Equity 734,234 689,573
------------ ------------
Total Liabilities and Shareholders' Equity $ 8,150,627 $ 7,914,321
============ ============
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Income
($ in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Interest Income
Interest and fees on loans $ 74,669 $ 71,093 $217,921 $212,960
Interest on securities:
Taxable 16,162 12,065 47,183 50,610
Tax exempt 1,925 1,953 5,888 6,033
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 120 60 226 236
Other interest income 16 14 37 37
-------- -------- -------- --------
Total Interest Income 92,892 85,185 271,255 269,876
Interest Expense
Interest on deposits 13,547 14,167 40,259 45,882
Interest on federal funds purchased and securities
sold under repurchase agreements 3,243 2,269 7,503 8,096
Other interest expense 6,179 4,918 15,663 14,681
-------- -------- -------- --------
Total Interest Expense 22,969 21,354 63,425 68,659
-------- -------- -------- --------
Net Interest Income 69,923 63,831 207,830 201,217
Provision for loan losses 1,161 1,771 3,916 7,420
-------- -------- -------- --------
Net Interest Income After Provision
for Loan Losses 68,762 62,060 203,914 193,797
Noninterest Income
Service charges on deposit accounts 15,010 14,304 42,295 40,054
Wealth management 5,080 5,118 15,054 14,616
Retail banking - other 4,678 4,721 13,495 13,826
Insurance commissions 5,197 6,942 12,728 14,050
Mortgage banking (931) 8,428 6,267 3,599
Securities gains 6 57 21 12,226
Other income 1,935 1,298 5,387 4,727
-------- -------- -------- --------
Total Noninterest Income 30,975 40,868 95,247 103,098
Noninterest Expense
Salaries and employee benefits 32,602 31,434 95,475 96,855
Services and fees 9,190 7,806 26,415 23,696
Equipment expense 3,799 3,721 11,122 11,104
Net occupancy - premises 4,043 3,395 10,773 9,541
Other expense 7,288 7,325 21,273 21,119
-------- -------- -------- --------
Total Noninterest Expense 56,922 53,681 165,058 162,315
-------- -------- -------- --------
Income Before Income Taxes 42,815 49,247 134,103 134,580
Income taxes 14,728 16,829 46,242 46,514
-------- -------- -------- --------
Net Income $ 28,087 $ 32,418 $ 87,861 $ 88,066
======== ======== ======== ========
Earnings Per Share
Basic $ 0.49 $ 0.55 $ 1.51 $ 1.49
======== ======== ======== ========
Diluted $ 0.48 $ 0.55 $ 1.51 $ 1.48
======== ======== ======== ========
Dividends Per Share $ 0.1900 $ 0.1650 $ 0.5700 $ 0.4950
======== ======== ======== ========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
($ in thousands)
(Unaudited)
2004 2003
-------- --------
Balance, January 1, $689,573 $679,534
Comprehensive income:
Net income per consolidated statements of income 87,861 88,066
Net change in fair value of securities available
for sale, net of tax 1,055 (10,325)
Net change in fair value of cash flow hedges,
net of tax - 2,966
-------- --------
Comprehensive income 88,916 80,707
Cash dividends paid (33,066) (29,229)
Common stock issued, long-term incentive plan 1,602 1,995
Compensation expense, long-term incentive plan 748 266
Repurchase and retirement of common stock (13,539) (51,175)
-------- --------
Balance, September 30, $734,234 $682,098
======== ========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2004 2003
---------- ----------
Operating Activities
Net income $ 87,861 $ 88,066
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,916 7,420
Depreciation and amortization/impairment 18,633 28,032
Net amortization of securities 15,955 13,886
Securities gains (21) (12,226)
Gains on sales of loans (5,152) (14,715)
Deferred income tax provision 5,040 977
Proceeds from sales of loans 640,000 1,217,389
Purchases and originations of loans held for sale (631,829) (1,176,419)
Net increase in intangible assets (8,652) (17,586)
Net decrease (increase) in other assets 1,516 (6,876)
Net increase in other liabilities 8,132 689
Other operating activities, net 20 (54)
---------- ----------
Net cash provided by operating activities 135,419 128,583
Investing Activities
Proceeds from calls and maturities of securities
held to maturity 31,094 429,647
Proceeds from calls and maturities of securities
available for sale 369,786 349,382
Proceeds from sales of securities available for sale - 267,895
Purchases of securities held to maturity (103) (3,978)
Purchases of securities available for sale (366,099) (1,127,658)
Net decrease (increase) in federal funds sold and
securities purchased under reverse repurchase
agreements 21,422 (35,543)
Net increase in loans (223,257) (218,389)
Purchases of premises and equipment (12,218) (5,964)
Proceeds from sales of premises and equipment 462 1,287
Proceeds from sales of other real estate 5,070 4,510
Net cash received (paid) in business combinations 4,622 (69,802)
---------- ----------
Net cash used in investing activities (169,221) (408,613)
Financing Activities
Net increase in deposits 34,170 100,839
Net decrease in federal funds purchased and
securities sold under repurchase agreements (73,649) (130,268)
Net increase in other borrowings 58,573 315,220
Cash dividends (33,066) (29,229)
Proceeds from the exercise of stock options 1,602 1,995
Repurchase and retirement of common stock (13,539) (51,175)
---------- ----------
Net cash (used in) provided by financing activities (25,909) 207,382
---------- ----------
Decrease in cash and cash equivalents (59,711) (72,648)
Cash and cash equivalents at beginning of period 333,096 357,427
---------- ----------
Cash and cash equivalents at end of period $ 273,385 $ 284,779
========== ==========
See notes to consolidated financial statements.
TRUSTMARK CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. 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. In the
opinion of Management, all adjustments (consisting of normal recurring accruals)
considered necessary for the fair presentation of these consolidated financial
statements have been included. Operating results for the three and nine month
periods ended September 30, 2004, are not necessarily indicative of the results
that may be expected for the year ended December 31, 2004. The notes included
herein should be read in conjunction with the notes to the consolidated
financial statements included in Trustmark Corporation's (Trustmark) 2003 annual
report on Form 10-K.
The consolidated financial statements include Trustmark and its wholly-owned
bank subsidiaries, Trustmark National Bank (TNB) and Somerville Bank & Trust
Company (Somerville). All intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
period amounts to conform with the current period presentation.
NOTE 2 - BUSINESS COMBINATIONS
On November 2, 2004, Trustmark announced the signing of an agreement in which
Fisher-Brown, Inc. would become a wholly owned subsidiary of Trustmark National
Bank. Founded in 1911, Fisher-Brown is the leading general lines insurance
agency in Northwest Florida, providing a broad spectrum of risk management
products to businesses and individuals in Northwest Florida. With annual
revenues of $16 million, Fisher-Brown is headquartered in Pensacola, Florida and
has offices in Milton, Mary Esther, Destin and Panama City, Florida. The
transaction, which is subject to due diligence, is expected to close in the
fourth quarter of 2004.
On March 12, 2004, Trustmark acquired five branches of Allied Houston Bank in a
business combination accounted for by the purchase method of accounting. In
connection with the transaction, Trustmark acquired approximately $148.1 million
in assets and assumed $161.7 million in deposits and other liabilities for a $10
million deposit premium. Assets consisted of $145.9 million of selected loans,
$585 thousand in premises and equipment and $1.6 million in other assets. The
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 $6.4 million discount, consisting of a discount for general credit risk of
$7.3 million offset by a market valuation premium of $862 thousand. Included in
the credit risk discount of $7.3 million was a specific amount for nonaccrual
loans of $1.7 million. Subsequent to the purchase date, the unpaid principal for
these nonaccrual loans was written down to net realizable value against the
recorded discount. Excess cost over tangible net assets acquired totaled $15.7
million, of which $426 thousand and $15.3 million have been allocated to
identifiable intangibles (core deposits) and goodwill, respectively. Trustmark's
financial statements include the results of operations for this acquisition from
the merger date. The pro forma impact of this acquisition on Trustmark's results
of operations is insignificant.
On 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 selected 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 identifiable intangibles (core deposits)
and goodwill, respectively. Trustmark's financial statements include the results
of operations for this acquisition from the merger date. The pro forma impact of
this acquisition on Trustmark's results of operations is insignificant.
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
For the periods presented, loans consisted of the following:
September 30, December 31,
2004 2003
------------ ------------
Real estate loans:
Construction and land development $ 496,937 $ 406,257
Secured by 1-4 family residential properties 1,808,966 1,663,915
Secured by nonfarm, nonresidential properties 885,813 858,708
Other 142,028 156,524
Loans to finance agricultural production 41,789 30,815
Commercial and industrial 859,156 787,094
Consumer 793,447 787,316
Obligations of states and political subdivisions 179,821 173,296
Other loans 75,996 56,127
------------ ------------
Loans 5,283,953 4,920,052
Less allowance for loan losses 74,179 74,276
------------ ------------
Net loans $ 5,209,774 $ 4,845,776
============ ============
The following table summarizes the activity in the allowance for loan losses for
the periods presented ($ in thousands):
Nine Months Ended
September 30,
------------------
2004 2003
-------- --------
Balance at beginning of year $ 74,276 $ 74,771
Provision charged to expense 3,916 7,420
Loans charged off (10,950) (14,675)
Recoveries 6,937 6,970
-------- --------
Net charge-offs (4,013) (7,705)
-------- --------
Balance at end of period $ 74,179 $ 74,486
======== ========
At September 30, 2004 and 2003, the carrying amounts of nonaccrual loans were
$27.1 million and $26.9 million, respectively. Included in these nonaccrual
loans at September 30, 2004 and 2003, are loans that are considered to be
impaired, which totaled $20.8 million and $19.6 million, respectively. At
September 30, 2004, the total allowance for loan losses related to impaired
loans was $7.0 million compared with $6.1 million at September 30, 2003. The
average carrying amounts of impaired loans during the third quarter of 2004 and
2003 were $20.3 million and $20.4 million, respectively. No material amounts of
interest income were recognized on impaired loans or nonaccrual loans for the
three and nine month periods ended September 30, 2004 and 2003.
NOTE 4 - MORTGAGE BANKING
At September 30, 2004 and December 31, 2003, the carrying amount of mortgage
servicing rights are as follows ($ in thousands):
September 30, December 31,
2004 2003
------------ ------------
Mortgage Servicing Rights $ 58,990 $ 65,574
Valuation Allowance (7,791) (15,867)
------------ ------------
Mortgage Servicing Rights, net $ 51,199 $ 49,707
============ ============
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 are retained, Trustmark allocated 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 new
servicing income. At September 30, 2004, Trustmark serviced $3.4 billion in
mortgage loans for others.
Impairment for mortgage servicing rights occurs when the estimated fair value
falls below the underlying carrying value. Fair value is determined utilizing
specific risk characteristics of the mortgage loan, current interest rates and
current prepayment speeds. During the second quarter of 2004, Trustmark
reclassified $6.6 million of mortgage servicing right impairment from temporary
to other-than-temporary which reduced the valuation allowance for impairment and
the gross mortgage servicing rights balance with no effect to the net mortgage
servicing rights asset. Impairment is considered to be other-than-temporary when
Trustmark determines that the carrying value is expected to exceed the fair
value for an extended period of time.
NOTE 5 - DEPOSITS
At September 30, 2004 and December 31, 2003, deposits consisted of the following
($ in thousands):
September 30, December 31,
2004 2003
------------ ------------
DDA, NOW, MMDA $ 2,597,592 $ 2,543,694
Savings 867,618 828,256
Time 1,822,321 1,717,509
------------ ------------
Total deposits $ 5,287,531 $ 5,089,459
============ ============
NOTE 6 - 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 for 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. 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):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income, as reported $28,087 $32,418 $87,861 $88,066
Add: Total stock-based employee compensation
expense reported in net income, net of taxes 187 84 462 164
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (459) (439) (1,274) (1,227)
------- ------- ------- -------
Pro forma net income $27,815 $32,063 $87,049 $87,003
======= ======= ======= =======
Earnings per share:
As reported
Basic $ 0.49 $ 0.55 $ 1.51 $ 1.49
Diluted 0.48 0.55 1.51 1.48
Pro forma
Basic $ 0.48 $ 0.55 $ 1.50 $ 1.47
Diluted 0.48 0.54 1.49 1.46
NOTE 7 - CONTINGENCIES
Standby Letters of Credit
Trustmark issues financial and performance standby letters of credit in the
normal course of business in order to fulfill the financing needs of its
customers. Standby letters of credit are conditional commitments issued by
Trustmark to insure the performance of a customer to a third party. A financial
standby letter of credit is a commitment by Trustmark to guarantee a customer's
repayment of an outstanding loan or debt instrument. Trustmark guarantees a
customer's performance to a third party under a contractual nonfinancial
obligation through the use of a performance standby letter of credit. When
issuing letters of credit, Trustmark uses essentially the same policies
regarding credit risk and collateral which are followed in the lending process.
At September 30, 2004, the maximum potential amount of future payments Trustmark
could be required to make under its standby letters of credit was $94.7 million,
which also represented the maximum credit risk associated with these
commitments. This amount consisted primarily of commitments with maturities of
less than three years. These standby letters of credit have an immaterial
carrying value. Trustmark holds collateral to support standby letters of credit
when deemed necessary. As of September 30, 2004, the fair value of collateral
held was $22.9 million.
Legal Proceedings
Trustmark and its subsidiaries are parties to lawsuits and other claims that
arise in the ordinary course of business. Some of the lawsuits assert claims
related to the lending, collection, servicing, investment, trust and other
business activities; and some of the lawsuits allege substantial claims for
damages. The cases are being vigorously contested. In the regular course of
business, Management evaluates estimated losses or costs related to litigation,
and provision is made for anticipated losses whenever Management believes that
such losses are probable and can be reasonably estimated. At the present time,
Management believes, based on the advice of legal counsel and Management's
evaluation, that the final resolution of pending legal proceedings will not have
a material impact on Trustmark's consolidated financial position or results of
operations; however, Management is unable to estimate a range of potential loss
on these matters because of the nature of the legal environment in states where
Trustmark conducts business.
NOTE 8 - ASSOCIATE PENSION PLAN
Trustmark maintains a noncontributory defined benefit pension plan which covers
substantially all associates with more than one year of service. The plan
provides pension benefits that are based on credited service, final average
compensation and the benefit formula as defined in the plan. Trustmark's policy
is to fund amounts allowable for federal income tax purposes, making sufficient
contributions to satisfy the minimum funding requirement for each plan year and
making additional contributions, as needed, based on the plan's funded status as
of the October 31 measurement date.
The following table presents information regarding net periodic pension costs
for the nine months ended September 30, 2004 and 2003 ($ in thousands):
2004 2003
------ ------
Service cost $1,228 $1,928
Interest cost 3,169 3,427
Expected return on plan assets (3,755) (4,136)
Amortization of prior service cost (65) 182
Recognized net loss due to early retirement - 2,378
Recognized net actuarial loss 892 -
------ ------
Net Periodic Benefit Cost $1,469 $3,779
====== ======
The table above shows the recognized net loss due to early retirement of $2.378
million, resulting from a voluntary early retirement program announced by
Trustmark in February 2003. This program was offered to associates age 58 and
above with ten years or more of service and was accepted by 116 associates, or
4.75% of Trustmark's workforce.
The acceptable range of contributions to the plan is determined each year by the
plan's actuary as of the measurement date, which is October 31st. Trustmark's
minimum required contribution for the current year is zero; however, Trustmark's
Management and Board of Directors approved a contribution of $11 million, which
was made in October 2004.
NOTE 9 - EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average shares of common stock outstanding. Diluted EPS is computed by
dividing net income by the weighted average shares of common stock outstanding,
adjusted for the effect of 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:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Basic 57,809,762 58,626,951 58,043,557 59,214,354
Dilutive shares (related to stock options) 304,558 271,346 289,964 191,656
---------- ---------- ---------- ----------
Diluted 58,114,320 58,898,297 58,333,521 59,406,010
========== ========== ========== ==========
NOTE 10 - STATEMENTS OF CASH FLOWS
Trustmark paid income taxes of $37.4 million and $45.3 million during the nine
months ended September 30, 2004 and 2003, respectively. Interest paid on deposit
liabilities and other borrowings totaled $62.4 million in the first nine months
of 2004 and $70.8 million in the first nine months of 2003. For the nine months
ended September 30, 2004 and 2003, noncash transfers from loans to foreclosed
properties were $3.8 million and $4.4 million, respectively. Assets acquired
during the first quarter of 2004 as a result of the Allied Houston business
combination totaled $148.1 million, while liabilities assumed totaled $161.7
million. During the first nine months of 2004, $175.0 million of long-term FHLB
advances were transferred to short-term borrowings compared with net transfers
of $42.3 million in the first nine months of 2003.
NOTE 11 - RECENT PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) issued EITF 03-1 "The Meaning of Other-than-Temporary and
its Application to Certain Investments". EITF 03-1 requires an evaluation of
investment securities to determine if impairment is "other-than-temporary". If
impairment is deemed to be other-than-temporary based on certain criteria, an
impairment loss equal to the difference between the investment's cost and its
fair value is recognized. EITF 03-1 also requires additional disclosure related
to unrealized losses. The disclosure requirements of EITF 03-1 are effective for
annual reporting periods ending after June 15, 2004. The impairment requirements
of EITF 03-1 are currently delayed pending clarification.
On March 9, 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 105, "Application of Accounting Principles to Loan
Commitments". This bulletin summarizes the views of the SEC staff regarding the
application of generally accepted accounting principles to loan commitments
accounted for as derivative instruments. The adoption of this bulletin did not
impact Trustmark's consolidated financial statements.
In December 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer." SOP 03-3 addresses accounting for differences between the contractual
cash flows of certain loans and debt securities and the cash flows expected to
be collected when loans or debt securities are acquired in a transfer and those
cash flow differences are attributable, at least in part, to credit quality. As
such, SOP 03-3 applies to loans and debt securities acquired individually, in
pools or as part of a business combination and does not apply to originated
loans. The application of SOP 03-3 limits the interest income, including
accretion of purchase price discounts, that may be recognized for certain loans
and debt securities. Additionally, SOP 03-3 does not allow the excess of
contractual cash flows over cash flows expected to be collected to be recognized
as an adjustment of yield, loss accrual or valuation allowance, such as the
allowance for possible loan losses. SOP 03-3 requires that increases in expected
cash flows subsequent to the initial investment be recognized prospectively
through adjustment of the yield on the loan or debt security over its remaining
life. Decreases in expected cash flows should be recognized as impairment. In
the case of loans acquired in a business combination where the loans show signs
of credit deterioration, SOP 03-3 represents a significant change from current
purchase accounting practice whereby the acquiree's allowance for loan losses is
typically added to the acquirer's allowance for loan losses. SOP 03-3 is
effective for loans and debt securities acquired by Trustmark beginning January
1, 2005. The adoption of this new standard is not expected to have a material
impact on Trustmark's financial statements.
NOTE 12 - SEGMENT INFORMATION
During the first quarter of 2004, Trustmark realigned its management reporting
structure to include four segments that include general banking, wealth
management, insurance and administration. The general banking segment realigns
Trustmark's former consumer and commercial segment into a single group that
delivers a full range of banking services to consumers, corporate, small and
middle market businesses through its extensive branch network. Trustmark
realigned its former investment segment into the wealth management segment
incorporating trust, brokerage, investment advisory, and private banking service
under one umbrella. The insurance segment, formerly included in the consumer
segment, represents Trustmark's retail insurance agency that offers a diverse
mix of insurance products and services. The administrative segment incorporates
Trustmark's treasury function with various non-allocated corporate operation
units and includes intangible assets and related amortization (except mortgage
servicing rights and related amortization, which is included in the general
banking segment).
The accounting policies of each reportable segment are the same as those of the
Corporation except for its internal allocations. Trustmark uses a match-funded
transfer pricing process to assess operating segment performance. Non-interest
expenses for back-office operations support are allocated to segments based on
estimated uses of those services. Income tax expense for segments is calculated
at the marginal statutory rate.
The following table discloses financial information by reportable segment for
the periods ended September 30, 2004 and 2003. The prior period has been
restated to conform with the current period presentation.
Trustmark Corporation
Segment Information
($ in thousands)
General
Banking Wealth Mgt Insurance Admin
Division Division Division Division Total
---------- ---------- ---------- ---------- ----------
For the three months ended
September 30, 2004
- --------------------------
Net interest income
from external customers $ 60,452 $ 1,174 $ - $ 8,297 $ 69,923
Internal funding (756) (85) - 841 -
---------- ---------- ---------- ---------- ----------
Net interest income 59,696 1,089 - 9,138 69,923
Provision for loan losses 1,143 20 - (2) 1,161
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 58,553 1,069 - 9,140 68,762
Noninterest income 19,973 5,179 5,201 622 30,975
Noninterest expense 40,267 4,603 3,718 8,334 56,922
---------- ---------- ---------- ---------- ----------
Income before income taxes 38,259 1,645 1,483 1,428 42,815
Income taxes 13,174 597 576 381 14,728
---------- ---------- ---------- ---------- ----------
Segment net income $ 25,085 $ 1,048 $ 907 $ 1,047 $ 28,087
========== ========== ========== ========== ==========
Selected Financial Information
Average assets $5,861,478 $ 100,582 $ 28,262 $2,298,878 $8,289,200
Depreciation and
amortization/impairment $ 8,282 $ 132 $ 39 $ 989 $ 9,442
For the three months ended
September 30, 2003
- --------------------------
Net interest income
from external customers $ 55,787 $ 1,149 $ - $ 6,895 $ 63,831
Internal funding 7,473 234 - (7,707) -
---------- ---------- ---------- ---------- ----------
Net interest income 63,260 1,383 - (812) 63,831
Provision for loan losses 1,709 61 - 1 1,771
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 61,551 1,322 - (813) 62,060
Noninterest income 28,725 5,222 6,922 (1) 40,868
Noninterest expense 43,238 4,825 4,033 1,585 53,681
---------- ---------- ---------- ---------- ----------
Income before income taxes 47,038 1,719 2,889 (2,399) 49,247
Income taxes 16,364 617 1,159 (1,311) 16,829
---------- ---------- ---------- ---------- ----------
Segment net income $ 30,674 $ 1,102 $ 1,730 $ (1,088) $ 32,418
========== ========== ========== ========== ==========
Selected Financial Information
Average assets $5,333,992 $ 94,251 $ 28,712 $2,042,515 $7,499,470
Depreciation and
amortization/impairment $ 527 $ 100 $ 31 $ 1,049 $ 1,707
Trustmark Corporation
Segment Information
($ in thousands)
General
Banking Wealth Mgt Insurance Admin
Division Division Division Division Total
---------- ---------- ---------- ---------- ----------
For the nine months ended
September 30, 2004
- -------------------------
Net interest income
from external customers $ 174,067 $ 3,377 $ - $ 30,386 $ 207,830
Internal funding 82 (260) - 178 -
---------- ---------- ---------- ---------- ----------
Net interest income 174,149 3,117 - 30,564 207,830
Provision for loan losses 4,287 (7) - (364) 3,916
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 169,862 3,124 - 30,928 203,914
Noninterest income 66,934 15,329 12,703 281 95,247
Noninterest expense 120,512 13,472 8,844 22,230 165,058
---------- ---------- ---------- ---------- ----------
Income before income taxes 116,284 4,981 3,859 8,979 134,103
Income taxes 40,249 1,827 1,449 2,717 46,242
---------- ---------- ---------- ---------- ----------
Segment net income $ 76,035 $ 3,154 $ 2,410 $ 6,262 $ 87,861
========== ========== ========== ========== ==========
Selected Financial Information
Average assets $5,708,616 $ 98,814 $ 19,799 $2,326,942 $8,154,171
Depreciation and
amortization/impairment $ 15,279 $ 359 $ 107 $ 2,888 $ 18,633
For the nine months ended
September 30, 2003
- -------------------------
Net interest income
from external customers $ 162,742 $ 3,587 $ - $ 34,888 $ 201,217
Internal funding 19,003 212 - (19,215) -
---------- ---------- ---------- ---------- ----------
Net interest income 181,745 3,799 - 15,673 201,217
Provision for loan losses 7,011 39 - 370 7,420
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 174,734 3,760 - 15,303 193,797
Noninterest income 63,409 14,905 13,992 10,792 103,098
Noninterest expense 128,890 13,551 8,798 11,076 162,315
---------- ---------- ---------- ---------- ----------
Income before income taxes 109,253 5,114 5,194 15,019 134,580
Income taxes 38,123 1,864 2,130 4,397 46,514
---------- ---------- ---------- ---------- ----------
Segment net income $ 71,130 $ 3,250 $ 3,064 $ 10,622 $ 88,066
========== ========== ========== ========== ==========
Selected Financial Information
Average assets $5,182,819 $ 93,180 $ 19,623 $2,017,808 $7,313,430
Depreciation and
amortization/impairment $ 24,177 $ 310 $ 67 $ 3,478 $ 28,032
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following provides a narrative discussion and analysis of Trustmark
Corporation's (Trustmark) financial condition and results of operations. This
discussion should be read in conjunction with the consolidated financial
statements and the supplemental financial data included elsewhere in this
report.
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 a
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 occur. 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.
Overview
Trustmark is an integrated provider of banking, wealth management and insurance
solutions with over 145 branches and 185 ATMs in Mississippi, Florida, Tennessee
and Texas. Trustmark National Bank (TNB), Trustmark's wholly-owned subsidiary,
accounts for substantially all of the assets and revenues of Trustmark. In
addition to banking activities, TNB provides investment and insurance products
and services to its customers through three wholly-owned subsidiaries, Trustmark
Securities, 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), which
serves the Fayette County, Tennessee market.
Basic earnings per share were $0.49 for the third quarter of 2004, which
resulted from net income of $28.1 million. Included in the results for the third
quarter of 2004 is a non-cash after-tax charge of $1.9 million, or $0.033 per
share, for impairment of the Company's home mortgage servicing portfolio related
to declines in long-term interest rates during the quarter. In the third quarter
of 2003, basic earnings per share were $0.55 and included a reversal of
previously recorded mortgage servicing impairment charges, which increased the
quarter's after-tax net income by $3.1 million, or $0.052 per share. Net income
for the nine months ended September 30, 2004, totaled $87.9 million, compared
with $88.1 million for the nine months ended September 30, 2003. Basic earnings
per share were $1.51 for the first nine months of 2004, an increase of 1.3% when
compared with $1.49 for the same period in 2003. Diluted earnings per share for
the first nine months of 2004 were $1.51, an increase of 2.0% compared with
$1.48 for the first nine months of 2003.
Management utilizes certain financial ratios to gauge Trustmark's performance.
Trustmark achieved a return on average assets of 1.35% and a return on average
equity of 15.26% for the three months ended September 30, 2004. These compared
with ratios of 1.71% for return on average assets and 19.03% for return on
average equity for the three months ended September 30, 2003. For the nine
months ended September 30, 2004, Trustmark achieved a return on average assets
of 1.44% and a return on average equity of 16.34%. These compare to a return on
average assets of 1.61% and a return on average equity of 17.58% for the same
period in 2003.
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. A summary of significant accounting policies and a
description of accounting policies that are considered critical may be found in
Trustmark's 2003 Annual Report on Form 10-K, filed on March 10, 2004, in the
Notes to the Consolidated Financial Statements. Because of recent developments
in mortgage servicing rights, additional information is shown below.
Mortgage Servicing Rights
Impairment for mortgage servicing rights occurs when the estimated fair value
falls below the underlying carrying value. Fair value is determined utilizing
specific risk characteristics of the mortgage loan, current interest rates and
current prepayment speeds. During the second quarter of 2004, Trustmark
reclassified $6.6 million of mortgage servicing right impairment from temporary
to other-than-temporary which reduced the valuation allowance for impairment and
the gross mortgage servicing rights balance with no effect to the net mortgage
servicing rights asset. Impairment is considered to be other-than-temporary when
Trustmark determines that the carrying value is expected to exceed the fair
value for an extended period of time.
Business Combinations
On November 2, 2004, Trustmark announced the signing of an agreement in which
Fisher-Brown, Inc. would become a wholly owned subsidiary of Trustmark National
Bank. Founded in 1911, Fisher-Brown is the leading general lines insurance
agency in Northwest Florida, providing a broad spectrum of risk management
products to businesses and individuals in Northwest Florida. With annual
revenues of $16 million, Fisher-Brown is headquartered in Pensacola, Florida and
has offices in Milton, Mary Esther, Destin and Panama City, Florida. The
transaction, which is subject to due diligence, is expected to close in the
fourth quarter of 2004.
During March 2004, Trustmark completed its entry into the dynamic Houston,
Texas, market with the purchase of five branches of Allied Houston Bank. These
offices, with loans of $145.9 million and deposits and other liabilities of
$161.7 million, are located in one of Houston's most attractive areas. In August
2003, Trustmark completed its expansion into Florida's vibrant Emerald Coast
market with the purchase of seven branches of The Banc Corporation. The Emerald
Coast branches, with $224.3 million in loans and $209.2 million in deposits and
other liabilities, are located in thriving areas and well positioned for
additional growth. Strategic acquisitions, which enhance internal growth, will
continue to be an important component of Trustmark's strategic plan. 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. Please
see the notes to the consolidated financial statements for further details
concerning these acquisitions.
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 Table
on pages 18 and 19 shows the average balances for all assets and liabilities of
Trustmark and the interest income or expense associated with earning assets and
interest-bearing liabilities. The yields and rates have been computed based upon
interest income and expense adjusted to a fully taxable equivalent (FTE) basis
using a 35% federal marginal tax rate for all periods shown. Nonaccruing loans
have been included in the average loan balances and interest collected prior to
these loans having been placed on nonaccrual has been included in interest
income. Loan fees included in interest associated with the average loan balances
are immaterial.
Yield/Rate Analysis Table
($ in thousands)
For the Three Months Ended September 30,
---------------------------------------------------------------
2004 2003
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest-earning assets:
Federal funds sold and securities
purchased under reverse
repurchase agreements $ 30,574 $ 120 1.56% $ 20,535 $ 60 1.16%
Securities - taxable 1,967,154 16,162 3.27% 1,757,429 12,065 2.72%
Securities - nontaxable 156,955 2,961 7.51% 154,781 3,005 7.70%
Loans, including loans held for sale 5,386,084 75,711 5.59% 4,933,252 72,049 5.79%
---------- -------- ---------- --------
Total interest-earning assets 7,540,767 94,954 5.01% 6,865,997 87,179 5.04%
Cash and due from banks 334,298 282,239
Other assets 488,363 426,066
Allowance for loan losses (74,228) (74,832)
---------- ----------
Total Assets $8,289,200 $7,499,470
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $4,006,694 13,547 1.35% $3,645,418 14,167 1.54%
Federal funds purchased and
securities sold under
repurchase agreements 966,420 3,243 1.33% 929,774 2,269 0.97%
Borrowings 1,241,519 6,179 1.98% 918,984 4,918 2.12%
---------- -------- ---------- --------
Total interest-bearing liabilities 6,214,633 22,969 1.47% 5,494,176 21,354 1.54%
-------- --------
Noninterest-bearing demand deposits 1,262,756 1,260,135
Other liabilities 79,427 69,231
Shareholders' equity 732,384 675,928
---------- ----------
Total Liabilities and
Shareholders' Equity $8,289,200 $7,499,470
========== ==========
Net Interest Margin 71,985 3.80% 65,825 3.80%
Less tax equivalent adjustment 2,062 1,994
-------- --------
Net Interest Margin per Consolidated
Statements of Income $ 69,923 $ 63,831
======== ========
Net interest income-FTE for the three-month and nine-month periods of 2004
increased $6.2 million, or 9.4%, and $6.7 million, or 3.2%, respectively, when
compared to the same periods of 2003. Excluding the business combinations with
Emerald Coast and Allied Houston, net interest income - FTE increased $1.2
million, or 1.9% for the three months ended September 30, 2004, and decreased
$6.5 million, or 3.1%, for the nine-month period ended September 30, 2004.
Yield/Rate Analysis Table
($ in thousands)
For the Nine Months Ended September 30,
---------------------------------------------------------------
2004 2003
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest-earning assets:
Federal funds sold and securities
purchased under reverse
repurchase agreements $ 24,005 $ 226 1.26% $ 27,063 $ 236 1.17%
Securities - taxable 1,982,676 47,183 3.18% 1,728,241 50,610 3.92%
Securities - nontaxable 158,912 9,058 7.61% 157,416 9,282 7.88%
Loans, including loans held for sale 5,246,443 221,082 5.63% 4,765,364 216,009 6.06%
---------- -------- ---------- --------
Total interest-earning assets 7,412,036 277,549 5.00% 6,678,084 276,137 5.53%
Cash and due from banks 336,210 296,854
Other assets 480,195 413,530
Allowance for loan losses (74,270) (75,038)
---------- ----------
Total Assets $8,154,171 $7,313,430
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $4,036,538 40,259 1.33% $3,617,219 45,882 1.70%
Federal funds purchased and
securities sold under
repurchase agreements 917,772 7,503 1.09% 965,417 8,096 1.12%
Borrowings 1,150,630 15,663 1.82% 788,852 14,681 2.49%
---------- -------- ---------- --------
Total interest-bearing liabilities 6,104,940 63,425 1.39% 5,371,488 68,659 1.71%
-------- --------
Noninterest-bearing demand deposits 1,267,936 1,206,457
Other liabilities 63,134 65,587
Shareholders' equity 718,161 669,898
---------- ----------
Total Liabilities and
Shareholders' Equity $8,154,171 $7,313,430
========== ==========
Net Interest Margin 214,124 3.86% 207,478 4.15%
Less tax equivalent adjustment 6,294 6,261
-------- --------
Net Interest Margin per Consolidated
Statements of Income $207,830 $201,217
======== ========
Interest income-FTE for the third quarter of 2004 increased $7.8 million, or
8.9%, when compared to the third quarter of 2003 and $3.1 million, or 3.4%, when
compared to the second quarter of 2004. Interest and fees on loans were
positively impacted by increases in short-term rates based on changes made by
the Federal Reserve Bank during the third quarter while interest earned on the
securities portfolio benefited from the slow-down in mortgage refinancing in
response to higher long-term interest rates during the second quarter of 2004.
In reaction, prepayments of mortgage-backed securities have slowed and reduced
the acceleration of premium amortization on these investments that had
negatively affected interest income during the second quarter of 2004. In
addition, interest income-FTE has been positively impacted by an increase in
average earning assets of $674.8 million, or 9.8%, when the third quarter of
2004 is compared with the third quarter of 2003. Without the Emerald Coast and
Allied Houston branch purchases, the increase in average interest-earning assets
for the third quarter of 2004 is $249.4 million, or 3.6%. When compared with the
second quarter of 2004, average-earning assets for the third quarter of 2004
increased $47.9 million, or 0.6%. In this comparison, loan growth increased
$97.8 million, or 1.8%, while securities decreased $56.3 million, or 2.6%.
During the third quarter, Trustmark utilized the liquidity provided by maturing
investments to reduce its reliance on wholesale funding which helped mitigate
the exposure to the increase in short-term rates. As a result of these actions,
the yield on earning assets for the third quarter of 2004 was lower than that
experienced during the same period of 2003 (5.01% versus 5.04%), however, this
yield increased by 8 basis points (from 4.93%) when compared to the second
quarter of 2004.
Increases in short-term rates also had an impact on interest expense during the
third quarter of 2004. Interest expense increased $1.6 million, or 7.6%, when
compared to the third quarter of 2003 and $2.8 million, or 13.7%, when compared
to the second quarter of 2004. A greater reliance on wholesale funding,
including federal funds purchased, securities sold under repurchase agreements
and Federal Home Loan Bank (FHLB) advances, during the third quarter of 2004 was
necessary in order to compensate for reduced funding from deposits. This is
illustrated by the increase in wholesale funding products of $129.4 million when
the third quarter of 2004 is compared with the second quarter of 2004, which
offset a decline of $101.9 million in interest-bearing deposits during the same
time period. While the cost of interest-bearing liabilities for the third
quarter of 2004 was lower than that experienced during the same period of 2003
(1.47% versus 1.54%), it had increased by 16 basis points (from 1.31%) when
compared to the second quarter of 2004.
The combination of these factors resulted in no change in the NIM for the third
quarter of 2004 (3.80%) when compared to the same quarter of 2003 and a decrease
of 4 basis points (from 3.84%) when compared to the second quarter of 2004.
Provision for Loan Losses
Trustmark's provision for loan losses totaled $1.2 million and $3.9 million,
respectively, for the three and nine months ended September 30, 2004, compared
with $1.8 million and $7.4 million, respectively, for the same periods in 2003.
During the nine months ended September 30, 2004, the provision for loan losses
equaled 97.6% of net charge-offs compared with 96.3% in the prior year period.
As a percentage of average loans, the provision was 0.10% for the first nine
months of 2004 compared with 0.21% for the first nine months of 2003.
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 expected economic conditions. Based on
recent improvements in economic conditions in both national and local markets,
increased diversification of the loan portfolio from a geographic and product
standpoint and continued improvement in both underwriting and oversight of loan
processes, Management feels that the current provision for loan losses for the
three and nine month periods ending September 30, 2004 is sufficient to maintain
the allowance for loan losses at an appropriate reserve level for present and
potential risk exposure.
Noninterest Income
Noninterest income (NII) consists of revenues generated from a broad range of
banking and financial services. NII totaled $95.2 million in the first nine
months of 2004 compared with $103.1 million in the first nine months of 2003.
NII represented 26.0% of total revenues in the first nine months of 2004 versus
27.6% in the first nine months of 2003. The comparative components of
noninterest income for the nine-month periods ended September 30, 2004 and 2003
are shown in the accompanying table. Noninterest income contributed by the
Emerald Coast and Allied Houston branch purchases during 2004 is considered
immaterial.
Noninterest Income
($ in thousands)
Nine Months Ended
September 30,
------------------
2004 2003 $ Change % Change
-------- -------- -------- --------
Service charges on deposit accounts $ 42,295 $ 40,054 $ 2,241 5.6%
Wealth management 15,054 14,616 438 3.0%
Retail banking - other 13,495 13,826 (331) -2.4%
Insurance commissions 12,728 14,050 (1,322) -9.4%
Mortgage banking 6,267 3,599 2,668 74.1%
Securities gains 21 12,226 (12,205) -99.8%
Other income 5,387 4,727 660 14.0%
-------- -------- -------- --------
Total Noninterest Income $ 95,247 $103,098 $ (7,851) -7.6%
======== ======== ======== ========
The single largest component of noninterest income continues to be service
charges for deposit products and services, which increased 5.6% in the first
nine months of 2004 over the same period in 2003. The growth in services charges
for 2004 is primarily attributed to an increase in fees charged for NSF and
overdrafts combined with increased transaction volumes when compared with the
same time period in 2003.
Wealth management income was $15.1 million for the first nine months of 2004, an
increase of $438 thousand when compared with the same period of 2003. Wealth
management consists of all income related to trust and advisory services,
including income generated from Trustmark Securities, Inc. and Trustmark
Investment Advisors, Inc. Recent improvements in the performance of the capital
markets positively impacted growth in this area. Increases in fees related to
trust and investment services were offset by a decrease in income derived from
annuities during the period. In addition, further integration of the Wealth
Management Division into Trustmark's Florida and Tennessee markets has begun to
impact income as well. Trustmark's assets under administration decreased by
approximately $800 million during the third quarter of 2004 as a result of the
finalization of a corporate bankruptcy, which eliminated promissory notes held
in a custodial relationship. Wealth management fees related to this relationship
were immaterial. At September 30, 2004, Trustmark held assets under
administration of $6.1 billion and remained one of the largest providers of
asset management services in Mississippi.
Retail banking - other income totaled $13.5 million in the first nine months of
2004, a decrease of $331 thousand, or 2.4%, when compared with the same period
in 2003. Retail banking - other income consists primarily of ATM fees, fees from
the sale of checks, bank card fees and safe deposit box fees. The primary factor
in the decrease is bank card fees, which has been negatively impacted by changes
in the pricing of interchange fees.
Mortgage banking income was $6.3 million for the nine months ended September 30,
2004, compared to $3.6 million for the same period of 2003. As shown in the
accompanying table, mortgage banking income primarily includes mortgage
servicing fees, gain on sale of mortgage loans, amortization and impairment of
mortgage servicing rights, guaranty fees and the valuation adjustment on fair
value hedges used in conjunction with the mortgage servicing portfolio. For the
nine months ended September 30, 2004, the primary factor for the increase in
mortgage banking income is a reduction in amortization and impairment of
mortgage servicing rights. During the first nine months of 2004, amortization
expense for mortgage servicing rights was $9.1 million. For the same period in
2003, amortization expense for mortgage servicing rights was $11.6 million.
During the first nine months of 2004, Trustmark recognized a $1.5 million
recovery of impairment charges. During the same period of 2003, impairment
charges of $5.0 million were recognized. While impairment charges increased in
the third quarter of 2004, rising interest rates in the second quarter of 2004
stabilized impairment and reduced the impairment of mortgage servicing rights
for the nine months ended September 30, 2004. Future changes in amortization and
impairment of mortgage servicing rights will continue to be closely tied to
fluctuations in long-term mortgage rates. Offsetting improvements in
amortization and impairment of mortgage servicing rights were a reduction in
gains on sales of mortgage loans, which totaled $3.9 million during the first
nine months of 2004 compared to $12.6 million for the same period of 2003, a
decrease of $8.7 million. The overall total of loan sales from secondary
marketing activities declined from $1.202 billion in the first nine months of
2003 to $636.0 million in the first nine months of 2004 as a sporadic rate
environment affected both the pricing of loans as well as the consumer demand.
The following table illustrates the components of mortgage banking included in
noninterest income in the accompanying income statements:
Mortgage Banking Income
($ in thousands)
Nine Months Ended
September 30,
-----------------
2004 2003
------- -------
Mortgage servicing income $12,612 $12,652
Mortgage guaranty fees (3,302) (3,454)
------- -------
Mortgage servicing, net 9,310 9,198
Amortization of mortgage
servicing rights (9,076) (11,621)
Recovery (impairment) of
mortgage servicing rights, net 1,516 (4,999)
Gain on sales of loans 3,926 12,602
Other, net 591 (1,581)
------- -------
Mortgage banking $ 6,267 $ 3,599
======= =======
Securities gains totaled $21 thousand during the first nine months of 2004
compared with $12.2 million during the first nine months of 2003. During the
first nine months of 2003, significant price changes in certain available for
sale (AFS) portfolio securities enabled Trustmark to sell securities with a
total fair value of $290.1 million, which provided the opportunity to
restructure a portion of the portfolio to reduce price volatility in an
extremely low interest rate cycle. Management considers the investment portfolio
as an integral tool in the management of interest rate risk.
Noninterest Expense
Trustmark's noninterest expense increased $2.7 million, or 1.7%, in the first
nine months of 2004 to $165.1 million, compared with $162.3 million in the first
nine months of 2003. Excluding the Emerald Coast and Allied Houston branch
purchases, noninterest expense for the nine months ended September 30, 2004
would total $159.5 million. Noninterest expenses for the first nine months of
2003 include $6.3 million associated with Trustmark's voluntary early retirement
program. If this were eliminated, noninterest expenses for the first nine months
of 2003 would total $156.0 million. Eliminating these adjustments, noninterest
expense for the first nine months of 2004 increased $3.5 million, or 2.2% when
compared to the same time period in 2003. Management continues to consider
expense control a major component of improving shareholder value. The
comparative components of noninterest expense for the nine months ended
September 30, 2004 and 2003 are shown in the accompanying table.
Noninterest Expense
($ in thousands)
Nine Months Ended
September 30,
------------------
2004 2003 $ Change % Change
-------- -------- -------- --------
Salaries and employee benefits $ 95,475 $ 96,855 $ (1,380) -1.4%
Services and fees 26,415 23,696 2,719 11.5%
Equipment expense 11,122 11,104 18 0.2%
Net occupancy - premises 10,773 9,541 1,232 12.9%
Other expense 21,273 21,119 154 0.7%
-------- -------- --------
Total Noninterest Expense $165,058 $162,315 $ 2,743 1.7%
======== ======== ========
Salaries and employee benefits, the largest category of noninterest expense,
decreased $1.4 million, or 1.4%, in the first nine months of 2004 to $95.5
million, compared with $96.9 million in the same time period in 2003. Excluding
the Emerald Coast and Allied Houston branch purchases, salaries and employee
benefits for the nine months ended September 30, 2004 would total $92.0 million.
Salaries and employee benefits for the first nine months of 2003 include $6.3
million associated with Trustmark's voluntary early retirement program, which
was accepted by 116 employees, or 4.75% of the workforce. If this were
eliminated, salaries and employee benefits for the first three quarters of 2003
would total $90.6 million. Eliminating these adjustments, salaries and employee
benefits for the first three quarters of 2004 grew $1.4 million, or 1.5% when
compared to the same time period in 2003. Trustmark's full-time equivalent
employees were 2,444 and 2,365 at September 30, 2004 and 2003, respectively.
Services and fees for the first nine months of 2004 totaled $26.4 million
compared to $23.7 million for the first nine months of 2003. The increase is
attributed to professional and audit-related fees resulting from the
implementation of requirements under the Sarbanes-Oxley Act of 2002 as well as
growth in consulting and communication expense.
Net occupancy-premises expense increased $1.2 million, or 12.9%, from $9.5
million in the first nine months of 2003 to $10.8 million in the first nine
months of 2004. The increase is attributable to occupancy costs associated with
facilities acquired in the Emerald Coast and Allied Houston business
combinations. Business combinations accounted for approximately 58% of the
increase.
Income Taxes
For the nine months ended September 30, 2004, Trustmark's combined effective tax
rate was 34.5%, compared with 34.6% for the first nine months of 2003. The
decrease in Trustmark's effective tax rate is due to immaterial changes in
various permanent items as a percentage of pretax income.
Liquidity
The liquidity position of Trustmark is monitored on a daily basis by Trustmark's
Treasury Department. In addition, the Asset/Liability Committee reviews
liquidity on a regular basis and approves any changes in strategy that are
necessary as a result of anticipated balance sheet or cash flow changes. Also,
on a monthly basis, Management compares Trustmark's liquidity position to
established corporate policies. The ability to maintain consistent cash flows
from operations as well as adequate capital also enhances Trustmark's liquidity.
The primary source of liquidity on the asset side of the balance sheet are
maturities and cash flows from both loans and securities, as well as the ability
to sell certain loans and securities. With mortgage rates at historical lows,
increased prepayments on mortgage loans have also provided an additional source
of liquidity for Trustmark. Liquidity on the liability side of the balance sheet
is generated primarily through growth in core deposits. To provide additional
liquidity, Trustmark utilizes economical short-term wholesale funding
arrangements for federal funds purchased and securities sold under repurchase
agreements in both regional and national markets. At September 30, 2004, these
arrangements gave Trustmark approximately $1.114 billion in borrowing capacity,
which approximated the level at the end of 2003. In addition, Trustmark
maintains a borrowing relationship with the FHLB, which provided $500.0 million
in short-term advances and $355.9 million in long-term advances at September 30,
2004, compared with $300.0 million in short-term advances and $531.0 million in
long-term advances at December 31, 2003. 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
$752.5 million available in unused FHLB advances. Another borrowing source is
the Federal Reserve Discount Window (Discount Window). At September 30, 2004,
Trustmark had approximately $591.4 million available in borrowing capacity at
the Discount Window from pledges of auto loans and securities, compared with
$539.9 million available at December 31, 2003. In June 2002, Trustmark entered
into a two-year line of credit arrangement enabling borrowings up to $50
million. When this line matured during the third quarter of 2004, Trustmark
entered into a revolving credit agreement with the same lender enabling
borrowings up to $50 million, subject to certain financial covenants. This
agreement matures on September 30, 2006. As of September 30, 2004, Trustmark had
not drawn upon this line of credit.
During 2003, Trustmark filed a registration statement on Form S-3 with the
Securities and Exchange Commission (SEC) utilizing a "shelf" registration
process. 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.
During 2002, the shareholders approved a proposal by the Board of Directors to
amend the Articles of Incorporation to authorize the issuance of up to 20
million preferred shares with no par value. The Board of Directors believes that
authorizing preferred shares for potential issuance is advisable and in the best
interests of Trustmark. The ability to issue preferred shares in the future will
provide Trustmark with additional financial and management flexibility. As of
September 30, 2004, no such shares have been issued.
Capital Resources
At September 30, 2004, Trustmark's shareholders' equity was $734.2 million, an
increase of $44.7 million, or 6.5%, from its level at December 31, 2003. This
increase is primarily related to net income for the first nine months of 2004,
which totaled $87.9 million and additional accumulated other comprehensive
income of $1.1 million, offset by dividends of $33.1 million and common stock
repurchases of $13.5 million.
Common Stock Repurchase Program
Trustmark currently has remaining authorization for the repurchase of up to 3.0
million shares of its common stock 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 18.5
million shares for $398.6 million, including 4,500 shares during the third
quarter of 2004. See further discussion of the Common Stock Repurchase Program
on page 31 in Part II, Item 2, "Changes in Securities and Use of Proceeds".
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. Dividends for the first nine months of 2004 were $ 0.57 per
share, an increase of 15.2% when compared with dividends of $ 0.495 per share in
the same period in 2003. Trustmark's dividend payout ratio was 37.75% for the
first nine months of 2004, compared with 33.22% for the same period in 2003.
During October 2004, the Board of Directors of Trustmark announced a 5.3%
increase in its regular quarterly dividend to $0.20 per share from $0.19 per
share. The Board declared the dividend payable on December 15 to shareholders of
record as of December 1, 2004. This action raises the indicated annual dividend
rate to $0.80 per share from $0.76 per share.
Regulatory Capital
Trustmark and TNB are subject to minimum capital requirements, which are
administered by various federal regulatory agencies. These capital requirements,
as defined by federal guidelines, involve quantitative and qualitative measures
of assets, liabilities and certain off-balance sheet instruments. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the financial statements of both Trustmark and TNB.
Trustmark aims not only to exceed the minimum capital standards, but also the
well-capitalized guidelines for regulatory capital. Management believes, as of
September 30, 2004, that Trustmark and TNB have met or exceeded all of the
minimum capital standards for the parent company and its primary banking
subsidiary as established by regulatory requirements. At September 30, 2004, the
most recent notification from the Office of the Comptroller of the Currency
(OCC), TNB's primary federal banking regulator, categorized TNB as well
capitalized. To be categorized in this manner, TNB must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios (defined in applicable
regulations) as set forth in the accompanying table. There are no significant
conditions or events that have occurred since the OCC's notification that
Management believes have affected TNB's present classification.
Regulatory Capital Table
($ in thousands)
September 30, 2004
---------------------------------------------------------
Minimum Regulatory
Actual Regulatory Minimum Regulatory Provision to be
Capital Capital Required Well Capitalized
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ -------- ------
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $669,178 12.12% $441,805 8.00% - -
Trustmark National Bank 632,807 11.67% 433,699 8.00% $542,124 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $600,082 10.87% $220,903 4.00% - -
Trustmark National Bank 564,994 10.42% 216,850 4.00% $325,274 6.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $600,082 7.36% $244,579 3.00% - -
Trustmark National Bank 564,994 7.06% 239,936 3.00% $399,893 5.00%
Earning Assets
Earning assets serve as the primary revenue streams for Trustmark and are
comprised of securities, loans, federal funds sold and securities purchased
under resale agreements. At September 30, 2004, earning assets were $7.468
billion, or 91.6% of total assets, compared with $7.183 billion, or 90.8% of
total assets at December 31, 2003, an increase of $285.2 million, or 4.0%.
Excluding the Allied Houston branch purchase, earning assets totaled $7.350
billion, an increase of $167.6 million when compared with December 31, 2003.
Securities
The securities portfolio consists primarily of debt securities, which are
utilized to provide Trustmark with a quality investment alternative and a stable
source of interest income, as well as collateral for pledges on public deposits
and repurchase agreements. Additionally, the securities portfolio is used as a
tool to manage risk from movements in interest rates, to support profitability
and to offset risks incurred by business units. When evaluating the performance
of the securities portfolio, Management considers not only interest income but
also the flexibility and liquidity provided by changes in fair value. At
September 30, 2004, Trustmark's securities portfolio totaled $2.063 billion,
compared to $2.112 billion at December 31, 2003, a decrease of $49.1 million, or
2.3%.
The securities portfolio is a powerful risk management tool that enables
Management to control both the invested balance and the duration of securities.
The estimated duration of the portfolio measured 2.04 years on September 30,
2003 primarily due to expected high cash flow levels during an environment of
heavy prepayments on mortgage related securities. Since then, estimated
portfolio duration was measured at 2.30 years at December 31, 2003 and September
30, 2004. Management intends to keep the portfolio near these 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 loss, a
separate component of shareholders' equity. At September 30, 2004, AFS
securities totaled $1.916 billion, which represented 92.9% of the securities
portfolio, compared to $ 1.934 billion, or 91.6%, at December 31, 2003. At
September 30, 2004, unrealized losses on AFS securities of $3.9 million, net of
$1.5 million of deferred income taxes, were included in accumulated other
comprehensive loss, compared with losses of $ 5.6 million, net of $2.1 million
in deferred income taxes, at December 31, 2003. At September 30, 2004, 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.
Held to maturity (HTM) securities are carried at amortized cost and represent
those securities that Trustmark both intends and has the ability to hold to
maturity. At September 30, 2004, HTM securities totaled $147.2 million and
represented 7.1% of the total portfolio, compared with $178.4 million, or 8.4%,
at the end of 2003. 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 89% of
the portfolio in U.S. Treasury, U.S. Government agencies obligations and other
AAA rated securities.
Loans and Allowance for Loan Losses
Loans, including loans held for sale, represented 72.2% of earning assets at
September 30, 2004, compared with 70.1% at year-end 2003. At September 30, 2004,
loans totaled $5.388 billion, a 7.1% increase from its level of $5.033 billion
at December 31, 2003. Adjusted loan growth was $277.8 million, or 5.5%, for the
first nine months of 2004, if both the Allied Houston branch purchase and the
sale of $39.6 million in student loans are excluded. Real estate lending,
primarily construction and land development as well as loans secured by 1-4
family properties, continued to be positively impacted by low interest rates. In
addition, commercial and industrial loans have also increased when compared to
December 31, 2003, as a result of improvement in economic conditions as
evidenced by growth in Corporate Lending as well as loans originating in the
Trustmark's Emerald Coast branches.
Trustmark makes loans in the normal course of business to certain directors,
including their immediate families and companies in which they are principal
owners. Such loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility at the time of the transaction.
Trustmark's lending policies have resulted in consistently sound asset quality.
One measure of asset quality in the financial services industry is the level of
nonperforming assets. The details of Trustmark's nonperforming assets at
September 30, 2004 and December 31, 2003, are shown in the accompanying table.
Total nonperforming assets increased $2.1 million, or 6.9%, during the first
nine months of 2004. Excluding the Allied Houston branch purchases,
nonperforming assets decreased $3.3 million, or 11.2%. The allowance coverage of
nonperforming loans remains strong at 274.1% at September 30, 2004, compared
with 310.5% at December 31, 2003.
Nonperforming Assets
($ in thousands)
September 30, December 31,
2004 2003
------------- ------------
Nonaccrual and restructured loans $ 27,062 $ 23,921
Other real estate (ORE) 4,844 5,929
------------- ------------
Total nonperforming assets $ 31,906 $ 29,850
============= ============
Accruing loans past due 90 days or more $ 7,553 $ 2,606
============= ============
Nonperforming assets/total loans and ORE 0.59% 0.59%
============= ============
At September 30, 2004, the allowance for loan losses was $74.2 million compared
with $74.3 million at December 31, 2003. The allowance for loan losses
represented 1.38% of total loans outstanding at September 30, 2004, compared to
1.48% at December 31, 2003. This decline in the allowance for loan losses to
loans is directly related to the accounting treatment for the acquired loans of
Allied Houston Bank. Generally accepted accounting principles provide that the
purchase of selected loans be recorded at fair value net of any credit or market
discounts; therefore, no specific allowance for loan losses has been recorded
for the Allied Houston loans purchased. Loans purchased totaled $145.9 million,
which included a $6.4 million discount; consisting of a discount for general
credit risk of $7.3 million offset by a market premium of $862 thousand. As of
September 30, 2004, 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 $4.0 million, or 0.10% of average loans, for the first nine
months of 2004, compared with $7.7 million, or 0.22% of average loans, for the
same period of 2003. This improvement can primarily be attributed to the
continued decline in charge-offs recorded during 2004 resulting from the
improvement in credit quality experienced during 2003 and 2004.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase agreements
were $16.3 million at September 30, 2004, a decrease of $21.4 million when
compared with year-end 2003. 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 CD's. Total
deposits were $5.288 billion at September 30, 2004, compared with $5.089 billion
at December 31, 2003, an increase of $198.1 million, or 3.9%. Excluding the
Allied Houston branch purchase, deposits increased $62.9 million, or 1.2%, when
compared with December 31, 2003. Noninterest bearing deposits have decreased
$86.8 million during the first nine months of 2004 due to seasonal run-offs
while interest-bearing deposits have increased $284.9 million during the same
time period. During 2003, Trustmark began a brokered CD program to provide
additional deposit funding. At September 30, 2004, brokered CD's totaled $236.9
million, an increase of $137.9 million when compared to the end of 2003.
Additional growth in interest-bearing deposits may be attributed to uncertain
financial market conditions, which have lead to more growth in traditional
deposit products such as interest-bearing demand deposits. Trustmark will
continue to seek deposits by expanding its presence in higher growth markets and
evaluating additional wholesale deposit funding sources.
Trustmark uses short-term borrowings and long-term FHLB advances to fund growth
of earning assets in excess of deposit growth. Short-term borrowings consist of
federal funds purchased, securities sold under repurchase agreements, short-term
FHLB advances and the treasury tax and loan note option account. Short-term
borrowings totaled $1.710 billion at September 30, 2004, an increase of $160.0
million, compared with $1.550 billion at year-end 2003. Long-term FHLB advances
totaled $355.9 million at September 30, 2004, a decrease of $175.1 million from
December 31, 2003. On a consolidated basis, total borrowings have decreased
$15.1 million when compared to December 31, 2003.
Segment Information
Internal funding costs for both the General Banking and Administrative divisions
saw significant changes when both the three and nine months ended September 30,
2004 are compared with the same periods in 2003. As part of the annual
evaluation of the match-funded transfer pricing process used to assess operating
segment performance, Management lowered the internal funding rate paid on
transactional deposits, primarily Savings, MMDA, NOW and DDA, at the beginning
of 2004. This reduction was based on a downward trend in yields and earnings
generated from these deposits in recent years. The impact of this change was
felt primarily in the General Banking Division where internal funding income was
reduced when 2004 is compared with 2003. Additionally, the Treasury Department,
included in the Administrative Division, received additional internal funding
income resulting from these same changes.
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 and 2004 may reduce the likelihood
of unexpected sizable awards. At the present time, Management believes, based on
the advice of legal counsel and Management's evaluation, that the final
resolution of pending legal proceedings will not have a material impact on
Trustmark's consolidated financial position or results of operations; 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.
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 September 30, 2004 and 2003, Trustmark had
commitments to extend credit of $1.344 billion and $1.131 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 September 30,
2004 and 2003, Trustmark's maximum exposure to credit loss in the event of
nonperformance by the other party for letters of credit was $95.5 million and
$76.7 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.
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.
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.
Based on the results of the simulation models using static balances at September
30, 2004, it is estimated that net interest income may increase 0.29%, in a
one-year, shocked, up 200 basis point rate shift scenario, compared to a base
case, flat rate scenario for the same time period. This same simulation as of
June 30, 2004 yielded a decrease in net interest income of 0.19%. This minor
change in forecasted net interest income illustrates Management's strategy to
mitigate Trustmark's exposure to cyclical increases in rates by maintaining a
neutral position in its interest rate risk position. This projection does not
contemplate any additional actions Trustmark could undertake in responses to
changes in interest rates. In the event of a 100 basis point decrease in
interest rates (utilized in place of a 200 basis point drop scenario due to the
historically low interest rate environment), it is estimated net interest income
may decrease by 3.08%. 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 prudently manage the balance sheet in an effort to control interest
rate risk and maintain profitability over the long term.
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 September
30, 2004, reflected a liability gap of $372 million compared with a liability
gap of $470 million at May 31, 2004. One-year gap analysis projected at
September 30, 2004, reflected a liability gap of $303 million compared with a
liability gap of $466 million at May 31, 2004. Liability sensitivity has
resulted from Trustmark's increased reliance on wholesale funding during 2004 in
response to decreased funding from deposits. This scenario would indicate that
Trustmark would benefit in a falling interest rate environment, however, the
simulation model indicates repricing sensitivity on various deposit products is
different when compared with a static gap analysis. For example, traditional
core deposit products typically are slower to react to changes in interest rates
when they occur.
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. As permitted by
Statement of Financial Accounting Standards (SFAS) No. 133, during 2003
Trustmark redesignated these derivative instruments as fair value hedges. In
accordance with 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. Management anticipates that this change will
help mitigate the potential for earnings volatility related to the valuation of
these hedging instruments in the future. The market valuation balance for these
fair value hedges was negative $502.6 thousand at September 30, 2004.
Trustmark continued a risk controlling strategy utilizing caps and floors, which
may be further implemented over time. As of September 30, 2004, 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. At September 30, 2004, the fair value of these contracts was $43
thousand.
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, fixed rate advances from the FHLB by agreeing to pay a
floating interest rate tied to LIBOR. Although this strategy exposes Trustmark
somewhat to a rising rate environment, Management felt this was more economical
in light of the significant prepayment charges associated with these advances.
The swap contracts are tied to the maturity of five separate FHLB advances
maturing between 2005 and 2006. The market valuation balance for interest rate
swaps at September 30, 2004 was negative $676 thousand.
Recent Pronouncements
Please see Note 11 of the Notes to Consolidated Financial Statements for more
information on recent pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in "Market/Interest Rate Risk
Management" (pages 29-30) of "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
For the period ended September 30, 2004, Trustmark evaluated the effectiveness
of the design and operation of its disclosure controls and procedures under the
supervision and with the participation of its management, including the Chief
Executive Officer and the Treasurer (the Principal Financial Officer). Based
upon this evaluation, the Chief Executive Officer and the Treasurer concluded
that Trustmark's disclosure controls and procedures were effective as of
September 30, 2004.
Internal Control over Financial Reporting
For the period ended September 30, 2004, there have been no changes in
Trustmark's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect Trustmark's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments for the quarter ended September 30, 2004,
other than those disclosed in the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of this Form 10-Q.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following table shows information relating to the repurchase of common
shares by Trustmark Corporation during the three months ended September 30,
2004:
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number Average as Part of Publicly Yet be Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
- ------------------------- ------------ ---------- ------------------- ------------------
July 1, 2004 through
July 31, 2004 4,500 $ 28.05 4,500 2,995,565
August 1, 2004 through
August 31, 2004 - $ - - 2,995,565
September 1, 2004 through
September 30, 2004 - $ - - 2,995,565
------------ -------------------
Total 4,500 4,500
============ ===================
On October 15, 2002, the Board of Directors of Trustmark authorized a plan to
repurchase 5% of current outstanding shares, or 3,083,020 shares. The Board of
Directors approved an additional plan on July 15, 2003, also allowing for a 5%
repurchase of current outstanding shares, or 2,936,571 shares. Both of these
plans are subject to market conditions and management discretion and will
continue to be implemented through open market purchases or privately negotiated
transactions. No expiration date has been given to either of these plans.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The exhibits listed in the Exhibit Index are filed herewith or are incorporated
herein by reference.
B. Reports on Form 8-K
1. On July 20, 2004, Trustmark filed a report on Form 8-K announcing its
financial results for the period ended June 30, 2004.
2. On September 14, 2004, Trustmark filed a report on Form 8-K announcing the
resignation of a member of the Board of Directors.
3. On September 16, 2004, Trustmark filed a report on Form 8-K announcing the
withdrawal of its application to convert to a state-chartered member bank.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRUSTMARK CORPORATION
BY: /s/ Richard G. Hickson BY: /s/ Zach L. Wasson
---------------------- ----------------------
Richard G. Hickson Zach L. Wasson
Chairman of the Board, President Treasurer (Principal)
& Chief Executive Officer Financial Officer)
DATE: November 9, 2004 DATE: November 9, 2004
EXHIBIT INDEX
31-a Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31-b Certification by Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32-a Certification by Chief Executive Officer pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32-b Certification by Chief Financial Officer pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
All other exhibits are omitted, as they are inapplicable or not required by the
related instructions.