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 June 30, 2005
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 July 28, 2005.
Title Outstanding
Common stock, no par value 56,773,614
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Trustmark Corporation and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
(Unaudited)
June 30, December 31,
2005 2004
------------ ------------
Assets
Cash and due from banks (noninterest-bearing) $ 300,585 $ 343,125
Federal funds sold and securities purchased
under reverse repurchase agreements 24,025 86,191
Securities available for sale (at fair value) 1,212,669 1,580,270
Securities held to maturity (fair value:
$312,090-2005; $145,936-2004) 304,589 136,797
Loans held for sale 144,665 101,222
Loans 5,645,812 5,330,055
Less allowance for loan losses 65,902 64,757
------------ ------------
Net loans 5,579,910 5,265,298
Premises and equipment 113,628 115,337
Mortgage servicing rights 51,561 52,463
Goodwill 137,412 137,225
Identifiable intangible assets 30,425 32,004
Other assets 204,930 203,025
------------ ------------
Total Assets $ 8,104,399 $ 8,052,957
============ ============
Liabilities
Deposits:
Noninterest-bearing $ 1,249,464 $ 1,354,749
Interest-bearing 4,271,260 4,095,344
------------ ------------
Total deposits 5,520,724 5,450,093
Federal funds purchased 247,551 134,318
Securities sold under repurchase agreements 479,295 483,228
Short-term borrowings 827,347 980,318
Long-term FHLB advances 205,827 180,894
Other liabilities 79,017 73,710
------------ ------------
Total Liabilities 7,359,761 7,302,561
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 56,751,801 shares -
2005; 57,858,497 shares - 2004 11,824 12,055
Capital surplus 91,619 121,705
Retained earnings 646,782 620,588
Accumulated other comprehensive loss, net of tax (5,587) (3,952)
------------ ------------
Total Shareholders' Equity 744,638 750,396
------------ ------------
Total Liabilities and Shareholders' Equity $ 8,104,399 $ 8,052,957
============ ============
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Income
($ in thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Interest Income
Interest and fees on loans $ 84,589 $ 72,892 $162,623 $143,252
Interest on securities:
Taxable 13,993 14,825 29,727 31,021
Tax exempt 1,896 1,967 3,757 3,963
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 143 63 416 106
Other interest income 22 9 42 21
-------- -------- -------- --------
Total Interest Income 100,643 89,756 196,565 178,363
Interest Expense
Interest on deposits 18,326 13,326 34,694 26,712
Interest on federal funds purchased and securities
sold under repurchase agreements 4,995 2,156 8,643 4,260
Other interest expense 9,413 4,726 16,910 9,484
-------- -------- -------- --------
Total Interest Expense 32,734 20,208 60,247 40,456
-------- -------- -------- --------
Net Interest Income 67,909 69,548 136,318 137,907
Provision for loan losses 1,429 1,703 4,225 2,755
-------- -------- -------- --------
Net Interest Income After Provision
for Loan Losses 66,480 67,845 132,093 135,152
Noninterest Income
Service charges on deposit accounts 13,541 13,959 25,925 27,285
Insurance commissions 8,370 4,346 16,232 7,531
Wealth management 5,414 4,958 10,657 9,974
Retail banking - other 5,284 4,685 10,036 8,817
Mortgage banking, net (3,246) 9,101 605 7,198
Other, net 2,644 1,821 5,097 4,041
Securities (losses) gains (4,057) 2 (4,054) 15
-------- -------- -------- --------
Total Noninterest Income 27,950 38,872 64,498 64,861
Noninterest Expense
Salaries and employee benefits 37,245 32,974 74,604 64,083
Services and fees 8,104 8,846 17,062 17,225
Net occupancy - premises 3,661 3,517 7,352 6,730
Equipment expense 3,855 3,781 7,808 7,323
Other expense 7,396 6,660 14,577 13,364
-------- -------- -------- --------
Total Noninterest Expense 60,261 55,778 121,403 108,725
-------- -------- -------- --------
Income Before Income Taxes 34,169 50,939 75,188 91,288
Income taxes 11,963 17,916 26,201 31,514
-------- -------- -------- --------
Net Income $ 22,206 $ 33,023 $ 48,987 $ 59,774
======== ======== ======== ========
Earnings Per Share
Basic $ 0.39 $ 0.57 $ 0.86 $ 1.03
======== ======== ======== ========
Diluted $ 0.39 $ 0.57 $ 0.86 $ 1.02
======== ======== ======== ========
Dividends Per Share $ 0.20 $ 0.19 $ 0.40 $ 0.38
======== ======== ======== ========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
($ in thousands)
(Unaudited)
2005 2004
-------- --------
Balance, January 1, $750,396 $689,573
Comprehensive income:
Net income per consolidated statements of income 48,987 59,774
Net change in fair value of securities available
for sale, net of tax (1,635) (5,599)
-------- --------
Comprehensive income 47,352 54,175
Cash dividends paid (22,793) (22,080)
Common stock issued, long-term incentive plan 1,315 1,100
Compensation expense, stock compensation plans 864 445
Repurchase and retirement of common stock (32,496) (13,412)
-------- --------
Balance, June 30, $744,638 $709,801
======== ========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)
Six Months Ended
June 30,
-------------------
2005 2004
-------- --------
Operating Activities
Net income $ 48,987 $ 59,774
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 4,225 2,755
Depreciation and amortization/impairment 15,170 9,191
Net amortization of securities 4,472 11,576
Securities losses (gains) 4,054 (15)
Gains on sales of loans (1,985) (3,550)
Deferred income tax (benefit) provision (1,523) 6,518
Proceeds from sales of loans held for sale 415,767 430,488
Purchases and originations of loans held for sale (449,297) (399,624)
Net increase in mortgage servicing rights (6,427) (6,703)
Net increase in other assets (4,002) (1,488)
Net increase in other liabilities 5,307 1,457
Other operating activities, net 1,048 710
-------- --------
Net cash provided by operating activities 35,796 111,089
Investing Activities
Proceeds from calls and maturities of securities held
to maturity 7,861 19,247
Proceeds from calls and maturities of securities
available for sale 114,154 252,656
Proceeds from sales of securities available for sale 269,668 -
Purchases of securities held to maturity (175,714) (103)
Purchases of securities available for sale (27,649) (331,765)
Net decrease in federal funds sold and securities
purchased under reverse repurchase agreements 62,166 14,610
Net increase in loans (317,560) (242,840)
Purchases of premises and equipment (5,368) (9,606)
Proceeds from sales of premises and equipment 1,701 461
Proceeds from sales of other real estate 3,691 2,573
Cash received in business combination - 4,622
-------- --------
Net cash used in investing activities (67,050) (290,145)
Financing Activities
Net increase (decrease) in deposits 70,631 (10,192)
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements 109,300 (13,014)
Net (decrease) increase in other borrowings (237,243) 173,118
Proceeds from long-term FHLB advances 100,000 -
Cash dividends (22,793) (22,080)
Proceeds from exercise of stock options 1,315 1,100
Repurchase and retirement of common stock (32,496) (13,412)
-------- --------
Net cash (used in) provided by financing activities (11,286) 115,520
-------- --------
Decrease in cash and cash equivalents (42,540) (63,536)
Cash and cash equivalents at beginning of period 343,125 333,096
-------- --------
Cash and cash equivalents at end of period $300,585 $269,560
======== ========
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 six month
periods ended June 30, 2005, are not necessarily indicative of the results that
may be expected for the year ended December 31, 2005. The notes included herein
should be read in conjunction with the notes to the consolidated financial
statements included in Trustmark Corporation's (Trustmark) 2004 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 December 1, 2004, Trustmark acquired Fisher-Brown, Incorporated, located in
Pensacola, Florida. This business combination was accounted for under the
purchase method of accounting. Excess cost over tangible net assets acquired
totaled $36.2 million, of which $9.3 million and $26.9 million have been
allocated to identifiable intangible assets and goodwill, respectively.
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 $15.3 million have been allocated to
identifiable intangibles (core deposits) and goodwill, respectively. The
purchase price was finalized during the first quarter of 2005 after completion
of an evaluation of the adequacy of the discount for general credit risk
mentioned above. The resulting adjustment was immaterial.
Trustmark's financial statements include the results of operations for the above
purchase business combinations from the respective merger dates. The pro forma
impact of these acquisitions on Trustmark's results of operations is immaterial.
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
For the periods presented, loans consisted of the following ($ in thousands):
June 30, December 31,
2005 2004
----------- -----------
Real estate loans:
Construction and land development $ 606,339 $ 526,321
Secured by 1-4 family residential properties 1,973,807 1,849,267
Secured by nonfarm, nonresidential properties 943,037 882,507
Other 147,658 135,938
Loans to finance agricultural production 36,183 29,885
Commercial and industrial 866,493 865,436
Consumer 807,852 812,133
Obligations of states and political subdivisions 186,099 178,222
Other loans 78,344 50,346
----------- -----------
Loans 5,645,812 5,330,055
Less allowance for loan losses 65,902 64,757
----------- -----------
Net loans $ 5,579,910 $ 5,265,298
=========== ===========
The following table summarizes the activity in the allowance for loan losses for
the periods presented ($ in thousands):
Six Months Ended
June 30,
-----------------------
2005 2004
---------- ----------
Balance at beginning of year $ 64,757 $ 74,276
Provision charged to expense 4,225 2,755
Loans charged off (7,625) (7,655)
Recoveries 4,545 4,803
---------- ----------
Net charge-offs (3,080) (2,852)
---------- ----------
Balance at end of period $ 65,902 $ 74,179
========== ==========
At June 30, 2005 and 2004, the carrying amounts of nonaccrual loans were $32.7
million and $27.0 million, respectively. Included in these nonaccrual loans at
June 30, 2005 and 2004, are loans that are considered to be impaired, which
totaled $26.3 million and $20.2 million, respectively. At June 30, 2005, the
total allowance for loan losses related to impaired loans was $8.0 million
compared with $5.3 million at June 30, 2004. The average carrying amounts of
impaired loans during the second quarter of 2005 and 2004 were $26.2 million and
$20.0 million, respectively. No material amounts of interest income were
recognized on impaired loans or nonaccrual loans for the three and six month
periods ended June 30, 2005 and 2004.
NOTE 4 - MORTGAGE BANKING
At June 30, 2005 and December 31, 2004, the carrying amount of mortgage
servicing rights are as follows ($ in thousands):
June 30, December 31,
2005 2004
----------- -----------
Mortgage Servicing Rights $ 59,694 $ 58,507
Valuation Allowance (8,133) (6,044)
----------- -----------
Mortgage Servicing Rights, net $ 51,561 $ 52,463
=========== ===========
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 net
servicing income. At June 30, 2005, Trustmark serviced $3.5 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 2004, Trustmark reclassified $7.1 million of
mortgage servicing right impairment from temporary to other-than-temporary which
reduced the valuation allowance for impairment and the gross mortgage servicing
rights balance with no effect to the net mortgage servicing rights asset.
Impairment is considered to be other-than-temporary when Trustmark determines
that the carrying value is expected to exceed the fair value for an extended
period of time.
NOTE 5 - DEPOSITS
At June 30, 2005 and December 31, 2004, deposits consisted of the following ($
in thousands):
June 30, December 31,
2005 2004
----------- -----------
Noninterest-bearing demand $ 1,249,464 $ 1,354,749
Interest-bearing demand 987,774 1,362,437
Savings 1,378,787 892,643
Time 1,904,699 1,840,264
----------- -----------
Total deposits $ 5,520,724 $ 5,450,093
=========== ===========
Improved coverage of sweep eligible accounts resulting from the implementation
of a third-party software product was the primary factor in an increase in
savings accounts, which have no reserve requirement as defined by the Federal
Reserve Bank, and a resulting decline in transaction based interest-bearing
demand deposits and noninterest-bearing demand deposits.
NOTE 6 - STOCK-BASED COMPENSATION
On May 10, 2005, the shareholders of Trustmark, upon the recommendation of
Trustmark's Board of Directors, approved the Trustmark Corporation 2005 Stock
and Incentive Compensation Plan (the 2005 Plan), which was adopted by the Board
of Directors, and replaces the Trustmark Corporation 1997 Long Term Incentive
Plan (the 1997 Plan). The 2005 Plan became effective May 10, 2005, and subject
to earlier termination by the Board of Directors, terminates on May 9, 2015. The
2005 Plan allows Trustmark to make grants of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted stock, restricted
stock units and performance units to key associates and directors. The maximum
number of shares of Trustmark's common stock available for issuance under the
2005 Plan is the sum of (1) 6,000,000 common shares plus (2) the number of
outstanding options under the 1997 Plan, which expire or are otherwise
terminated or forfeited after May 10, 2005.
Effective January 1, 2003, Trustmark adopted the fair value recognition
provisions of Statement of Financial Accounting Standard (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. Compensation expense for stock
options granted is estimated using the fair value of each option granted using
the Black-Scholes option-pricing model. Compensation expense for restricted
stock granted is recorded over the service period based on the fair value of the
underlying common stock on the date of grant based on the number of restricted
shares expected to vest.
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 Six Months Ended
June 30, June 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income, as reported $ 22,206 $ 33,023 $ 48,987 $ 59,774
Add: Total stock-based compensation expense
reported in net income, net of related tax
effects 232 186 421 275
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of related tax effects (385) (437) (795) (830)
-------- -------- -------- --------
Pro forma net income $ 22,053 $ 32,772 $ 48,613 $ 59,219
======== ======== ======== ========
Earnings per share:
As reported
Basic $ 0.39 $ 0.57 $ 0.86 $ 1.03
Diluted 0.39 0.57 0.86 1.02
Pro forma
Basic $ 0.39 $ 0.56 $ 0.85 $ 1.02
Diluted 0.39 0.56 0.85 1.01
NOTE 7 - CONTINGENCIES
Letters of Credit
Standby and commercial letters of credit are conditional commitments issued by
Trustmark to insure the performance of a customer to a third party. Trustmark
issues financial and performance standby letters of credit in the normal course
of business in order to fulfill the financing needs of its customers. A
financial standby letter of credit irrevocably obligates Trustmark to pay a
third-party beneficiary when a customer fails to repay an outstanding loan or
debt instrument. A performance standby letter of credit irrevocably obligates
Trustmark to pay a third-party beneficiary when a customer fails to perform some
contractual, nonfinancial obligation. When issuing letters of credit, Trustmark
uses essentially the same policies regarding credit risk and collateral which
are followed in the lending process.
At June 30, 2005 and 2004, Trustmark's maximum exposure to credit loss in the
event of nonperformance by the other party for standby and commercial letters of
credit was $114.5 million and $91.4 million, respectively. These amounts consist
primarily of commitments with maturities of less than three years, which have an
immaterial carrying value. Trustmark holds collateral to support standby letters
of credit when deemed necessary. As of June 30, 2005, the fair value of
collateral held was $26.0 million.
Legal Proceedings
Trustmark and its subsidiaries are parties to lawsuits and other claims that
arise in the ordinary course of business. Some of the lawsuits assert claims
related to the lending, collection, servicing, investment, trust and other
business activities, and some of the lawsuits allege substantial claims for
damages. The cases are being vigorously contested. In the regular course of
business, Management evaluates estimated losses or costs related to litigation,
and provision is made for anticipated losses whenever Management believes that
such losses are probable and can be reasonably estimated. At the present time,
Management believes, based on the advice of legal counsel and Management's
evaluation, that the final resolution of pending legal proceedings will not have
a material impact on Trustmark's consolidated financial position or results of
operations; however, Management is unable to estimate a range of potential loss
on these matters because of the nature of the legal environment in states where
Trustmark conducts business.
NOTE 8 - BENEFIT PLANS
Pension Plan
Trustmark maintains a noncontributory defined benefit pension plan which covers
substantially all associates with more than one year of service. The plan
provides pension benefits that are based on the length of credited service and
final average compensation as defined in the plan. Trustmark's policy is to fund
amounts allowable as deductions for federal income tax purposes.
The following table presents information regarding the plan's net periodic
pension costs for the six months ended June 30, ($ in thousands):
2005 2004
------- -------
Service cost - benefits earned during the period $ 1,090 $ 819
Interest cost on projected benefit obligation 2,135 2,113
Expected return on plan assets (2,704) (2,503)
Amortization of prior service cost (45) (44)
Recognized net actuarial loss 959 595
------- -------
Net periodic benefit cost $ 1,435 $ 980
======= =======
Supplemental Retirement Plan
Trustmark maintains a non-qualified supplemental retirement plan covering
directors that elect to defer fees, key executive officers and senior officers.
The plan provides for defined death benefits and/or retirement benefits based on
a participant's covered salary. Trustmark has acquired life insurance contracts
on the participants covered under the plan which may be used to fund future
payments.
The following table presents information regarding the plan's net periodic
benefit costs for the six months ended June 30, ($ in thousands):
2005 2004
------- -------
Service cost - benefits earned during the period $ 723 $ 508
Interest cost on projected benefit obligation 783 702
Amortization of prior service cost 101 -
Recognized net actuarial loss 52 -
------- -------
Net periodic benefit cost $ 1,659 $ 1,210
======= =======
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 potentially dilutive stock options outstanding during
the period. The following table reflects weighted-average shares used to
calculate basic and diluted EPS for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Basic shares 56,828,841 58,055,793 57,112,559 58,161,738
Dilutive shares (related to stock options) 139,154 255,539 138,838 287,624
---------- ---------- ---------- ----------
Diluted shares 56,967,995 58,311,332 57,251,397 58,449,362
========== ========== ========== ==========
For the quarters ended June 30, 2005 and 2004, options to purchase 1.0 million
and 767 thousand shares, respectively, were outstanding, but not included in the
computation of diluted earnings per share because they were antidilutive.
NOTE 10 - STATEMENTS OF CASH FLOWS
Trustmark paid income taxes of $22.4 million and $21.2 million during the six
months ended June 30, 2005 and 2004, respectively. Interest paid on deposit
liabilities and other borrowings approximated $45.8 million in the first six
months of 2005 and $40.8 million in the first six months of 2004. For the six
months ended June 30, 2005 and 2004, noncash transfers from loans to foreclosed
properties were $1.1 million and $3.3 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 six months of 2005, $75.0 million of long-term FHLB
advances were converted to short-term borrowings compared with conversions of
$150.0 million in the first six months of 2004.
NOTE 11 - RECENT PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No.
154, "Accounting Changes and Error Corrections." SFAS No. 154 is a replacement
of APB No. 20, "Accounting Changes" and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements." SFAS No. 154 establishes,
unless impracticable, retrospective application as the required method for
reporting a change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. This statement
applies to voluntary changes in accounting principle as well as changes required
by an accounting pronouncement that provide no specific transition provisions.
This statement is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The effects of this
statement are not expected to have a material impact on Trustmark's statement of
position or results of operations.
In December 2004, the FASB issued a revision of SFAS No. 123 (SFAS No. 123r),
"Share-Based Payment." This statement revises SFAS No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123r establishes standards for the
accounting for transactions in which a company exchanges equity instruments for
goods or services. This statement requires companies to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. As of the required effective date,
public companies using the fair-value-based method for recognition or disclosure
under SFAS No. 123, will apply this statement using a modified version of
prospective application. Trustmark adopted the provisions of SFAS No. 123
effective January 1, 2003; therefore, Trustmark will recognize compensation cost
for the portion of outstanding awards for which the requisite service has not
yet been rendered (unvested awards). For public companies, this statement is
effective as of the beginning of the first annual reporting period beginning
after June 15, 2005. The effects of this statement are not expected to have a
material impact on Trustmark's statement of position or results of operations.
NOTE 12 - SEGMENT INFORMATION
Trustmark's management reporting structure includes four segments: general
banking, wealth management, insurance and administration. General banking is
responsible for all traditional banking products and services, including loans
and deposits. Wealth management provides customized solutions for affluent
customers by integrating financial services with traditional banking products
and services such as private banking, money management, full-service brokerage,
financial planning, risk management, personal and institutional trust, and
retirement services. Wealth management includes three wholly-owned subsidiaries
of TNB: Trustmark Securities, Inc., Trustmark Investment Advisors, Inc., and
TRMK Risk Management, Inc. Insurance includes two wholly-owned subsidiaries of
TNB: The Bottrell Insurance Agency and Fisher-Brown, Incorporated. Through
Bottrell, Trustmark provides a full range of retail insurance products,
including commercial risk management products, bonding, group benefits and
personal lines coverages. Fisher-Brown operates as a full-service insurance
agency, selling a broad spectrum of insurance services. Administration includes
all other activities that are not directly attributable to one of the major
lines of business. Administration consists of internal operations such as Human
Resources, Executive Administration, Property Management, Treasury (Funds
Management) and Corporate Finance.
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. Noninterest
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 June 30, 2005 and 2004.
Trustmark Corporation
Segment Information
($ in thousands)
General Wealth
Banking Management Insurance Admin.
Division Division Division Division Total
For the three months ended ---------- ---------- ---------- ---------- ----------
June 30, 2005
- --------------------------
Net interest income from
external customers $ 65,837 $ 1,257 $ (3) $ 818 $ 67,909
Internal funding (4,312) (348) - 4,660 -
---------- ---------- ---------- ---------- -----------
Net interest income 61,525 909 (3) 5,478 67,909
Provision for loan losses 3,416 - - (1,987) 1,429
---------- ---------- ---------- ---------- -----------
Net interest income after
provision for loan losses 58,109 909 (3) 7,465 66,480
Noninterest income 18,442 5,562 8,348 (4,402) 27,950
Noninterest expense 41,247 4,547 5,631 8,836 60,261
---------- ---------- ---------- ---------- -----------
Income before income taxes 35,304 1,924 2,714 (5,773) 34,169
Income taxes 12,174 715 1,120 (2,046) 11,963
---------- ---------- ---------- ---------- -----------
Segment net income $ 23,130 $ 1,209 $ 1,594 $ (3,727) $ 22,206
========== ========== ========== ========== ===========
Selected Financial Information
Average assets $6,156,930 $ 98,349 $ 17,897 $1,981,421 $8,254,597
Depreciation and
amortization/impairment $ 10,007 $ 134 $ 93 $ 1,178 $ 11,412
For the three months ended
June 30, 2004
- --------------------------
Net interest income from
external customers $ 58,108 $ 1,095 $ - $ 10,345 $ 69,548
Internal funding 652 (102) - (550) -
---------- ---------- ---------- ---------- -----------
Net interest income 58,760 993 - 9,795 69,548
Provision for loan losses 1,758 (6) - (49) 1,703
---------- ---------- ---------- ---------- -----------
Net interest income after
provision for loan losses 57,002 999 - 9,844 67,845
Noninterest income 28,969 5,042 4,333 528 38,872
Noninterest expense 40,712 4,558 2,835 7,673 55,778
---------- ---------- ---------- ---------- -----------
Income before income taxes 45,259 1,483 1,498 2,699 50,939
Income taxes 15,700 551 583 1,082 17,916
---------- ---------- ---------- ---------- -----------
Segment net income $ 29,559 $ 932 $ 915 $ 1,617 $ 33,023
========== ========== ========== ========== ===========
Selected Financial Information
Average assets $5,755,605 $ 97,912 $ 16,336 $2,372,565 $8,242,418
Depreciation and
amortization/impairment $ (1,386) $ 122 $ 34 $ 972 $ (258)
Trustmark Corporation
Segment Information
($ in thousands)
General Wealth
Banking Management Insurance Admin.
Division Division Division Division Total
For the six months ended ---------- ---------- ---------- ---------- ----------
June 30, 2005
- ------------------------
Net interest income
from external customers $ 126,446 $ 2,413 $ (5) $ 7,464 $ 136,318
Internal funding (6,014) (575) - 6,589 -
---------- ---------- ---------- ---------- -----------
Net interest income 120,432 1,838 (5) 14,053 136,318
Provision for loan losses 4,186 (7) - 46 4,225
---------- ---------- ---------- ---------- -----------
Net interest income after
provision for loan losses 116,246 1,845 (5) 14,007 132,093
Noninterest income 40,910 10,939 16,193 (3,544) 64,498
Noninterest expense 83,892 9,354 11,027 17,130 121,403
---------- ---------- ---------- ---------- -----------
Income before income taxes 73,264 3,430 5,161 (6,667) 75,188
Income taxes 25,243 1,268 2,126 (2,436) 26,201
---------- ---------- ---------- ---------- -----------
Segment net income $ 48,021 $ 2,162 $ 3,035 $ (4,231) $ 48,987
========== ========== ========== ========== ===========
Selected Financial Information
Average assets $6,077,468 $ 98,748 $ 16,639 $2,004,164 $8,197,019
Depreciation and
amortization/impairment $ 12,368 $ 267 $ 182 $ 2,353 $ 15,170
For the six months ended
June 30, 2004
- ------------------------
Net interest income from
external customers $ 113,615 $ 2,203 $ - $ 22,089 $ 137,907
Internal funding 838 (175) - (663) -
---------- ---------- ---------- ---------- -----------
Net interest income 114,453 2,028 - 21,426 137,907
Provision for loan losses 3,144 (27) - (362) 2,755
---------- ---------- ---------- ---------- -----------
Net interest income after
provision for loan losses 111,309 2,055 - 21,788 135,152
Noninterest income 46,961 10,150 7,502 248 64,861
Noninterest expense 80,245 8,869 5,126 14,485 108,725
---------- ---------- ---------- ---------- -----------
Income before income taxes 78,025 3,336 2,376 7,551 91,288
Income taxes 27,075 1,230 873 2,336 31,514
---------- ---------- ---------- ---------- -----------
Segment net income $ 50,950 $ 2,106 $ 1,503 $ 5,215 $ 59,774
========== ========== ========== ========== ===========
Selected Financial Information
Average assets $5,631,345 $ 97,920 $ 15,521 $2,341,128 $8,085,914
Depreciation and
amortization/impairment $ 6,997 $ 227 $ 68 $ 1,899 $ 9,191
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following provides a narrative discussion and analysis of Trustmark
Corporation's (Trustmark) financial condition and results of operations. This
discussion should be read in conjunction with the consolidated financial
statements and the supplemental financial data included elsewhere in this
report.
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 and
encompass any estimate, prediction, expectation, projection, opinion,
anticipation, outlook or statement of belief included therein as well as the
management assumptions underlying these forward-looking statements. 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 rapidly
declining 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. Trustmark undertakes no obligation to
update or revise any of this information, whether as the result of new
information, future events or developments or otherwise.
OVERVIEW
Trustmark is a multi-bank holding company headquartered in Jackson, Mississippi,
incorporated under the Mississippi Business Corporation Act on August 5, 1968.
Trustmark commenced doing business in November 1968. Through its subsidiaries,
Trustmark operates as a financial services organization providing banking and
financial solutions through over 145 offices and 2,616 associates predominantly
within the states of Florida, Mississippi, Tennessee and Texas.
Trustmark National Bank (TNB), Trustmark's wholly-owned subsidiary, accounts for
substantially all of the assets and revenues of Trustmark. Chartered by the
state of Mississippi in 1889, TNB is also headquartered in Jackson, Mississippi.
In addition to banking activities, TNB provides investment and insurance
products and services to its customers through four wholly-owned subsidiaries,
Trustmark Securities, Inc. (formerly Trustmark Financial Services, Inc.),
Trustmark Investment Advisors, Inc., The Bottrell Insurance Agency, Inc.
(Bottrell) and Fisher-Brown, Incorporated. In January 2005, Trustmark
established a de novo subsidiary, Trustmark Risk Management, Inc. (TRMI). TRMI
commenced doing business on January 31, 2005, and engages in insurance agency
activities as an agent for individual life, disability and long-term care
insurance, and also as agent for the sale of fixed annuities. These activities
were previously provided by Bottrell.
Trustmark also engages in banking activities through its wholly-owned
subsidiary, Somerville Bank & Trust Company (Somerville), headquartered in
Somerville, Tennessee. Somerville was acquired in a business combination during
2001 and presently has five locations in Somerville, Hickory Withe and
Rossville, Tennessee. In addition to its banking subsidiaries, Trustmark also
owns all of the stock of F. S. Corporation and First Building Corporation, both
inactive nonbank Mississippi corporations. Neither Trustmark nor its
subsidiaries have any foreign activities.
Net income for the three months ended June 30, 2005 and 2004, totaled $22.2
million and $33.0 million, respectively. Basic and diluted earnings per share
were $0.39 for the second quarter of 2005, compared with $0.57 for the second
quarter of 2004. Earnings during the second quarter of 2005 included a pre-tax,
non-cash charge of $4.8 million for impairment of the home mortgage servicing
portfolio related to declines in long-term interest rates during the quarter.
Also included in earnings for the second quarter of 2005 is a pre-tax charge of
$4.1 million related to the sale of certain investment securities. See the
section captioned "Noninterest Income" elsewhere in this discussion for further
analysis of these items. Net income for the six months ended June 30, 2005 and
2004, totaled $49.0 million and $59.8 million, respectively. Basic and diluted
earnings per share for the six months ended June 30, 2005 were $0.86 compared
with basic earnings per share of $1.03 and diluted earnings per share of $1.02
for the six months ended June 30, 2004. At June 30, 2005, Trustmark reported
gross loans, including loans held for sale, of $5.790 billion, total assets of
$8.104 billion, total deposits of $5.521 billion and shareholders' equity of
$744.6 million.
Management utilizes certain financial ratios to gauge Trustmark's performance.
Trustmark achieved a return on average assets of 1.08% and a return on average
equity of 11.84% for the three months ended June 30, 2005. These compared with
ratios of 1.61% for return on average assets and 18.51% for return on average
equity for the three months ended June 30, 2004. For the six months ended June
30, 2005, Trustmark achieved a return on average assets of 1.21% and a return on
average equity of 13.13%. These compare to a return on average assets of 1.49%
and a return on average equity of 16.91% for the same periods of 2004.
CRITICAL ACCOUNTING POLICIES
Trustmark's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
follow general practices within the financial services industry. Application of
these accounting principles requires management to make estimates, assumptions
and judgments that affect the amounts reported in the consolidated financial
statements and accompanying notes. These estimates, assumptions and judgments
are based on information available as of the date of the consolidated financial
statements; accordingly, as this information changes, actual financial results
could differ from those estimates.
Certain policies inherently have a greater reliance on the use of estimates,
assumptions and judgments and, as such, have a greater possibility of producing
results that could be materially different than originally reported. These
critical accounting policies are described in detail below.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for estimated
loan losses charged against earnings. The allowance for loan losses is
maintained at a level believed adequate by management, based on estimated
probable losses within the existing loan portfolio. Trustmark's allowance for
loan loss methodology is based on guidance provided by SEC Staff Accounting
Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation
Issues," as well as other regulatory guidance. Accordingly, Trustmark's
methodology is based on historical loss experience by type of loan and internal
risk rating, homogeneous risk pools and specific allocations, with adjustments
considering current economic events and conditions. This evaluation is
inherently subjective, as it requires material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change.
Mortgage Servicing Rights
Mortgage servicing rights are rights to service mortgage loans for others,
whether the loans were acquired through purchase or loan origination. Purchased
mortgage servicing rights are capitalized at cost. For loans originated and sold
where the servicing rights have been retained, Trustmark allocates the cost of
the loan and the servicing right based on their relative fair value. Mortgage
servicing rights are amortized over the estimated period of the related net
servicing income.
Mortgage servicing rights are evaluated quarterly for impairment. Impairment
occurs when the estimated fair value falls below the underlying carrying value.
For purposes of evaluating impairment, Trustmark stratifies its mortgage
servicing portfolio on the basis of certain risk characteristics including loan
type, term and note rate. Changes in interest rates, prepayment speeds or other
factors could result in impairment or recovery of the servicing asset.
Impairment or impairment recovery is recognized through a valuation allowance
with a corresponding charge to mortgage banking noninterest income.
Benefit Plans
Benefit plan assets, liabilities and pension costs are determined utilizing
actuarially present value calculations. The valuation of the benefit obligation
and net periodic expense is considered critical, as it requires Management and
its actuaries to make estimates regarding the amount and timing of expected cash
outflows including assumptions about mortality, expected service periods, rate
of compensation increases and the long-term return on plan assets. Note 8 -
Benefit Plans, included in the accompanying Notes to the Consolidated Financial
Statements, provides further discussion on the accounting for Trustmark's
benefit plans (pension and supplemental retirement plan) and the estimates used
in determining the actuarial present value of the benefit obligations and the
net periodic benefit expense.
Fair Value Accounting Estimates
Generally accepted accounting principles require the use of fair values in
determining the carrying values of assets and liabilities, as well as for
specific disclosures. The most significant include securities, derivative
instruments, loans held for sale, mortgage servicing rights and net assets
acquired in a business combination. Certain of these assets do not have a
readily available market to determine fair value and require an estimate based
on specific parameters. When market prices are unavailable, Trustmark determines
fair values utilizing parameters, which are constantly changing, including
interest rates, duration, prepayment speeds and other specific conditions. In
most cases, these specific parameters require a significant amount of judgment
by Management.
Contingent Liabilities
Trustmark estimates contingent liabilities based on Management's evaluation of
the probability of outcomes and their ability to estimate the range of exposure.
As stated by Statement of Financial Accounting Standards (SFAS) No. 5,
"Accounting for Contingencies," a liability is contingent if the amount is not
presently known, but may become known in the future as a result of the
occurrence of some uncertain future event. Accounting standards require that a
liability be recorded if Management determines that it is probable that a loss
has occurred and the loss can be reasonably estimated. In addition, it must be
probable that the loss will be confirmed by some future event. As part of the
estimation process, Management is required to make assumptions about matters
that are, by their nature, highly uncertain. The assessment of contingent
liabilities, including legal contingencies and income tax liabilities, involves
the use of critical estimates, assumptions and judgments. Management's estimates
are based on their belief that future events will validate the current
assumptions regarding the ultimate outcome of these exposures. However, there
can be no assurance that future events, such as court decisions or Internal
Revenue Service positions, will not differ from Management's assessments.
Whenever practicable, Management consults with outside experts (attorneys,
independent accountants, claims administrators, etc.) to assist with the
gathering and evaluation of information related to contingent liabilities.
BUSINESS COMBINATIONS
Trustmark's strategic acquisition program is based on efforts to evaluate
opportunities to expand and invest in higher-growth markets by implementing
market-specific business initiatives. This approach is designed to maximize
financial profitability, bolster growth prospects and enhance shareholder value.
In the first quarter of 2004, Trustmark entered the dynamic Houston banking
market with the purchase of five branch offices from Allied Houston Bank. The
Houston MSA is among the largest and highest-growth markets in the country. In
December 2004, Trustmark continued to expand insurance services, as well as its
presence in the Florida Panhandle, with the acquisition of Fisher-Brown,
Incorporated, Northwest Florida's leading insurance agency, headquartered in
Pensacola, with offices in Milton, Mary Esther, Destin and Panama City. This
transaction enhances Trustmark's strategic goal of becoming a more diversified
financial services organization. For more information on these business
combinations, please refer to Note 2 of the Notes to the Consolidated Financial
Statements.
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 accompanying Yield/Rate
Analysis Table 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 June 30,
---------------------------------------------------------------
2005 2004
----------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest-earning assets:
Federal funds sold and securities
purchased under reverse
repurchase agreements $ 18,308 $ 143 3.13% $ 24,132 $ 63 1.05%
Securities - taxable 1,600,322 13,993 3.51% 2,021,527 14,825 2.95%
Securities - nontaxable 157,178 2,917 7.44% 158,896 3,026 7.66%
Gross loans, including loans held for sale 5,669,110 85,663 6.06% 5,288,298 73,917 5.62%
---------- -------- ------ ---------- -------- ------
Total interest-earning assets 7,444,918 102,716 5.53% 7,492,853 91,831 4.93%
Cash and due from banks 343,117 337,596
Other assets 532,805 486,184
Allowance for loan losses (66,243) (74,215)
---------- ----------
Total Assets $8,254,597 $8,242,418
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $4,277,848 18,326 1.72% $4,108,546 13,326 1.30%
Federal funds purchased and
securities sold under
repurchase agreements 745,858 4,995 2.69% 894,158 2,156 0.97%
Borrowings 1,138,709 9,413 3.32% 1,184,423 4,726 1.60%
---------- -------- ------ ---------- -------- ------
Total interest-bearing liabilities 6,162,415 32,734 2.13% 6,187,127 20,208 1.31%
-------- --------
Noninterest-bearing demand deposits 1,261,788 1,283,043
Other liabilities 78,121 54,867
Shareholders' equity 752,273 717,381
---------- ----------
Total Liabilities and
Shareholders' Equity $8,254,597 $8,242,418
========== ==========
Net Interest Margin 69,982 3.77% 71,623 3.84%
Less tax equivalent adjustment 2,073 2,075
-------- --------
Net Interest Margin per Consolidated
Statements of Income $ 67,909 $ 69,548
======== ========
Net interest income-FTE for the three-month and six-month periods of 2005
decreased $1.6 million, or 2.3%, and $1.7 million, or 1.2%, when compared with
the same periods of 2004. Increases in the target fed funds rate of 225 basis
points throughout 2004 and the first half of 2005 resulted in increased interest
income-FTE and interest expense. While interest expense on interest-bearing
liabilities, primarily federal funds purchased, repurchase agreements and
borrowings, increased substantially, the increase in interest income on earning
assets was sufficient to offset the additional interest expense. The combination
of these factors resulted in a nominal decline in the NIM during the six months
ended June 30, 2005 of 6 basis points when compared with the same period of
2004. For additional discussion, see Market/Interest Rate Risk Management
included later in the Management's Discussion and Analysis.
Yield/Rate Analysis Table
($ in thousands)
For the Six Months Ended June 30,
---------------------------------------------------------------
2005 2004
----------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest-earning assets:
Federal funds sold and securities
purchased under reverse
repurchase agreements $ 33,087 $ 416 2.54% $ 20,685 $ 106 1.03%
Securities - taxable 1,617,348 29,727 3.71% 1,990,523 31,021 3.13%
Securities - nontaxable 154,744 5,780 7.53% 159,901 6,097 7.67%
Gross loans, including loans held for sale 5,579,561 164,727 5.95% 5,175,855 145,371 5.65%
---------- -------- ------ ---------- -------- ------
Total interest-earning assets 7,384,740 200,650 5.48% 7,346,964 182,595 5.00%
Cash and due from banks 345,944 337,176
Other assets 531,903 476,066
Allowance for loan losses (65,568) (74,292)
---------- ----------
Total Assets $8,197,019 $8,085,914
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits $4,273,634 34,694 1.64% $4,051,625 26,712 1.33%
Federal funds purchased and
securities sold under
repurchase agreements 717,198 8,643 2.43% 893,181 4,260 0.96%
Borrowings 1,089,795 16,910 3.13% 1,104,686 9,484 1.73%
---------- -------- ------ ---------- -------- ------
Total interest-bearing liabilities 6,080,627 60,247 2.00% 6,049,492 40,456 1.34%
-------- --------
Noninterest-bearing demand deposits 1,289,311 1,270,554
Other liabilities 74,461 54,897
Shareholders' equity 752,620 710,971
---------- ----------
Total Liabilities and
Shareholders' Equity $8,197,019 $8,085,914
========== ==========
Net Interest Margin 140,403 3.83% 142,139 3.89%
Less tax equivalent adjustment 4,085 4,232
Net Interest Margin per Consolidated -------- --------
Statements of Income $136,318 $137,907
======== ========
Average interest-earning assets for the first half of 2005 were $7.385 billion,
compared with $7.347 billion for the first half of 2004, an increase of $37.8
million, or 0.5%. Without the Allied Houston branch purchase, the increase in
average interest-earning assets for the first half of 2005 is $11.8 million, or
0.2%. Growth in average loans for the first half of 2005, which increased 7.8%
(7.3% without Allied Houston) when compared with the first half of 2004, was
offset by a decrease in average securities, which decreased 17.6% when the first
six months of 2005 and 2004 are compared. Since the fourth quarter of 2003,
Management has been adjusting the balance sheet in anticipation of the risk of
rising rates. This strategy has been well founded as short-term rates have risen
225 basis points over that time period. However, the upward shift in the
short-term rates without a proportionate upward shift in long-term rates has
diminished the profitability of holding long-term assets. If ignored, persistent
interest rate behavior of this nature could lead to significant negative impact
on margin. In preparation for potential adverse risks to margin, Management
implemented a strategy of exiting certain assets and reducing balances of
funding sources that would bear the highest costs in such a rate environment.
This began in the fourth quarter of 2004, with the sale of $304 million in
mortgage-related and U. S. Treasury securities and continued during the second
quarter of 2005 when Trustmark sold $256 million in U. S. Government Agency and
U. S. Treasury securities. Projected funding costs to carry these investments to
their remaining maturity may have generated a greater negative margin impact
than the actual losses incurred at sale. Proceeds from sales were used to reduce
balances of higher-cost funding sources. The rising interest rate environment
positively impacted yields as the yield on average earning assets increased from
5.00% during the first half of 2004 to 5.48% for the first half of 2005, an
increase of 48 basis points. The combination of these factors resulted in an
increase in interest income-FTE during the first six months of 2005 of $18.1
million, or 9.9%, when compared with the first six months of 2004.
Average interest-bearing liabilities for the first half of 2005 totaled $6.081
billion, compared with $6.049 billion for the first half of 2004, an increase of
$31.1 million, or 0.5%. Without the Allied Houston branch purchase, average
interest-bearing liabilities for the first half of 2005 decreased $11.6 million,
or 0.2%. Average interest-bearing deposits and short-term borrowings increased
during the first six months of 2005, which offset decreases in federal funds
purchased, repurchase agreements and long-term FHLB advances resulting from
liquidity created from the sale of securities mentioned above. The rising
interest rate environment negatively impacted yields on interest-bearing
liabilities as seen in the increase in rates on interest-bearing deposits of 31
basis points, federal funds purchased and repurchase agreements of 147 basis
points as well as the increase in rates on borrowings of 140 basis points when
the first six months of 2005 and 2004 are compared. The average rates on
interest-bearing liabilities for the first half of 2005 and 2004 were 2.00% and
1.34%, respectively, representing an increase of 66 basis points during 2005. As
a result of these factors, total interest expense for the first six months of
2005 increased $19.8 million, or 48.9%, when compared with the first six months
of 2004.
Provision for Loan Losses
The provision for loan losses is determined by Management as the amount to
adjust the allowance for loan losses to a level, which, in Management's best
estimate, is necessary to absorb probable losses within the existing loan
portfolio. The provision for loan losses for the three and six months ended June
30, 2005, totaled $1.4 million and $4.2 million, respectively, compared with
$1.7 million and $2.8 million, respectively, for the same periods of 2004. The
increase for the six months ended June 30, 2005, is primarily the result of an
additional provision of $1.9 million related to a single commercial credit
recognized during the first quarter of 2005. As a percentage of average loans,
the provision was 0.15% for the first half of 2005 and 0.11% for the same period
of 2004. See the section captioned "Loans and Allowance for Loan Losses"
elsewhere in this discussion for further analysis of the provision for loan
losses.
Noninterest Income
Noninterest income (NII) consists of revenues generated from a broad range of
banking and financial services. NII totaled $64.5 million in the first six
months of 2005 compared with $64.9 million in the first six months of 2004. The
comparative components of noninterest income for the six months ended June 30,
2005 and 2004 are shown in the accompanying table.
Noninterest Income
($ in thousands)
Six Months Ended
June 30,
-------------------
2005 2004 $ Change % Change
-------- -------- -------- --------
Service charges on deposit accounts $ 25,925 $ 27,285 $ (1,360) -5.0%
Insurance commissions 16,232 7,531 8,701 115.5%
Wealth management 10,657 9,974 683 6.8%
Retail banking - other 10,036 8,817 1,219 13.8%
Mortgage banking, net 605 7,198 (6,593) -91.6%
Other, net 5,097 4,041 1,056 26.1%
Securities (losses) gains (4,054) 15 (4,069) n/m
-------- -------- -------- --------
Total Noninterest Income $ 64,498 $ 64,861 $ (363) -0.6%
======== ======== ======== ========
n/m - not meaningful
The single largest component of noninterest income continues to be service
charges for deposit products and services, which decreased 5.0% in the first six
months of 2005 over the same period in 2004. The primary reason for the decrease
in service charges is a decline in fees earned on deposit accounts as a result
of increased usage of accounts that do not charge a monthly service fee. An
additional component of this decrease relates to increases in earnings credits
earned by commercial depositors as a result of the rising interest rate
environment, which has negatively impacted the overall service charges earned on
these accounts.
Insurance commissions were $16.2 million in the first six months of 2005,
compared with $7.5 million in the first six months of 2004, an increase of $8.7
million or 115.5%. The increase in insurance commissions is primarily due to the
Fisher-Brown acquisition, which occurred during the fourth quarter of 2004 and
contributed approximately $8.5 million, or 98% of the increase.
Wealth management income was $10.7 million during the first six months of 2005,
compared with $10.0 million in the first six months of 2004. Wealth management
consists of income related to trust and advisory services, including income
generated from Trustmark Securities, Inc. and Trustmark Investment Advisors,
Inc. The growth in wealth management income is largely attributed to an increase
in trust fee income resulting from new account growth, asset appreciation on
existing accounts and changes in the fee structure related to certain managed
accounts. In addition, the increased presence of wealth management teams in
Florida, Houston and Memphis and the creation of the Wealth Management Center in
Jackson have begun to positively impact income. At June 30, 2005, 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 totaled $10.0 million for the six months ended June 30,
2005, an increase of $1.2 million, or 13.8%, when compared with the same period
of 2004. Retail banking - other income consists primarily of ATM fees, fees from
the sale of checks, bank card fees and safe deposit box fees. This growth is a
result of increased fees related to electronic transactions such as ACH and
debit card transactions resulting from increased transaction volume.
Mortgage banking income was $605 thousand for the first six months of 2005,
compared to $7.2 million for the first six months of 2004. As shown in the
accompanying table, net mortgage servicing income has remained constant,
resulting from consistent balances in the mortgage servicing portfolio. Loans
serviced for others totaled $3.5 billion and $3.4 billion at June 30, 2005 and
2004, respectively. As a result, the factors that drive the change in mortgage
banking income are primarily those factors that are sensitive to changes in
interest rates such as amortization and impairment of mortgage servicing rights
as well as gains on sales of loans.
For the first six months of 2005, the primary factor for the decrease in
mortgage banking income is an increase of $6.7 million in impairment of mortgage
servicing rights resulting from declines in long-term interest rates during the
second quarter. This non-cash charge against income could be reversed, in whole
or in part, if long-term interest rates rise, refinancing slows and the expected
life of home mortgages lengthens. Amortization expense decreased to $5.2 million
for the first six months of 2005 when compared with $6.4 million for the same
period in 2004, as the expected life of the portfolio has lengthened in response
to a rise in interest rates from the historically low environment of the first
quarter of 2004. Future changes in amortization and impairment of mortgage
servicing rights will continue to be closely tied to fluctuations in long-term
mortgage rates. Gain on sales of loans decreased from $2.3 million during the
six months ended June 30, 2004, to $708 thousand during the six months ended
June 30, 2005. The overall total of loan sales from secondary marketing
activities declined from $426.9 million during the first half of 2004 to $415.1
million in the first half of 2005. The volatile interest rate environment
experienced during 2005 has presented fewer gain on sale opportunities when
compared to the first half of 2004.
The following table illustrates the components of mortgage banking included in
noninterest income in the accompanying income statements.
Mortgage Banking Income
($ in thousands)
Six Months Ended
June 30,
------------------
2005 2004
------- -------
Mortgage servicing income $ 8,412 $ 8,445
Mortgage guaranty fees (2,228) (2,221)
------- -------
Mortgage servicing, net 6,184 6,224
Amortization of mortgage servicing rights (5,240) (6,401)
(Impairment)/Recovery of mortgage
servicing rights, net (2,089) 4,627
Gain on sales of loans 708 2,347
Other, net 1,042 401
------- -------
Mortgage banking, net $ 605 $ 7,198
======= =======
Securities losses totaled $4.1 million during the six months ended June 30,
2005, compared with securities gains of $15 thousand during the same period of
2004. The losses for the six months ended June 30, 2005, primarily resulted from
the sale of $256 million in U.S. Government Agency and U.S. Treasury securities
during the second quarter of 2005. The sale of these securities resulted from an
intentional reduction in the investment portfolio due to the declining
profitability of holding longer-term investment securities.
Noninterest Expense
Trustmark's noninterest expense increased $12.7 million, or 11.7%, in the first
six months of 2005 to $121.4 million, compared with $108.7 million in the same
period of 2004. Excluding the Fisher-Brown acquisition and Allied Houston branch
purchase, noninterest expense for the first six months of 2005 would total
$112.8 million, an increase of $5.3 million, or 4.9%, compared with the same
period of 2004. Management continues to consider expense control a major
component of improving shareholder value. The comparative components of
noninterest expense for the six months ended June 30, 2005 and 2004 are shown in
the accompanying table.
Noninterest Expense
($ in thousands)
Six Months Ended
June 30,
-------------------
2005 2004 $ Change % Change
-------- -------- -------- --------
Salaries and employee benefits $ 74,604 $ 64,083 $ 10,521 16.4%
Services and fees 17,062 17,225 (163) -0.9%
Net occupancy - premises 7,352 6,730 622 9.2%
Equipment expense 7,808 7,323 485 6.6%
Other expense 14,577 13,364 1,213 9.1%
-------- -------- -------- --------
Total Noninterest Expense $121,403 $108,725 $ 12,678 11.7%
======== ======== ======== ========
Salaries and employee benefits, the largest category of noninterest expense,
were $74.6 million for the first six months of 2005, compared with $64.1 million
for the same period of 2004. Business combinations, primarily Fisher-Brown,
accounted for 58% of the increase. Eliminating adjustments for business
combinations, salaries and employee benefits for the six months ended June 30,
2005, grew $5.3 million, or 8.3%, when compared to the same time period in 2004
primarily from merit salary increases as well as salaries and benefits for
additional employees added as Trustmark continues to consider that its
investment in people is one of the critical components of adding shareholder
value. Trustmark's full-time equivalent employees were 2,616 and 2,465 at June
30, 2005 and 2004, respectively.
During the first six months of 2005, net occupancy-premises expense increased
$622 thousand, or 9.2%. The increase during the first half of 2005 is
attributable to occupancy costs associated with facilities acquired in the
Fisher-Brown acquisition and Allied Houston branch purchase. Business
combinations accounted for approximately 80% of the increase. The increase was
also the result of additional maintenance on existing premises.
Equipment expense totaled $7.8 million for the six months ended June 30, 2005,
compared with $7.3 million for the same period of 2004, an increase of $485
thousand or 6.6%. The increase is a result of additional costs related to data
processing and depreciation of office equipment. Business combinations accounted
for approximately 40% of the increase.
Income Taxes
For the six months ended June 30, 2005, Trustmark's combined effective tax rate
was 34.8%, compared with 34.5% for the first six months of 2004. The slight
increase in Trustmark's effective tax rate for 2005 is due to immaterial changes
in permanent items as a percentage of pretax income.
LIQUIDITY
Liquidity is the ability to meet asset funding requirements and operational cash
outflows in a timely manner, in sufficient amount and without excess cost.
Consistent cash flows from operations and adequate capital provide internally
generated liquidity. Furthermore, Management maintains funding capacity from a
variety of external sources to meet daily funding needs, such as those required
to meet deposit withdrawals, loan disbursements and security settlements.
Liquidity strategy also includes the use of wholesale funding sources to provide
for the seasonal fluctuations of deposit and loan demand and the cyclical
fluctuations of the economy that impact the availability of funds. Management
keeps excess funding capacity available to meet potential demands associated
with adverse circumstances.
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. Liquidity on the liability side of the
balance sheet is generated primarily through growth in core deposits. To provide
additional liquidity, Trustmark utilizes economical short-term wholesale funding
arrangements for federal funds purchased and securities sold under repurchase
agreements in both regional and national markets. At June 30, 2005, Trustmark
estimated gross fed funds borrowing capacity at $1.319 billion, compared to
$1.137 billion at December 31, 2004. In addition, Trustmark maintains a
borrowing relationship with the FHLB, which provided $575.0 million in
short-term advances and $205.8 million in long-term advances at June 30, 2005,
compared with $650.0 million in short-term advances and $180.9 million in
long-term advances at December 31, 2004. 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
$695.0 million available in unused FHLB advances. Another borrowing source is
the Federal Reserve Discount Window (Discount Window). At June 30, 2005,
Trustmark had approximately $511.7 million available in collateral capacity at
the Discount Window from pledges of auto loans and securities, compared with
$597.5 million available at December 31, 2004. In September 2004, Trustmark
entered into a two-year revolving credit arrangement enabling borrowings of up
to $50.0 million, subject to certain financial covenants. At June 30, 2005,
Trustmark was in compliance with all financial covenants and had borrowings on
this line of credit that totaled $11.0 million.
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.
The Board of Directors currently has the authority to issue up to 20 million
preferred shares with no par value. The ability to issue preferred shares in the
future will provide Trustmark with additional financial and management
flexibility for general corporate and acquisition purposes. At June 30, 2005, no
such shares have been issued.
Liquidity position and strategy are reviewed regularly by the Asset/Liability
Committee and continuously adjusted in relationship to Trustmark's overall
strategy. Management believes that Trustmark has sufficient liquidity and
capital resources to meet presently known cash flow requirements arising from
ongoing business transactions.
CAPITAL RESOURCES
At June 30, 2005, Trustmark's shareholders' equity was $744.6 million, a
decrease of $5.8 million, or 0.8%, from its level at December 31, 2004. This
decrease is primarily related to dividends of $22.8 million, shares repurchased
at a cost of $32.5 million and a net increase in accumulated other comprehensive
loss of $1.6 million being offset by net income of $49.0 million for the first
six months of 2005. Management will continue to hold sufficient capital to
provide for growth opportunities, protect the balance sheet against sudden
adverse market conditions and maintain an attractive return on equity to
shareholders.
Common Stock Repurchase Program
Trustmark currently has remaining authorization for the repurchase of up to 1.8
million shares of its common stock, which will be executed at the discretion of
management, subject to capital needs and market conditions. 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 19.7 million shares for $432.0 million,
including 287 thousand shares during the second quarter of 2005 and 1.2 million
shares for the six months ended June 30, 2005.
Dividends
Dividends for the first six months of 2005 were $0.40 per share, increasing 5.3%
when compared with dividends of $0.38 per share in the first six months of 2004.
Regulatory Capital
Trustmark and TNB are subject to minimum capital requirements, which are
administered by various federal regulatory agencies. These capital requirements,
as defined by federal guidelines, involve quantitative and qualitative measures
of assets, liabilities and certain off-balance sheet instruments. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the financial statements of both Trustmark and TNB.
Trustmark aims not only to exceed the minimum capital standards but also the
well-capitalized guidelines for regulatory capital. Management believes, as of
June 30, 2005, that Trustmark and TNB have met or exceeded all of the minimum
capital standards for the parent company and its primary banking subsidiary as
established by regulatory requirements. At June 30, 2005, the most recent
notification from the Office of the Comptroller of the Currency (OCC), TNB's
primary federal banking regulator, categorized TNB as well capitalized. To be
categorized in this manner, TNB must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios (defined in applicable regulations) as set
forth in the accompanying table. There are no significant conditions or events
that have occurred since the OCC's notification that Management believes have
affected TNB's present classification.
Regulatory Capital Table
($ in thousands)
June 30, 2005
-----------------------------------------------------------
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 $640,540 10.98% $466,486 8.00% - -
Trustmark National Bank 615,976 10.75% 458,476 8.00% $573,096 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $574,638 9.85% $233,243 4.00% - -
Trustmark National Bank 552,641 9.64% 229,238 4.00% $343,857 6.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $574,638 7.11% $242,448 3.00% - -
Trustmark National Bank 552,641 6.97% 238,030 3.00% $396,717 5.00%
EARNING ASSETS
Earning assets serve as the primary revenue streams for Trustmark and are
comprised of securities, loans, federal funds sold and securities purchased
under resale agreements. At June 30, 2005, earning assets were $7.332 billion,
or 90.5% of total assets, compared with $7.235 billion, or 89.8% of total assets
at December 31, 2004, an increase of $97.2 million, or 1.3%.
Securities
Interest-bearing investment securities are held to provide a stable alternative
source of interest income and to collateralize public deposits and repurchase
agreements. Trustmark's portfolio of investment securities also supports
liquidity and profitability strategies and may be used to offset potential
market risks in the various segments. The primary objective of the investment
portfolio is to make an adequate contribution to net interest income. Management
evaluates this contribution in relation to potential adverse market value risk
that may impact strategic flexibility, liquidity or future earnings. During the
fourth quarter of 2004, Management implemented a strategy of exiting certain
assets and reducing balances of funding sources that would bear the highest
costs in a rising interest rate environment. This strategy is illustrated by the
sale of $304 million in mortgage-related and U. S. Treasury securities during
the fourth quarter of 2004, which generated losses of $4.7 million, and
continued during the second quarter of 2005 when Trustmark sold $256 million in
U. S. Government Agency and U. S. Treasury securities, which incurred losses of
$4.1 million. The average maturity of these securities was 2.14 years with an
average book yield of 2.94%. Management believes projected funding costs to
carry these investments to their remaining maturity may have generated a greater
negative margin impact than the actual losses incurred at sale. Proceeds from
sales were used to reduce balances of higher-cost funding sources. Trustmark
intends to maintain lower balances in investment securities and reduce
dependency on wholesale funding until market conditions provide more attractive
opportunities. At June 30, 2005, Trustmark's securities portfolio totaled $1.517
billion compared with $1.717 billion at December 31, 2004, a decrease of $199.8
million, or 11.6%.
The securities portfolio can serve as a powerful tool that Management uses to
control exposure to interest rate risk. Interest rate risk can be adjusted by
altering both the duration of the portfolio and the balance of the portfolio.
Trustmark has maintained a strategy of offsetting potential exposure to higher
interest rates by keeping both the duration and the balances of investment
securities at relatively low levels. The estimated duration of the portfolio was
2.46 years at June 30, 2005, 2.47 years at December 31, 2004, and 2.44 years at
June 30, 2004. While this is a slight extension of the duration of Trustmark's
securities portfolio, duration remains near historically low levels. Management
does not expect to extend duration by a material amount during 2005.
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 June 30, 2005, AFS securities
totaled $1.213 billion, which represented 79.9% of the securities portfolio,
compared to $1.580 billion, or 92.0%, at December 31, 2004. At June 30, 2005,
unrealized losses on AFS securities of $4.8 million, net of $1.9 million of
deferred income taxes, were included in accumulated other comprehensive loss,
compared with unrealized losses of $2.2 million, net of $841 thousand in
deferred income taxes, at December 31, 2004. At June 30, 2005, 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 June 30, 2005, HTM securities totaled $304.6 million and
represented 20.1% of the total portfolio, compared with $136.8 million, or 8.0%,
at the end of 2004.
Management continues to focus on asset quality as one of the strategic goals of
the securities portfolio, which is evidenced by the investment of over 85% of
the portfolio in U.S. Treasury, U.S. Government agencies obligations and other
AAA rated securities.
Loans and Allowance for Loan Losses
Loans, including loans held for sale, represented 79.0% of earning assets at
June 30, 2005, compared with 75.1% at December 31, 2004. At June 30, 2005, loans
totaled $5.790 billion, a 6.6% increase from its level of $5.431 billion at
December 31, 2004, due in part to growth in Trustmark's Florida Gulf Coast,
Mortgage Banking, Commercial Real Estate and Indirect Auto portfolios.
Trustmark makes loans in the normal course of business to certain directors,
including their immediate families and companies in which they are principal
owners. Such loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility at the time of the transaction.
Trustmark's lending policies have resulted in consistently sound asset quality.
One measure of asset quality in the financial services industry is the level of
nonperforming assets. The details of Trustmark's nonperforming assets at June
30, 2005 and December 31, 2004, are shown in the accompanying table.
Total nonperforming assets increased $8.8 million, or 32.2%, during the first
six months of 2005. The increase from December 31, 2004, is primarily
attributable to a single commercial credit of approximately $14.9 million, of
which $13.6 million was placed on nonaccrual during the first quarter of 2005.
The allowance coverage of nonperforming loans was 201.63% at June 30, 2005.
Loans held for sale past due 90 days or more represents $6.6 million in loans
serviced by Trustmark and fully guaranteed by the Government National Mortgage
Association that are eligible for repurchase.
Nonperforming Assets and Past Due Loans
($ in thousands)
June 30, December 31,
2005 2004
----------- -----------
Nonaccrual and restructured loans $ 32,684 $ 21,864
Other real estate (ORE) 3,634 5,615
----------- -----------
Total nonperforming assets $ 36,318 $ 27,479
=========== ===========
Loans past due 90 days or more:
Loan portfolio $ 1,698 $ 5,284
Loans held for sale 6,612 -
----------- -----------
Total loans past due 90 days or more $ 8,310 $ 5,284
=========== ===========
Nonperforming assets/total loans and ORE 0.63% 0.51%
=========== ===========
The allowance for loan losses is established through provisions for estimated
loan losses charged against earnings. The allowance for loan losses is
maintained at a level believed adequate by Management, based on estimated
probable losses within the existing loan portfolio. Trustmark's allowance for
loan loss methodology is based on guidance provided by the SEC Staff Accounting
Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation
Issues," as well as other regulatory guidance. Accordingly, Trustmark's
methodology is based on historical loss experience by type of loan and internal
risk rating, homogeneous risk pools and specific allocations, with adjustments
considering current economic events and conditions.
The allowance for loan losses consists of three elements: (i) specific valuation
allowances established for probable losses on specific loans; (ii) historical
valuation allowances calculated based on historical loan experience for similar
loans with similar characteristics and trends and (iii) unallocated general
valuation allowances determined based on general economic conditions and other
qualitative risk factors, both internal and external, to Trustmark.
At June 30, 2005, the allowance for loan losses was $65.9 million compared with
$64.8 million at December 31, 2004. The allowance represented 1.17% of total
loans outstanding at June 30, 2005, compared to 1.21% at December 31, 2004. As
of June 30, 2005, Management believes that the allowance for loan losses
provides adequate protection in regards to charge-off experience and the current
level of nonperforming assets.
Loans identified as losses by Management, internal loan review and/or bank
examiners are charged-off against the allowance, while consumer loans are
charged-off based on regulatory requirements. Net charge-offs for the first six
months of 2005 totaled $3.1 million compared to $2.9 million for the same period
of 2004. The continued stability in net charge-offs is a result of realignments
of specific underwriting standards and changes to risk management analysis over
the past 24 months.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase agreements
were $24.0 million at June 30, 2005, a decrease of $62.2 million when compared
with December 31, 2004. Trustmark utilizes these products as a short-term
investment alternative whenever it has excess liquidity.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Trustmark's deposit base is its primary source of funding and consists of core
deposits from the communities served by Trustmark. Deposits include
interest-bearing and noninterest-bearing demand accounts, savings, money market,
certificates of deposit, individual retirement accounts and brokered CDs. Total
deposits were $5.521 billion at June 30, 2005, compared with $5.450 billion at
December 31, 2004, an increase of $70.6 million, or 1.3%. Noninterest-bearing
deposits have decreased $105.3 million during the first six months of 2005,
while interest-bearing deposits have increased $175.9 million during the same
time period. At June 30, 2005, brokered CDs totaled $189.2 million, a decrease
of $34.5 million when compared to December 31, 2004. Trustmark will continue to
utilize a brokered CD program to provide additional deposit funding. Additional
growth in interest-bearing deposits may be attributed to uncertain financial
market conditions, which have led to more growth in traditional deposit products
such as interest-bearing demand deposits. Management has refocused on
initiatives to expand deposits in our market area as a key to providing low cost
funding for loan growth.
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 $1.554 billion at June 30, 2005, a decrease of $43.7 million,
compared with $1.598 billion at December 31, 2004. Long-term FHLB advances
totaled $205.8 million at June 30, 2005, an increase of $24.9 million from
December 31, 2004. On a consolidated basis, total borrowings have decreased
$18.7 million when compared to December 31, 2004, as Trustmark utilized
liquidity from the sale of securities to reduce Trustmark's dependency on
wholesale funding products.
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, with 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 recent years 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 June 30, 2005 and 2004, Trustmark had
commitments to extend credit of $1.434 billion and $1.240 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 June 30, 2005
and 2004, Trustmark's maximum exposure to credit loss in the event of
nonperformance by the other party for letters of credit was $114.9 million and
$92.8 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 +/- two 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 two 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 June 30,
2005, it is estimated that net interest income may decrease 0.58%, 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 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 response 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 1.87%. 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 2005. 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. 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 June 30, 2005, reflected an asset gap of $50 million compared with
a liability gap of $189 million at March 31, 2005. One-year gap analysis
projected at June 30, 2005, reflected a liability gap of $151 million compared
with a liability gap of $571 million at March 31, 2005. The three-month and
one-year gap positions were primarily impacted during the second quarter of 2005
by increases in variable rate loans, as well as an increase in prepayment
projections on mortgage loans and mortgage related securities as a result of a
flattening yield curve. In addition, the sale of certain investment securities
reduced reliance on overnight and other short-term wholesale funding such as
federal funds. Of the primary asset groups, Trustmark expects maturities and
repricing of approximately $3.365 billion in loans and $401.7 million in
securities during the next twelve months. 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.
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 fair value of these derivatives was
negative $787 thousand at June 30, 2005.
Trustmark continued a risk controlling strategy utilizing caps and floors, which
may be further implemented over time. As of June 30, 2005, 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
June 30, 2005, the fair value of these contracts was $25 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 fair value of these interest rate swaps at
June 30, 2005 was negative $940 thousand.
RECENT PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No.
154, "Accounting Changes and Error Corrections." SFAS No. 154 is a replacement
of Accounting Principles Board Opinion (APB) No. 20, "Accounting Changes" and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to the
newly adopted accounting principle. This statement applies to voluntary changes
in accounting principle as well as changes required by an accounting
pronouncement that provide no specific transition provisions. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The effects of this statement are not
expected to have a material impact on Trustmark's statement of position or
results of operations.
In December 2004, the FASB issued a revision of SFAS No. 123 (SFAS No. 123r),
"Share-Based Payment." This Statement revises SFAS No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123r establishes standards for the
accounting for transactions in which a company exchanges equity instruments for
goods or services. This statement requires companies to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. As of the required effective date,
public companies using the fair-value-based method for recognition or disclosure
under SFAS No. 123, will apply this statement using a modified version of
prospective application. Trustmark adopted the provisions of SFAS No. 123
effective January 1, 2003; therefore, Trustmark will recognize compensation cost
for the portion of outstanding awards for which the requisite service has not
yet been rendered (unvested awards). For public companies, this statement is
effective as of the beginning of the first annual reporting period beginning
after June 15, 2005. The effects of this statement are not expected to have a
material impact on Trustmark's statement of position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in the discussion of
Market/Interest Rate Risk Management found in Management's Discussion and
Analysis.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Trustmark, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Treasurer (Principal Financial
Officer), evaluated the effectiveness of the design and operation of Trustmark's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and the Principal
Financial Officer concluded that as of the end of the second quarter of 2005,
Trustmark's disclosure controls and procedures were effective in ensuring that
information required to be disclosed in the reports Trustmark files and submits
under the Securities Exchange Act of 1934 are recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Changes in Internal Control over Financial Reporting
There has been no change in Trustmark's internal control over financial
reporting during the quarter ended June 30, 2005 that has materially affected,
or is 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 June 30, 2005, other
than those disclosed in the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of this Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY 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 June 30, 2005:
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
- --------------------- ------------ ---------- ------------------- ------------------
April 1, 2005 through
April 30, 2005 147,700 $ 27.51 147,700 1,935,569
May 1, 2005 through
May 31, 2005 74,700 $ 27.03 74,700 1,860,869
June 1, 2005 through
June 30, 2005 64,600 $ 28.41 64,600 1,796,269
------------ -------------------
Total 287,000 287,000
============ ===================
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of Trustmark's shareholders was held on May 10, 2005. At this
meeting, the following matters were voted on by Trustmark's shareholders:
A. Election of Directors
The following individuals were elected to serve as Directors of Trustmark until
the annual meeting of shareholders in 2006 or until their respective successors
are elected and qualified. The vote was cast as follows:
Votes Cast
Votes Cast in Favor Against/Withheld
------------------- -----------------
Number % Number %
---------- ------ --------- -----
J. Kelly Allgood 48,815,112 97.75% 1,124,040 2.25%
Reuben V. Anderson 48,630,175 97.38% 1,308,977 2.62%
William C. Deviney, Jr. 49,213,017 98.55% 726,135 1.45%
C. Gerald Garnett 49,039,904 98.20% 899,248 1.80%
Richard G. Hickson 49,189,501 98.50% 749,651 1.50%
Matthew L. Holleman III 49,194,469 98.51% 744,683 1.49%
John M. McCullouch 48,930,454 97.98% 1,008,698 2.02%
Richard H. Puckett 49,055,434 98.23% 883,718 1.77%
Carolyn C. Shanks 48,760,590 97.64% 1,178,562 2.36%
R. Michael Summerford 48,814,553 97.75% 1,124,599 2.25%
Kenneth W. Williams 49,056,234 98.23% 882,918 1.77%
William G. Yates, Jr. 49,356,422 98.83% 582,730 1.17%
B. Approval of the 2005 Stock and Incentive Compensation Plan
A proposal was made to adopt the 2005 Stock and Incentive Compensation Plan. The
vote was cast as follows:
Votes Cast Votes Cast Votes
in Favor Against Abstained
---------- ---------- ---------
2005 Stock and Incentive Compensation Plan 32,131,180 6,860,348 379,593
ITEM 6. EXHIBITS
The exhibits listed in the Exhibit Index are filed herewith or are incorporated
herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRUSTMARK CORPORATION
BY: /s/ Richard G. Hickson BY: /s/ Zach L. Wasson
---------------------- ---------------------
Richard G. Hickson Zach L. Wasson
Chairman of the Board, President Treasurer (Principal
& Chief Executive Officer Financial Officer)
DATE: August 9, 2005 DATE: August 9, 2005
EXHIBIT INDEX
31-a Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31-b Certification by Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32-a Certification by Chief Executive Officer pursuant to 18 U.S.C. ss. 1350.
32-b Certification by Chief Financial Officer pursuant to 18 U.S.C. ss. 1350.
All other exhibits are omitted, as they are inapplicable or not required by the
related instructions.