FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-3683
TRUSTMARK CORPORATION
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Mississippi 64-1471500
Trustmark Corporation
248 East Capitol Street
Jackson, MS 39201
(601) 354-5111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of August 8, 1997.
Title Outstanding
Common stock, no par value 36,367,808
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
June 30, December 31,
1997 1996*
---------- ----------
ASSETS
Cash and due from banks (noninterest-bearing) $ 273,119 $ 337,090
Federal funds sold and securities purchased
under reverse repurchase agreements 30,636 92,718
Trading account securities 112 102
Securities available for sale 644,863 527,942
Securities held to maturity (fair value: $1,412,861-1997;
$1,431,805-1996) 1,409,552 1,425,260
Loans 2,731,830 2,637,320
Less: Unearned income 1,913 2,747
Allowance for loan losses 63,800 63,000
---------- ----------
Net loans 2,666,117 2,571,573
Premises and equipment 64,990 61,535
Intangible assets 37,757 38,637
Other assets 142,369 138,827
---------- ----------
TOTAL ASSETS $5,269,515 $5,193,684
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing $ 779,642 $ 826,137
Interest-bearing 2,917,781 2,771,299
---------- ----------
Total deposits 3,697,423 3,597,436
Federal funds purchased 101,369 201,965
Securities sold under repurchase agreements 752,508 765,226
Other short-term borrowings 98,280 26,361
Other liabilities 55,283 78,512
---------- ----------
TOTAL LIABILITIES 4,704,863 4,669,500
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity
Common stock, no par value:
Authorized: 100,000,000 shares
Issued and outstanding: 36,386,808 shares 15,161 14,546
Surplus 248,038 244,578
Retained earnings 296,152 261,850
Net unrealized gain on securities available for sale, net of tax 5,301 3,210
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 564,652 524,184
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,269,515 $5,193,684
========== ==========
* Derived from audited financial statements.
See notes to consolidated financial statements.
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
------- ------- -------- --------
INTEREST INCOME
Interest and fees on loans $60,453 $56,262 $119,789 $113,284
Interest on securities:
Taxable interest income 30,567 30,690 60,026 59,335
Interest income exempt from federal income taxes 1,493 1,432 3,019 2,880
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 1,313 948 2,798 3,036
------- ------- -------- --------
TOTAL INTEREST INCOME 93,826 89,332 185,632 178,535
INTEREST EXPENSE
Interest on deposits 30,283 28,247 59,805 56,376
Interest on federal funds purchased and securities
sold under repurchase agreements 11,612 12,145 22,862 25,026
Other interest expense 1,632 469 2,402 756
------- ------- -------- --------
TOTAL INTEREST EXPENSE 43,527 40,861 85,069 82,158
------- ------- -------- --------
NET INTEREST INCOME 50,299 48,471 100,563 96,377
Provision for loan losses 1,357 1,364 2,265 3,508
------- ------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 48,942 47,107 98,298 92,869
NONINTEREST INCOME
Trust service income 2,841 2,382 5,881 4,764
Service charges on deposit accounts 6,056 5,836 12,061 11,408
Other account charges, fees and commissions 8,135 7,190 15,860 14,035
Securities gains 410 50 410 46
Other income 1,369 880 2,561 1,885
------- ------- -------- --------
TOTAL NONINTEREST INCOME 18,811 16,338 36,773 32,138
NONINTEREST EXPENSES
Salaries and employee benefits 21,337 19,098 42,274 38,100
Net occupancy - premises 2,400 2,330 4,799 4,452
Equipment expenses 3,471 3,008 6,460 6,113
Services and fees 5,692 5,182 11,350 10,140
FDIC insurance assessment 155 507 90 1,005
Amortization of intangible assets 2,398 2,056 4,703 3,991
Other expenses 6,285 6,412 12,394 12,708
------- ------- -------- --------
TOTAL NONINTEREST EXPENSES 41,738 38,593 82,070 76,509
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 26,015 24,852 53,001 48,498
Income taxes 8,473 8,665 17,784 16,942
------- ------- -------- --------
NET INCOME $17,542 $16,187 $35,217 $31,556
======= ======= ======== ========
NET INCOME PER SHARE $0.48 $0.46 $0.97 $0.90
======= ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 36,386,808 34,910,683 36,386,808 34,910,683
See notes to consolidated financial statements.
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(Unaudited)
Six months ended June 30,
-------------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES
Net income $ 35,217 $ 31,556
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 2,264 3,508
Provision for depreciation and amortization 9,619 8,656
Net amortization (accretion) of securities 145 (3,325)
Securities gains (410) (46)
Gains and writedowns on other real estate (15) (2)
Other 12,264 (960)
Increase in intangible assets (3,899) (5,279)
Increase in deferred income taxes (570) (1,589)
Increase in other assets (6,330) (927)
(Decrease) increase in other liabilities (23,229) 1,552
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25,056 33,144
--------- ---------
INVESTING ACTIVITIES
Proceeds from calls and maturities of securities available for sale 81,772 87,579
Proceeds from calls and maturities of securities held to maturity 108,390 108,272
Proceeds from sales of securities available for sale 53,237 155,905
Purchases of securities available for sale (249,473) (392,145)
Purchases of securities held to maturity (91,487) (213,884)
Net decrease in federal funds sold and securities
purchased under reverse repurchase agreements 62,082 60,065
Net (increase) decrease in loans (95,836) 47,342
Purchases of premises and equipment (7,786) (3,926)
Proceeds from sales of premises and equipment 331 29
Proceeds from sales of other real estate 1,339 1,795
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (137,431) (148,968)
--------- ---------
FINANCING ACTIVITIES
Net increase in deposits 99,987 76,740
Net (decrease) increase in federal funds purchased and
securities sold under repurchase agreements (113,314) 79,321
Net increase in short-term borrowings 71,919
Cash dividends paid (10,188) (8,379)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 48,404 147,682
--------- ---------
(Decrease) increase in cash and cash equivalents (63,971) 31,858
Cash and cash equivalents at beginning of year 337,090 299,006
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 273,119 $ 330,864
========= =========
See notes to consolidated financial statements.
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 generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Management, all adjustments (consisting of normal recurring
accruals) considered necessary for the fair presentation of these consolidated
financial statements have been included. The notes included herein should be
read in conjunction with the notes to the consolidated financial statements
included in Trustmark Corporation's (the Corporation) 1996 annual report on Form
10-K.
The consolidated financial statements include the accounts of the
Corporation, its wholly-owned subsidiaries, First Building Corporation, F.S.
Corporation, Trustmark National Bank (the Bank) and the Bank's wholly-owned
subsidiary, Trustmark Financial Services, Inc. All intercompany profits,
balances and transactions have been eliminated.
NOTE 2 - LOANS
The following table summarizes the activity in the allowance for loan
losses for the six month periods ended June 30, 1997 and 1996 ($ in thousands):
1997 1996
------- -------
Balance at beginning of year $63,000 $62,000
Provision charged to expense 2,265 3,508
Loans charged off (4,411) (4,380)
Recoveries 2,155 1,872
Allowance applicable to
loans of acquired bank 791
------- -------
Balance at end of period $63,800 $63,000
======= =======
At June 30, 1997, the recorded investment in commercial loans considered to
be impaired under Statement of Financial Accounting Standards (SFAS) No. 114 was
$11.4 million, all of which were on a nonaccrual basis. As a result of direct
write-downs, the specific allowance related to these impaired loans is
immaterial. For the three months ended June 30, 1997, the average recorded
investment in impaired loans was approximately $11.5 million, and the amount of
interest income recognized on impaired loans was immaterial. Loans on which the
accrual of interest has been discontinued or reduced totaled $13.3 million at
June 30, 1997. The foregone interest associated with such loans is immaterial.
NOTE 3 - CONTINGENCIES
Twenty-three suits are pending in federal court against the Corporation's
subsidiary, Trustmark National Bank, relating to the placement of collateral
protection insurance (CPI) on particular automobile and mobile home loans. On
September 18, 1995, one of the suits was certified as a mandatory class action,
with the class broadly defined to include all persons who financed an automobile
(or other property) through Trustmark and whose loans were charged for CPI
premiums. One of the CPI insurers, the CPI underwriter and the insurance agent
are also defendants to the class action. All plaintiffs in pending suits are
members of the mandatory class. On January 10, 1996, the federal court entered
an order in the class action enjoining all other pending CPI-related lawsuits
and enjoining all future CPI-related lawsuits. In November 1996, a proposed
classwide settlement filed in United States District Court for the Southern
District of Mississippi, received preliminary court approval. The proposed
settlement includes a cash payment of $4 million and forgiveness of uncollected
CPI debts. Notices were mailed to approximately 6,000 borrowers. Final court
approval of the proposed settlement was the subject of a fairness hearing held
by the United States District Court on April 14, 1997. The District Court filed
a Memorandum Opinion approving the proposed settlement on June 5, 1997. The
District Court entered a Final Judgment consistent with the Memorandum Opinion
on July 10, 1997. Three Class Members filed a Notice of Appeal on July 21, 1997,
appealing to the United States Court of Appeals for the Fifth Circuit from the
Final Judgment entered July 10, 1997. The effects of this proposed settlement
are included in the consolidated financial statements.
In addition, Trustmark is defendant in various pending and threatened legal
actions arising in the normal course of business. In the opinion of Management,
and based on the advice of legal counsel, the ultimate resolution of these
matters will not have a material effect on the Corporation's consolidated
financial statements.
NOTE 4 - STATEMENTS OF CASH FLOWS
During the six months ended June 30, 1997 and 1996, the Corporation paid
approximately $18.6 and $18.9 million, respectively, in income taxes. During the
six months ended June 30, 1997 and 1996, the Corporation paid $79.9 and $82.1
million, respectivley, in interest on deposit liabilities and other borrowings.
For the six months ended June 30, 1997 and 1996, noncash transfers from loans to
foreclosed properties were $1.1 million and $920 thousand, respectively.
NOTE 5 - RECENT PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. This statement is effective for financial statements issued for
periods ending after December 15, 1997. Since the Corporation's capital
structure would not be defined as complex, Management does not expect the impact
of this standard to affect the Corporation's disclosure of EPS.
In conjunction with SFAS No. 128, the FASB also issued SFAS No. 129,
"Disclosure of Information about Capital Structure." This statement continues
the requirements to disclose certain information about an entity's capital
structure that was found in previously issued accounting standards, but now
requires these disclosures for all entities. This statement is effective for
financial statements for periods ending after December 15, 1997. Since the
Corporation has been disclosing the information required by previous accounting
standards, Management does not expect the impact of this standard to affect the
Corporation's disclosures of its capital structure.
NOTE 6 - BUSINESS COMBINATIONS
On February 28, 1997, Trustmark Corporation completed its merger with First
Corinth Corporation (FCC) and its subsidiary, National Bank of Commerce of
Corinth (NBC). The Corporation issued approximately 1.5 million shares of common
stock in the merger which was accounted for as a pooling of interests. As a
result of this transaction, the Corporation has restated its financial
statements to include FCC and NBC as of January 1, 1997. Prior year's financial
statements were not restated as the changes would have been immaterial.
On May 13, 1997, plans for the merger of Perry County Bank, New Augusta,
Mississippi and Trustmark National Bank were announced. Perry County Bank
reported total assets at March 31, 1997, of approximately $44 million and has
four locations serving Perry and Greene counties. The merger, which will be
accounted for as a purchase, is subject to the approval of the stockholders of
Perry County Bank and applicable regulatory authorities and is expected to be
completed during the third quarter of 1997.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements found elsewhere in this report.
FINANCIAL SUMMARY
Trustmark Corporation reported net income of $17.5 million, or $0.48 per
share for the second quarter of 1997, compared with $16.2 million, or $0.46 per
share for the second quarter of 1996. Net income for the six months ended June
30, 1997 was $35.2 million, or $0.97 per share, compared with $31.6 million, or
$0.90 per share, for the six months ended June 30, 1996. The increase in
earnings reflects a higher level of net interest income, continued improvement
in other noninterest income and controlled noninterest expense growth.
Total assets at June 30, 1997 increased 1.46% over year end 1996 to $5.270
billion, while stockholders' equity increased 7.72% over year end 1996 and
equaled $564.7 million. The return on average assets for the six months ended
June 30, 1997 was 1.34% compared with 1.24% for the same period in 1996.
BUSINESS COMBINATIONS
A strategic objective of the Corporation is to achieve asset growth through
mergers and acquisitions. Management is continually evaluating new market areas
in which to expand and provide its financial services.
On February 28, 1997, Trustmark Corporation completed its merger with First
Corinth Corporation (FCC) and its subsidiary, National Bank of Commerce of
Corinth (NBC). At February 28, 1997, FCC and subsidiary had approximately $64
million in net loans, $134 million in total assets and $113 million in total
deposits. The Corporation issued approximately 1.5 million shares of common
stock in the merger which was accounted for as a pooling of interests. As a
result of this transaction, the Corporation has restated its financial
statements to include FCC and NBC as of January 1, 1997. Prior years' financial
statements were not restated as the changes would have been immaterial.
On May 13, 1997, plans for the merger of Perry County Bank, New Augusta,
Mississippi and Trustmark National Bank were announced. Perry County Bank
reported total assets at March 31, 1997 of approximately $44 million and has
four locations serving Perry and Greene counties. The merger, which will be
accounted for as a purchase, is subject to the approval of the stockholders of
Perry County Bank and applicable regulatory authorities and is expected to be
completed during the third quarter of 1997.
ASSET/LIABILITY MANAGEMENT AND LIQUIDITY
A key objective of the Corporation's asset/liability management program is
to quantify, monitor and control interest rate risk and to assist Management in
maintaining stability in the net interest margin under varying interest rate
environments. The Asset/Liability Committee, consisting of executive officers,
sets the day-to-day operating guidelines and approves strategies affecting net
interest income and coordinates activities within board policy limits. The
primary tool utilized by this committee is an asset/liability modeling system
used to evaluate exposure to interest rate risk and to project earnings and
manage balance sheet growth. The Asset/Liability Committees of both executive
officers and the board of directors meet monthly to evaluate current and
projected interest rate risk positions and review the balance sheet composition.
The interest rate sensitivity gap analysis shown in the accompanying table
compares the volume of rate sensitive assets against rate sensitive liabilities
during the next year. This analysis is a relatively straightforward tool which
is useful mainly in highlighting significant short-term repricing volume
mismatches. The table presents the rate sensitivity gap analysis at June 30,
1997 ($ in thousands):
Interest Sensitive Within
90 days One Year
---------- ----------
Total rate sensitive assets $ 1,342,423 $ 2,067,241
Total rate sensitive liabilities 1,782,520 2,557,639
---------- ----------
Net gap $ (440,097) $ (490,398)
========== ==========
The analysis indicates that the Corporation is in a negative gap position
over the next three and twelve month periods. Management believes there is
adequate flexibility to alter the overall rate sensitivity structure as
necessary to minimize exposure to changes in interest rates, should they occur.
The Asset/Liability Committee establishes quidelines by which they monitor
the current liquidity position to ensure adequate funding capacity. The
Corporation's goal is to maintain an adequate liquidity position to compensate
for expected and unexpected balance sheet fluctuations and to provide funds for
growth. This is accomplished through the active management of both the asset and
liability sides of the balance sheet and by maintaining accessibility to local,
regional and national funding sources. The ability to maintain consistent
earnings and adequate capital also enhances the Corporation's liquidity.
EARNING ASSETS
The percentage of earning assets to total assets measures the effectiveness
of Management's efforts to invest available funds into the most efficient and
profitable uses. Earning assets at June 30, 1997 were $4.815 billion, or 91.38%
of total assets, compared with $4.681 billion, or 90.12% of total assets for
December 31, 1996, an increase of $134 million, or 2.87%, and is the direct
result of the FCC and NBC merger previously discussed.
Loans are the largest category of earning assets for the Corporation and
produce the highest level of interest income. At June 30, 1997, total loans were
$2.730 billion, an increase of $95.3 million, or 3.62%, from the $2.635 billion
reported at December 31, 1996. Approximately $63 million of this growth comes
from the FCC and NBC acquisition. Loans secured by real estate were primarily
responsible for the remaining increase in loans during the first six months of
1997. The Corporation has increased its residential and commercial real estate
loans through competitive pricing, superior customer service and a retail
network of its community banks.
The Corporation's conservative lending policies have produced consistently
strong asset quality. A measure of asset quality in the financial institutions
industry is the level of nonperforming assets. Nonperforming assets include
nonperforming loans, consisting of nonaccrual and restructured loans, and other
real estate as reflected in the table below ($ in thousands):
June 30, December 31,
------------------ -----------
1997 1996 1996
------- ------- -------
Nonaccrual loans $13,291 $10,711 $ 8,390
Restructured loans 0 0 0
------- ------- -------
Nonperforming loans 13,291 10,711 8,390
Other real estate (ORE) 2,471 3,108 2,734
------- ------- -------
Nonperforming assets 15,762 13,819 11,124
Accruing loans past due 90 days or more 2,380 2,163 2,407
------- ------- -------
Total nonperforming assets and
loans past due 90 days or more $18,142 $15,982 $13,531
======= ======= =======
Nonperforming assets/Total loans + ORE 0.58% 0.55% 0.42%
======= ======= =======
As seen above, the Corporation's level of nonperforming assets and loans
past due 90 days or more at June 30, 1997 was somewhat higher than both the
December 31 and June 30, 1996 levels. In spite of these increases, the
Corporation's level of nonperforming assets compares very favorably to those of
its peer group. The Corporation has controlled its level of nonperforming assets
due to strong underwriting standards, consistent credit reviews and a prudent
loan charge-off policy. At June 30, 1997, Management is not aware of any
additional credits, other than those identified above, where serious doubts as
to the repayment of principal and interest exist.
The allowance for loan losses is maintained at a level that Management and
the board of directors believe is adequate to absorb estimated losses inherent
in the loan portfolio, plus estimated losses associated with off-balance sheet
credit instruments such as letters of credit and unfunded lines of credit. A
formal review is prepared quarterly to assess the risk in the loan portfolio and
to determine the adequacy of the allowance for loan losses. This analysis is
presented to the Credit Policy Committee with subsequent review and approval by
the board of directors. At June 30, 1997, the allowance for loan losses was
$63.8 million, representing 2.34% of total loans outstanding and providing 480%
coverage of nonperforming loans. This compares with an allowance for loan losses
of $63.0 million at December 31, 1996, representing 2.39% of total loans
outstanding and providing 751% coverage of nonperforming loans.
Net charge-offs were $2.256 million or .17% of average loans for the six
months ended June 30, 1997, down $252 thousand from $2.508 million or .20% of
average loans for the six months ended June 30, 1996. The Corporation's level of
net charge-offs for 1997 compares favorably to its peer group.
The securities portfolio is utilized to provide a quality investment
alternative for available funds and a stable source of interest income. At June
30, 1997, securities available for sale (AFS), with a carrying value of $644.9
million, and securities held to maturity (HTM), with a carrying value of $1.410
billion, combined to create a securities portfolio totaling $2.055 billion, an
increase of $101 million or 5.18% from December 31, 1996. The FCC and NBC
acquisition previously mentioned accounted for approximately $54 million of this
growth. Growth has also come in the area of shorter term U. S. Government
securities that have provided the Corporation a greater degree of liquidity and
additional collateral for pledging purposes.
Management continues to stress credit quality as one of the strategic goals
of the securities portfolio. This is clearly visible as more than 87% of the
portfolio is invested in U. S. Government and Agency securities.
At June 30, 1997, securities AFS had a carrying value of $644.9 million and
an amortized cost of $636.3 million. This compares with a carrying value of
$527.9 million and an amortized cost of $522.7 million at December 31, 1996. At
June 30, 1997, gross unrealized gains were $11.7 million on securities AFS while
gross unrealized losses were $3.1 million. Net unrealized gains are shown as a
separate component of stockholders' equity, net of taxes and equaled $5.3
million at June 30, 1997.
The carrying value of securities HTM was $1.410 billion at June 30, 1997
compared with $1.425 billion at year end 1996. The fair value of HTM securities
at June 30, 1997 was $1.413 billion compared with $1.432 billion at year end
1996. Gross unrealized gains were $10.8 million and gross unrealized losses were
$7.4 million on securities HTM at June 30, 1997.
Federal funds sold and securities purchased under reverse repurchase
agreements were $30.6 million at June 30, 1997, a decrease of $62.1 million when
compared with year end 1996. The Corporation utilizes these products as a
short-term investment alternative whenever it has excess liquidity. The decline
during the first six months of 1997 reflects Management's decision to invest in
higher yielding loans and securities.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits originating within the communities served by the Bank are the
primary source of funding for the Corporation's earning assets. Total deposits
were $3.697 billion at June 30, 1997, an increase of $100.0 million, or 2.8%,
over year end 1996. The acquisition of FCC and NBC is responsible for the
majority of this growth. In regard to the total change, interest-bearing
deposits grew $146.5 million when comparing June 30, 1997 to December 31, 1996.
Of this amount, the acquisition of FCC and NBC contributed approximately $91
million. The remaining growth in interest-bearing deposits is linked directly to
substantial increases in certificates of deposit. The Corporation has continued
to bring in new core deposits from a special certificates of deposit program
that began in 1996. In addition, purchases of certificates of deposit of
$100,000 or more have grown primarily from governmental units who traditionally
have seasonal increases in receipts.
Federal funds purchased were $101.4 million at June 30, 1997 and decreased
$100.6 million when compared with year end 1996. Securities sold under
repurchase agreements totaled $752.5 million at June 30, 1997, a decrease of
$12.7 million since year end 1996. Also included in this category are demand
notes (demand notes) issued to the U. S. Treasury. At June 30, 1997, the balance
in demand notes was $98.3 million compared to $26.4 million at December 31,
1996. The Corporation has begun to increase its utilization of demand notes as a
low cost source of funding. Because of the funding available from demand notes,
the Corporation was able to reduce its overall need for funds from federal funds
purchased and securities sold under repurchase agreements.
CONTINGENCIES
Twenty-three suits are pending in federal court against the Corporation's
subsidiary, Trustmark National Bank, relating to the placement of collateral
protection insurance (CPI) on particular automobile and mobile home loans. On
September 18, 1995, one of the suits was certified as a mandatory class action,
with the class broadly defined to include all persons who financed an automobile
(or other property) through Trustmark and whose loans were charged for CPI
premiums. One of the CPI insurers, the CPI underwriter and the insurance agent
are also defendants to the class action. All plaintiffs in pending suits are
members of the mandatory class. On January 10, 1996, the federal court entered
an order in the class action enjoining all other pending CPI-related lawsuits
and enjoining all future CPI-related lawsuits. In November 1996, a proposed
classwide settlement, filed in United States District Court for the Southern
District of Mississippi, received preliminary court approval. The proposed
settlement includes a cash payment of $4 million and forgiveness of uncollected
CPI debts. Notices were mailed to approximately 6,000 borrowers. Final court
approval of the proposed settlement was the subject of a fairness hearing held
by the United States District Court on April 14, 1997. The District Court filed
a Memorandum Opinion approving the proposed settlement on June 5, 1997. The
District Court entered a Final Judgment consistent with the Memorandum Opinion
on July 10, 1997. Three Class Members filed a Notice of Appeal on July 21, 1997,
appealing to the United States Court of Appeals for the Fifth Circuit from the
Final Judgment entered July 10, 1997. The effects of this proposed settlement
are included in the consolidated financial statements.
In addition, Trustmark is defendant in various other pending and threatened
legal actions arising in the normal course of business. In the opinion of
Management, and based on the advice of legal counsel, the ultimate resolution of
these matters will not have a material effect on the Corporation's consolidated
financial statements.
STOCKHOLDERS' EQUITY
The regulatory capital ratios for the Corporation and the Bank are shown
below compared to the minimums that are currently required under capital
adequacy standards imposed by their regulators. Management believes, at June 30,
1997, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject. The most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized. The
Corporation's and the Bank's actual, as well as minimum, regulatory capital
amounts and ratios at June 30, 1997 are presented in the table below ($ in
thousands):
Actual Minimum Regulatory
Regulatory Capital Capital Required
------------------ -----------------
Amount Ratio Amount Ratio
-------- ------- -------- --------
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $588,240 19.82% $237,388 8.00%
Trustmark National Bank $567,003 19.19% $236,379 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $550,818 18.56% $118,694 4.00%
Trustmark National Bank $529,737 17.93% $118,190 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $550,818 10.38% $212,193 4.00%
Trustmark National Bank $529,737 10.01% $211,664 4.00%
At June 30, 1997, the Corporation had stockholders' equity of $564.7
million, which contained a net unrealized gain on securities available for sale,
net of taxes, of $5.3 million. This compares to total stockholders' equity at
December 31, 1996 of $524.2 million, which contained a net unrealized gain on
securities available for sale, net of taxes, of $3.2 million.
Based on a dividend payout ratio of 28.87%, the Corporation retained 71.13%
of its earnings during the first six months of 1997, generating an internal
capital growth rate of 9.21%. Dividends for the second quarter of 1997 were $.14
per share compared to $.12 per share for the second quarter of 1996. Book value
for the Corporation's common stock was $15.52 at June 30, 1997, compared with
the closing market price of $28.00.
In connection with the proposed Perry County Bank merger, the Corporation's
board of directors has authorized the Corporation to purchase shares of its
common stock in the open market or in private sales in an amount not to exceed
the estimated number of shares to be issued in the merger. During July, the
Corporation had purchased approximately 19,000 shares of its common stock
bringing its number of common shares outstanding to 36,367,808.
NET INTEREST INCOME
Net interest income (NII) is interest income generated by earning assets
reduced by the interest expense of funding those assets. NII is the principal
source of income for the Corporation. Consequently, changes in the mix and
volume of earning assets and interest-bearing liabilities, and their related
yields and interest rates, can have a major impact on earnings.
For the first half of 1997, the Corporation's level of NII increased by
$4.2 million, or 4.3%, when compared with the same period in 1996. The
improvement in NII for 1997 was due to more rapid growth of average earning
assets when compared to interest-bearing liabilities combined with a relatively
stable interest rate environment. This analysis would also be true for the
second quarter of 1997 when compared with the same period in 1996.
For the first half of 1997, average earning assets increased 3.5% when
compared to the first half of 1996. This was driven by a 6.5% increase in
average loans. When this growth was combined with relatively stable interest
rates, the yield on average earning assets increased by eight basis points when
compared to the first half of 1996. This combination resulted in an increase in
total interest income of $7.1 million, or 4.0%, when comparing the first half of
1997 with 1996.
Average interest-bearing liabilities grew by 1.28% during the first half of
1997. Interest-bearing deposits experienced growth of 3.9% during the first half
of 1997 while federal funds purchased and securities sold under repurchase
agreements declined 9.5%. In addition, the Corporation's increased utilization
of demand notes during the second quarter of 1997 led to substantial growth in
this category when comparing the first half of 1997 and 1996. As a result of
these factors, total interest expense increased by $2.9 million when comparing
the first half of 1997 to the same time in 1996.
The table below illustrates the changes in the net interest margin as a
percentage of average earning assets for the periods shown:
Six Months Ended
June 30,
------------------
1997 1996
---- ----
Yield on interest-earning assets-FTE 7.86% 7.78%
Rate on interest-bearing liabilities 3.54% 3.53%
---- ----
Net interest margin-FTE 4.32% 4.25%
==== ====
The fully taxable equivalent (FTE) yield on tax-exempt income has been
computed based on a 35% federal marginal tax rate for all periods shown. The
Corporation will continue to take the necessary precautions to minimize exposure
to changes in interest rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects Management's assessment of the
adequacy of the allowance for loan losses to absorb potential write-offs in the
loan portfolio. Factors considered in the assessment include growth and
composition of the loan portfolio, historical credit loss experience, current
and anticipated economic conditions and changes in borrowers' financial
positions. During the first half of 1997, the Corporation's provision for loan
losses was $2.3 million compared with $3.5 million for the first half of 1996.
The increase in the provision during 1996 can be attributed to Management's
decision to raise the allowance for loan losses given the overall growth and
composition of the loan portfolio.
NONINTEREST INCOME
The Corporation stresses the importance of growth in noninterest income as
one of its key long-term strategies. This was accomplished during the first half
of 1997, as noninterest income, excluding securities gains, increased 13.3% when
compared with the same period in 1996. By comparison, noninterest income
increased 13.0% during the second quarter of 1997 when compared to the same
period in 1996.
The largest single category of noninterest income, other account charges,
fees and commissions, increased $1.8 million, or 13.0%, during the first half of
1997. The major contributors to the growth in this category during these periods
were fees generated from residential mortgage servicing, discount brokerage
services, credit cards, ATMs and a variety of other fee producing products and
services.
Service charges for the first half of 1997 grew by $653 thousand, or 5.7%,
when compared with the first half of 1996. This increase can be attributed to a
reduction in the amount of waived service charges and a higher volume of
consumer account activity.
Trust service income increased by $1.1 million during the first half of
1997 as the Bank continued to be one of the largest providers of asset
management services in Mississippi. At June 30, 1997, the Bank had trust
accounts with an asset market value of approximately $5.1 billion.
Gross securities gains of $410 thousand were realized during the first six
months of 1997 because of calls and dispositions of securities classified as
available for sale. There were no sales of securities held to maturity during
the first half of 1997.
NONINTEREST EXPENSE
Another long-term strategy of the Corporation is to continue to provide
quality service to customers within the context of economic discipline. The
efficiency ratio, a key indicator of the control of noninterest expense and the
growth of noninterest income, was 58.7% for the first six months ended June 30,
1997 and 59.5% for the second quarter of 1997. Total noninterest expense
increased 7.3% during the first six months of 1997 compared with 8.1% during the
second quarter of 1997.
Salaries and employee benefits continue to comprise the largest portion of
noninterest expenses and increased $4.2 million, or 11.0%, when comparing 1997
with 1996. The primary reasons for the increase were enhancements to employee
benefit plans and additional personnel. The number of full-time equivalent
employees totaled 2,335 at June 30, 1997 (including 45 as a result of the
acquisition of FCC and NBC) and 2,198 at June 30, 1996.
Services and fees increased $1.2 million when comparing the first half of
1997 to the same period in 1996. Increased costs for professional fees,
advertising and communication expense contributed to this increase.
Several changes in the FDIC assessment took place during 1996 and 1997 and
resulted in a decline of the FDIC assessment by $915 thousand when comparing the
first half of 1997 to the same period in 1996. As a result of the passage on
September 30, 1996 of the Deposit Insurance Funds Act(DIFA), the Corporation
received a refund of its fourth quarter FDIC assessment on January 2, 1997. This
was offset somewhat by the new Financing Corporation (FICO) assessment that
began in 1997 for both Bank Insurance Fund (BIF) and Savings Association
Insurance Fund (SAIF) assessable deposits. For the first half of 1996, the
Corporation paid an FDIC assessment on its deposits insured by the SAIF at a
rate of $.23 per $100 of SAIF assessable deposits. This assessment was reduced
to zero by the DIFA legislation which was effective for 1997.
The amortization of intangible assets increased $712 thousand when
comparing the first half of 1997 with the same time in 1996. The amount of
mortgages serviced increased 11.6% when comparing June 30, 1997 with June 30,
1996 and provided a larger base of mortgage servicing rights that began
amortization during that period.
INCOME TAXES
For the six months ended June 30, 1997, the Corporation's effective tax
rate was 33.6% compared with 34.9% for the first six months of 1996. The
decrease in the Corporation's effective tax rate is due primarily to an increase
in tax-exempt interest as a percentage of pretax income.
OFF-BALANCE SHEET INSTRUMENTS
The Corporation's principal objective in issuing derivatives for purposes
other than trading is asset/liability management. To achieve that objective, the
Corporation enters into forward interest rate contracts involving commitments to
sell mortgages originated or purchased by the Corporation. Interest rate forward
contracts are commitments to either purchase or sell a financial instrument at a
specific future date for a specified price and may be settled in cash or through
delivery of the financial instrument. These contracts allow the Corporation to
fix the interest rate at which it can offer mortgage loans to its customers or
purchase mortgages from other financial institutions. Gains or losses on the
sale of mortgages in the secondary market are recorded upon the sale of the
mortgages and included in other income. Any decline in the market value of
mortgages which are pending sale in the secondary market and are held by the
Corporation at the end of a financial reporting period, is recognized at that
time. As of June 30, 1997, the Corporation's exposure under commitments to sell
mortgages is immaterial. The remaining maturity on all forward interest rate
contracts is less than one year.
REGULATORY MATTERS
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. This statement is effective for financial statements issued for
periods ending after December 15, 1997. Since the Corporation's capital
structure would not be defined as complex, Management does not expect the impact
of this standard to affect the Corporation's disclosure of EPS.
In conjunction with SFAS No. 128, the FASB also issued SFAS No. 129,
"Disclosure of Information about Capital Structure." This statement continues
the requirements to disclose certain information about an entity's capital
structure that was found in previously issued accounting standards but now
requires these disclosures for all entities. This statement is effective for
financial statements for periods ending after December 15, 1997. Since the
Corporation has been disclosing the information required by previous accounting
standards, Management does not expect the impact of this standard to affect the
Corporation's disclosures of its capital structure.
OTHER MATTERS
On May 13, 1997, Frank Day, Chairman of the Board of Trustmark Corporation
and Trustmark National Bank, announced that Richard G. Hickson had been named by
the board of directors to the position of President and Chief Executive Officer
of Trustmark Corporation and Vice Chairman and Chief Executive Officer of
Trustmark National Bank. Mr. Hickson, 52, had served since 1995 as President and
Chief Operating Officer of SouthTrust Bank of Georgia, N.A. and has been
involved in banking since 1971 with various banks in the southeast and southwest
United States.
The Corporation is in the process of identifying the systems that could be
affected by the year 2000 issue and is developing an implementation plan to
resolve the issue. The Corporation believes, with the appropriate modifications,
it will be able to operate its time-sensitive business application software
programs through the turn of the century.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments for the quarter ended June 30, 1997
other than those disclosed in the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. The following exhibits are included herein:
(27) Financial Data Schedule
There were no reports on Form 8-K filed during the quarter ended June 30,
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Trustmark Corporation has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
By: /s/ Frank R. Day
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Frank R. Day Chairman of the Board
Date: August 12, 1997
By: /s/ Richard G. Hickson
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Richard G. Hickson President & Chief Executive Officer
Date: August 12, 1997
By: /s/ Gerard R. Host
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Gerard R. Host Treasurer
Date: August 12, 1997
EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule