Exhibit 13
Report of Independent Public Accountants
To the Board of Directors and Shareholders
Trustmark Corporation:
We have audited the accompanying consolidated balance sheets of Trustmark
Corporation (a Mississippi corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trustmark Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
- ------------------------
Arthur Andersen LLP
Jackson, Mississippi,
January 15, 1999.
Trustmark Corporation and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
December 31,
-----------------------
1998 1997
---------- ----------
Assets
Cash and due from banks (noninterest-bearing) $ 312,527 $ 292,555
Federal funds sold and securities purchased
under reverse repurchase agreements 185,619 70,786
Trading account securities 1,053 99
Securities available for sale (at fair value) 774,996 610,471
Securities held to maturity (fair value: $1,192,505 - 1998;
$1,407,167 - 1997) 1,171,513 1,396,928
Loans 3,702,318 2,983,655
Less allowance for loan losses 66,150 64,100
---------- ----------
Net loans 3,636,168 2,919,555
Premises and equipment 70,750 67,958
Intangible assets 50,349 40,085
Other assets 152,215 146,721
---------- ----------
Total Assets $6,355,190 $5,545,158
========== ==========
Liabilities
Deposits:
Noninterest-bearing $ 954,210 $ 898,679
Interest-bearing 2,992,187 2,920,270
---------- ----------
Total deposits 3,946,397 3,818,949
Federal funds purchased 336,546 283,468
Securities sold under repurchase agreements 981,999 665,232
Short-term borrowings 389,543 140,058
Other liabilities 48,829 43,826
---------- ----------
Total Liabilities 5,703,314 4,951,533
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 72,531,636 shares - 1998;
72,740,708 shares - 1997 15,111 15,154
Surplus 241,155 246,768
Retained earnings 378,567 320,901
Accumulated other comprehensive income,
net of tax 17,043 10,802
---------- ----------
Total Shareholders' Equity 651,876 593,625
---------- ----------
Total Liabilities and Shareholders' Equity $6,355,190 $5,545,158
========== ==========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Income
($ in thousands except per share data)
Year Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- -------
Interest Income
Interest and fees on loans $290,454 $247,604 $229,373
Interest on securities:
Taxable interest income 117,448 119,879 119,044
Interest income exempt from federal income taxes 6,120 5,834 5,354
Interest on federal funds sold and securities purchased
under reverse repurchase agreements 6,078 3,575 4,292
-------- -------- --------
Total Interest Income 420,100 376,892 358,063
Interest Expense
Interest on deposits 123,569 120,873 112,614
Interest on federal funds purchased and securities
sold under repurchase agreements 58,894 47,236 48,653
Other interest expense 9,437 4,778 2,739
-------- -------- --------
Total Interest Expense 191,900 172,887 164,006
-------- -------- --------
Net Interest Income 228,200 204,005 194,057
Provision for loan losses 7,771 4,682 5,783
-------- -------- --------
Net Interest Income After Provision
for Loan Losses 220,429 199,323 188,274
Noninterest Income
Service charges on deposit accounts 30,654 25,260 23,425
Other account charges, fees and commissions 25,318 20,685 18,517
Mortgage servicing fees 13,670 13,253 11,925
Trust service income 13,624 12,401 10,102
Securities gains 865 549 113
Other income 4,929 3,407 2,892
-------- -------- --------
Total Noninterest Income 89,060 75,555 66,974
Noninterest Expenses
Salaries and employee benefits 90,441 85,920 77,890
Net occupancy-premises 9,853 9,748 9,353
Equipment expenses 13,295 12,822 12,522
Services and fees 27,500 22,574 20,996
Amortization of intangible assets 10,280 9,341 8,372
Other expenses 29,022 27,510 28,685
-------- -------- --------
Total Noninterest Expenses 180,391 167,915 157,818
-------- -------- --------
Income Before Income Taxes 129,098 106,963 97,430
Income taxes 45,784 35,899 32,291
-------- -------- --------
Net Income $ 83,314 $ 71,064 $ 65,139
======== ======== ========
Earnings Per Share
Basic and Diluted $ 1.14 $ 0.98 $ 0.93
======== ======== ========
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
($ in thousands except per share data)
Accumulated
Other
Common Retained Comprehensive
Total Stock Surplus Earnings Income
-------- ------- -------- -------- -------------
Balance, January 1, 1996 $478,752 $14,546 $244,578 $214,166 $ 5,462
Comprehensive income:
Net income per consolidated statements of income 65,139 65,139
Net change in unrealized gains on
securities available for sale, net of tax (2,252) (2,252)
--------
Comprehensive income 62,887
Cash dividends paid ($0.25 per share) (17,455) (17,455)
-------- ------- -------- -------- -------------
Balance, December 31, 1996 524,184 14,546 244,578 261,850 3,210
Comprehensive income:
Net income per consolidated statements of income 71,064 71,064
Net change in unrealized gains on
securities available for sale, net of tax 7,592 7,592
---------
Comprehensive income 78,656
Cash dividends paid ($0.29 per share) (21,286) (21,286)
Common stock issued in business combinations 18,800 701 8,826 9,273
Repurchase and retirement of common stock (6,729) (93) (6,636)
-------- ------- -------- -------- -------------
Balance, December 31, 1997 593,625 15,154 246,768 320,901 10,802
Comprehensive income:
Net income per consolidated statements of income 83,314 83,314
Net change in unrealized gains on
securities available for sale, net of tax 6,241 6,241
--------
Comprehensive income 89,555
Cash dividends paid ($0.35 per share) (25,648) (25,648)
Common stock issued in business combination 15,709 151 15,558
Repurchase and retirement of common stock (21,365) (194) (21,171)
-------- ------- -------- -------- -------------
Balance, December 31, 1998 $651,876 $15,111 $241,155 $378,567 $ 17,043
======== ======= ======== ======== =============
See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Operating Activities
Net income $ 83,314 $ 71,064 $ 65,139
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 7,771 4,682 5,783
Depreciation and amortization 19,696 18,964 17,993
Net accretion of securities (730) (236) (4,316)
Securities gains (865) (549) (113)
Net increase in intangible assets (13,875) (8,309) (9,490)
Net (increase) decrease in deferred income taxes (1,851) 1,127 (2,206)
Net increase in other assets (11,192) (16,606) (10,305)
Net increase in other liabilities 4,494 5,358 23,607
Other operating activities, net (3,799) 2,059 (2,184)
--------- --------- ---------
Net cash provided by operating activities 82,963 77,554 83,908
Investing Activities
Proceeds from calls and maturities of securities available for sale 71,265 90,184 137,863
Proceeds from calls and maturities of securities held to maturity 396,530 213,784 197,880
Proceeds from sales of securities available for sale 175,609 166,469 215,344
Purchases of securities available for sale (370,799) (323,119) (392,145)
Purchases of securities held to maturity (162,201) (175,614) (269,037)
Net (increase) decrease in federal funds sold and securities
purchased under reverse repurchase agreements (114,833) 25,982 20,867
Net increase in loans (677,328) (331,368) (65,030)
Purchases of premises and equipment (8,811) (14,690) (8,573)
Proceeds from sales of premises and equipment 356 478 40
Proceeds from sales of other real estate 2,521 2,084 2,369
Net assets assumed in immaterial pooling of interests business combination 13,348
Cash received (paid) in business combinations 13,035 (1,319)
--------- --------- ---------
Net cash used by investing activities (674,656) (333,781) (160,422)
Financing Activities
Net increase in deposits 39,348 184,492 67,391
Net increase (decrease) in federal funds purchased and securities sold
under repurchase agreements 369,845 (18,491) 34,208
Net increase in short-term borrowings 249,485 73,706 30,454
Cash dividends (25,648) (21,286) (17,455)
Common stock purchased and retired (21,365) (6,729)
--------- --------- ---------
Net cash provided by financing activities 611,665 211,692 114,598
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 19,972 (44,535) 38,084
Cash and cash equivalents at beginning of year 292,555 337,090 299,006
--------- --------- ---------
Cash and cash equivalents at end of year $ 312,527 $ 292,555 $ 337,090
========= ========= =========
See notes to consolidated financial statements.
NOTE 1 - BUSINESS, BASIS OF FINANCIAL STATEMENT PRESENTATION,
ACCOUNTING POLICIES AND RECENT PRONOUNCEMENTS
BUSINESS
Trustmark Corporation (the Corporation), through Trustmark National
Bank (the Bank), its wholly-owned subsidiary, provides a broad array of
financial products and services primarily to customers in Mississippi. The
Corporation and Bank are subject to the regulations of federal agencies which
perform periodic examinations.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the amounts of the
Corporation, the Bank, and the Bank's wholly-owned subsidiaries, Trustmark
Financial Services, Inc. and Trustmark Insurance Agency, Inc. All intercompany
accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. Certain reclassifications have
been made to prior period amounts to conform with current year presentation.
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.
ACCOUNTING POLICIES
Trading Account Securities
Trading account securities are held for resale in anticipation of
short-term market movements. Trading account securities, consisting primarily of
debt securities, are carried at fair value. Gains and losses, both realized and
unrealized, are classified as other income.
Securities Available for Sale and Held to Maturity
Management determines the appropriate classification of securities at
the time of purchase. Securities are classified as held to maturity when the
Corporation has the intent and ability to hold the security to maturity.
Securities held to maturity are stated at amortized cost.
Securities not classified as held to maturity are classified as
available for sale and are stated at fair value. Unrealized gains and losses,
net of tax, on these securities are recorded in shareholders' equity as
accumulated other comprehensive income.
The amortized cost of securities available for sale and held to
maturity is adjusted for amortization of premiums and accretion of discounts to
maturity, determined using the interest method. Such amortization and accretion
is included in interest income on securities. The specific identification method
is used to determine realized gains and losses on sales of securities, which are
reported as securities gains(losses) in noninterest income.
Loans
Loans are stated at the amount of unpaid principal, adjusted for the
net amount of direct costs and nonrefundable loan fees associated with lending.
The net amount of nonrefundable loan origination fees and direct costs
associated with the lending process, including commitment fees, are deferred and
amortized to interest income over the lives of the loans using a method that
approximates the interest method. Interest on loans is accrued and recorded as
interest income based on the outstanding principal balance.
Generally, a loan is classified as nonaccrual and the accrual of
interest on such loan is discontinued when the contractual payment of principal
or interest has become 90 days past due or Management has serious doubts about
further collectibility of principal or interest, even though the loan is
currently performing. A loan may remain on accrual status if it is in the
process of collection and is either guaranteed or well secured. When a loan is
placed on nonaccrual status, unpaid interest credited to income in the current
and prior years is reversed against interest income. Interest received on
nonaccrual loans is applied against principal. Loans are restored to accrual
status when the obligation is brought current or has performed in accordance
with the contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for
loan losses charged against earnings. Loans deemed to be uncollectible are
charged against the allowance for loan losses, and subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is maintained at a level believed
adequate by Management to absorb estimated probable loan losses. Management's
periodic evaluation of the adequacy of the allowance is based on the
Corporation's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions and
other relevant factors. This evaluation is inherently subjective as it requires
material estimates, including the amounts and timing of future cash flows
expected to be received on impaired loans, that may be susceptible to
significant change.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is charged to expense over the estimated useful
lives of the assets. Leasehold improvements are amortized over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. Depreciation and amortization expenses are computed using both
straight-line and accelerated methods. The Corporation continually evaluates
whether events and circumstances have occurred that indicate that such
long-lived assets have been impaired. Measurement of any impairment of such
long-lived assets is based on those assets' fair values and is recognized
through a valuation allowance with the resulting charge recorded as a loss.
There were no impairment losses recorded during 1998, 1997 or 1996.
Intangible Assets
Core deposit intangibles represent the net present value of the future
economic benefits related to the use of deposits purchased and are amortized on
a straight-line basis up to 15 years. At December 31, 1998 and 1997, net core
deposit intangible assets totaled $17.2 million and $14.3 million, respectively.
Amortization expense related to core deposits was $3.8 million in 1998, $4.1
million in 1997 and $4.5 million in 1996.
The Corporation records, as a separate asset, rights to service
mortgage loans for others whether the loans were acquired through the purchase
or origination of the loans. For purposes of measuring impairment, the rights
are stratified based on product type and interest rate bands. The cost of
mortgage servicing rights is being amortized in proportion to and over the
period of estimated net servicing income. The realization of these assets is
periodically evaluated in relation to net servicing revenues using a discounted
cash flow basis and is adjusted appropriately for any impairment of the
underlying assets. At December 31, 1998 and 1997, net mortgage servicing right
assets totaled $33.1 million and $25.8 million, respectively. Amortization
expense related to these mortgage servicing rights was $6.5 million in 1998,
$5.2 million in 1997 and $3.9 million in 1996.
Other Real Estate Owned
Other real estate owned includes assets that have been acquired in
satisfaction of debt through foreclosure. Other real estate owned is reported in
other assets and is recorded at the lower of cost or estimated fair value less
the estimated cost of disposition. Valuation adjustments required at foreclosure
are charged to the allowance for loan losses. Subsequent to foreclosure, losses
on the periodic revaluation of the property are charged to current period
earnings as other expenses. Costs of operating and maintaining the properties,
net of related income and gains (losses) on their disposition, are charged to
other expenses as incurred. Improvements made to properties are capitalized if
the expenditures are expected to be recovered upon the sale of the property.
Income Taxes
The Corporation accounts for deferred income taxes using the asset and
liability method. Deferred tax assets and liabilities are based on the temporary
differences between the financial statement carrying amounts and tax bases of
the Corporation's assets and liabilities. Deferred tax assets and liabilities
are measured using the enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be realized or
settled.
Derivative Financial Instruments
Derivatives are used to hedge interest rate exposures by modifying the
interest rate characteristics of specific balance sheet instruments. The
Corporation regularly enters into certain derivative financial instruments in
the form of forward interest rate contracts, as part of its normal
asset/liability management strategies. The Corporation's obligations under
forward contracts consist of commitments to sell mortgage loans, originated
and/or purchased, in the secondary market at a future date. These obligations
are entered into by the Corporation in order to fix the interest rate at which
it can offer mortgage loans to its customers or purchase mortgage loans from
other financial institutions. Realized gains and losses on forward contracts and
the sale of mortgage loans in the secondary market are recorded upon the sale of
the mortgages and included in other income. Any decline in market value of
mortgages held for sale by the Corporation at the end of a financial reporting
period is recognized at that time.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
The Corporation paid income taxes approximating $46.5 million in 1998,
$34.5 million in 1997 and $36.0 million in 1996. Interest paid on deposit
liabilities and other borrowings approximated $195.0 million in 1998, $166.2
million in 1997 and $163.7 million in 1996. For the years ended December 31,
1998, 1997 and 1996, noncash transfers from loans to foreclosed properties were
$1.9 million, $1.7 million and $1.5 million, respectively.
Per Share Data
All per share data and number of common shares have been restated to
reflect the two-for-one stock split that was approved by the Corporation's Board
of Directors in February 1998.
Basic earnings per share (EPS) was computed by dividing net income by
the weighted average shares of common stock outstanding, 72,881,323 in 1998,
72,768,926 in 1997 and 69,821,366 in 1996. Diluted EPS for 1998 and 1997 was
computed by dividing net income by the sum of the weighted average shares of
common stock outstanding and for the effect of stock options outstanding in 1998
and 1997. The effect of the stock options was to increase the weighted average
number of shares by 64,706 for 1998 and 16,876 for 1997, for computing diluted
EPS. For 1996, the weighted average shares outstanding were the same for
computing basic and diluted EPS because the Corporation did not have any
dilutive securities outstanding.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. This statement was effective for
fiscal years beginning after December 15, 1997. The Corporation's principal
activities did not constitute separate segments of its business but encompassed
traditional banking activities which offered similar products and services
within the same primary geographic area and regulatory and economic environment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The adoption of this statement will not have a material
impact on the Corporation's consolidated financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities" and will affect
accounting and reporting standards for classifying securitized mortgage loans
held for sale. This statement shall be effective for the first fiscal quarter
beginning after December 15, 1998. The adoption of this statement will not have
a material impact on the Corporation's consolidated financial statements.
NOTE 2 - BUSINESS COMBINATIONS
On March 13, 1998, Smith County Bank (SCB) in Taylorsville, Mississippi
was merged with the Corporation in a business combination accounted for by the
purchase method of accounting. At the merger date, SCB had $44 million in net
loans, $98 million in total assets and $88 million in total deposits. The
shareholders of SCB received 725 thousand shares of the Corporation's common
stock in connection with the merger. Excess cost over net assets acquired
equaled $6.7 million and has been allocated to core deposit intangibles. SCB's
results of operations, which are not material, have been included in the
financial statements from the merger date.
On September 19, 1997, Perry County Bank (PCB) in New Augusta,
Mississippi was merged with the Corporation and accounted for as a purchase
business combination. The shareholders of PCB received 411 thousand shares of
the Corporation's common stock and $3.5 million cash. The Corporation received
assets of $43.3 million and assumed liabilities of $37 million. Excess cost over
net assets acquired equaled $2.7 million and has been allocated to core
deposits. The results of operations, which are not material, have been included
in the financial statements from the merger date.
On February 28, 1997, the Corporation completed its merger with First
Corinth Corporation (FCC) and its subsidiary, National Bank of Commerce of
Corinth (NBC). The Corporation issued 3 million shares of common stock in the
merger which was accounted for as a pooling of interests business combination.
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 February 4, 1999, the Corporation entered into a definitive
agreement to acquire the Dan Bottrell Agency, Inc. (Bottrell), an independent
insurance agency, located in Jackson, Mississippi with approximately $9 million
in total assets. The Corporation will exchange its common stock for all the
issued and outstanding common stock of Bottrell. The Corporation will issue
between 750 thousand and 1.1 million shares of common stock based on the
Corporation's 15 day average market price, to be determined prior to the
effective date. The transaction, which will be accounted for as a purchase
business combination, is subject to the approval of the shareholders of Bottrell
and regulatory authorities and is expected to be completed by the end of the
first quarter of 1999.
NOTE 3 - CASH AND DUE FROM BANKS
The Corporation is required to maintain average reserve balances with
the Federal Reserve Bank based on a percentage of deposits. The average amount
of those reserves for the years ended December 31, 1998 and 1997, was $15.6
million and $7.1 million, respectively.
NOTE 4 - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
A summary of the amortized cost and estimated fair value of securities
available for sale and held to maturity at December 31, 1998 and 1997 follows ($
in thousands):
Securities Available for Sale Securities Held to Maturity
--------------------------------------------- -----------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value Cost Gains (Losses) Value
1998 --------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
U.S. Treasury and other U.S.
Government agencies $ 362,930 $ 12,597 $ (100) $ 375,427 $ 132,388 $ 4,039 $ 0 $ 136,427
Obligations of states and political
subdivisions 239,441 10,637 (56) 250,022
Debt securities of foreign governments 100 100
Mortgage-backed securities 353,300 4,258 (167) 357,391 799,584 6,848 (476) 805,956
Other securities 31,166 11,197 (185) 42,178
--------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Total $ 747,396 $ 28,052 $ (452) $ 774,996 $1,171,513 $ 21,524 $ (532) $1,192,505
========= ========== ========== ========== ========== =========== ========== ==========
1997
U.S. Treasury and other U.S.
Government agencies $ 480,965 $ 6,197 $ (912) $ 486,250 $ 221,929 $ 1,621 $ (243) $ 223,307
Obligations of states and political
subdivisions 230,642 7,319 (1,257) 236,704
Debt securities of foreign governments 100 100
Mortgage-backed securities 97,853 334 (211) 97,976 944,257 5,843 (3,044) 947,056
Other securities 14,159 12,213 (127) 26,245
--------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Total $ 592,977 $ 18,744 $ (1,250) $ 610,471 $1,396,928 $ 14,783 $ (4,544) $1,407,167
========= ========== ========== ========== ========== =========== ========== ==========
The amortized cost and estimated fair value of securities available for
sale and held to maturity at December 31, 1998, by contractual maturity, are
shown below ($ in thousands). Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Securities Securities
Available for Sale Held to Maturity
----------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- --------- ---------- ----------
Due in one year or less $ 25,848 $ 26,020 $ 27,860 $ 28,077
Due after one year through five years 288,973 301,378 224,436 231,270
Due after five years through ten years 96,496 103,139
Due after ten years 79,275 90,207 23,137 24,063
---------- --------- ---------- ----------
394,096 417,605 371,929 386,549
Mortgage-backed securities 353,300 357,391 799,584 805,956
----------- --------- ---------- ----------
Total $ 747,396 $ 774,996 $1,171,513 $1,192,505
========== ========= ========== ==========
Gross gains and losses as a result of calls and dispositions of
securities available for sale were $755 thousand and $12 thousand, respectively,
in 1998, $640 thousand and $97 thousand, respectively, in 1997 and $106 thousand
and $86 thousand, respectively, in 1996.
During 1998, 1997 and 1996, there were no sales of securities held to
maturity. Gross gains of $122 thousand, $6 thousand and $93 thousand were
realized on calls and other dispositions of these securities during 1998, 1997
and 1996, respectively.
Securities with a carrying value of $1.81 billion and $1.82 billion at
December 31, 1998 and 1997, respectively, were pledged to collateralize public
deposits, securities sold under agreements to repurchase, and for other purposes
as required or permitted by law.
NOTE 5 - LOANS
At December 31, 1998 and 1997, loans consisted of the following ($ in
thousands):
1998 1997
----------- -----------
Real estate loans:
Construction and land development $ 251,654 $ 195,728
Secured by 1-4 family residential properties 1,106,735 699,486
Secured by nonfarm, nonresidential properties 508,194 446,492
Other 72,445 70,592
Loans to finance agricultural production 39,682 38,466
Commercial and industrial 721,483 702,361
Loans to individuals for personal expenditures 773,578 701,132
Obligations of states and political subdivisions 141,152 79,178
Loans for purchasing or carrying securities 24,854 17,622
Other loans 62,541 32,598
----------- -----------
Loans 3,702,318 2,983,655
Allowance for loan losses (66,150) (64,100)
----------- -----------
Net loans $ 3,636,168 $ 2,919,555
=========== ===========
Changes in the allowance for loan losses were as follows ($ in
thousands):
1998 1997 1996
-------- -------- --------
Balance at January 1 $ 64,100 $ 63,000 $ 62,000
Provision charged to expense 7,771 4,682 5,783
Loans charged off (12,272) (8,960) (9,272)
Recoveries 5,251 4,034 4,489
Allowance applicable to loans of acquired banks 1,300 1,344
-------- -------- --------
Balance at December 31 $ 66,150 $ 64,100 $ 63,000
======== ======== ========
The Corporation 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. At December 31, 1998 and
1997, total loans to these persons were $90.6 million and $63.5 million,
respectively. During 1998, $360 million of new loan advances were made while
repayments were $332.9 million.
At December 31, 1998 and 1997, the carrying amounts of nonaccrual loans
were $13.3 million and $14.2 million, respectively. Included in these nonaccrual
loans at December 31, 1998 and 1997, are loans that are considered to be
impaired and totaled $10.1 million and $11 million, respectively. As a result of
direct write-downs, the specific allowance related to these impaired loans was
not material. The average carrying amounts of impaired loans during 1998 and
1997 were $11 million and $9.9 million, respectively. No material amounts of
interest income were recognized on impaired loans or nonaccrual loans for the
years ended December 31, 1998, 1997 and 1996.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows ($ in thousands):
December 31,
-------------------
1998 1997
-------- --------
Land $ 12,664 $ 12,070
Buildings and leasehold improvements 83,739 81,486
Furniture and equipment 77,343 70,057
-------- --------
173,746 163,613
Less accumulated depreciation and amortization 102,996 95,655
-------- --------
Premises and equipment $ 70,750 $ 67,958
======== ========
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At December 31, 1998 and 1997, the carrying values of securities sold
under repurchase agreements, by contractual maturity, are shown below ($ in
thousands):
Carrying Value
--------------------
1998 1997
-------- --------
Demand $377,241 $295,338
In one day 245,445 162,085
Term up to 30 days 39,979 42,067
Term of 30 to 90 days 52,436 62,844
Term of 90 days and over 266,898 102,898
-------- --------
Total $981,999 $665,232
======== ========
The weighted average interest rate for these repurchase agreements was
4.39% and 5.59% at December 31, 1998 and 1997, respectively. The repurchase
agreements are collateralized by specific U. S. Treasury and other U. S.
Government agency securities with carrying values of $994.9 million at December
31, 1998 and $675.8 million at December 31, 1997. Fair values at December 31,
1998 and 1997, approximated $1 billion and $678.8 million, respectively.
NOTE 8 - SHORT-TERM BORROWINGS
The Corporation's short-term borrowings at December 31, 1998 and 1997
are presented below ($ in thousands):
1998 1997
-------- --------
Federal Home Loan Bank $340,000 $
Treasury tax and loan note option account 33,056 73,867
Other 16,487 66,191
-------- --------
Total $389,543 $140,058
======== ========
Short-term borrowings serve as an alternate source of low cost funding
for the Corporation. The Corporation's short-term borrowings primarily consist
of the treasury tax and loan note option account (TT&L) and advances from the
Federal Home Loan Bank (FHLB).
The TT&L account, which is an open-ended interest bearing note
maintained at the Federal Reserve Bank, is collateralized by a pledge of U. S.
Treasury, U. S. Government Agencies and State, County and Municipal securities
as required by the Department of the Treasury. Interest is charged at the weekly
Federal Funds rate minus 25 basis points.
The Corporation became a member of the FHLB during October 1998 and has
made advances of $340 million. These advances are collateralized by a blanket
lien on the Corporation's 1-4 family mortgage loans. These advances mature in
October 1999 and have floating rates ranging from 5.02% to 5.39%.
NOTE 9 - INCOME TAXES
The income tax provision included in the statements of income is as
follows ($ in thousands):
1998 1997 1996
-------- -------- --------
Current:
Federal $ 43,151 $ 32,076 $ 31,767
State 4,484 2,696 2,730
Deferred:
Federal (1,575) 1,038 (1,879)
State (276) 89 (327)
-------- -------- --------
Income tax provision $ 45,784 $ 35,899 $ 32,291
======== ======== ========
The income tax provision differs from the amount computed by applying
the statutory federal income tax rate of 35% to income before income taxes as a
result of the following ($ in thousands):
1998 1997 1996
-------- -------- --------
Income tax computed at statutory tax rate $ 45,184 $ 37,437 $ 34,101
Tax exempt interest (4,339) (3,702) (3,103)
Nondeductible interest expense 555 536 470
State income taxes, net 4,208 2,785 2,403
Other 176 (1,157) (1,580)
-------- -------- --------
Income tax provision $ 45,784 $ 35,899 $ 32,291
======== ======== ========
Temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities give rise to the following net
deferred tax asset, which is included in other assets ($ in thousands):
1998 1997
-------- --------
Deferred Tax Assets:
Allowance for loan losses $ 24,856 $ 24,321
Deferred compensation 4,690 4,207
Capitalized mortgage servicing costs 764 1,114
Core deposit intangibles 1,896 1,837
Other 3,652 2,394
-------- --------
Total gross deferred tax asset 35,858 33,873
Deferred Tax Liabilities:
Unrealized securities gains (10,557) (6,691)
Pension plan (1,585) (1,911)
Discount accretion on securities (879) (878)
Accelerated depreciation and amortization (759) (458)
Other (727) (608)
-------- --------
Total gross deferred tax liability (14,507) (10,546)
-------- --------
Net deferred tax asset $ 21,351 $ 23,327
======== ========
The Corporation has evaluated the need for a valuation allowance and,
based on the weight of the available evidence, has determined that it is more
likely than not that all deferred tax assets will be realized. The income tax
provision included $331 thousand in 1998, $210 thousand in 1997 and $43 thousand
in 1996 resulting from securities transactions.
NOTE 10 - EMPLOYEE BENEFIT PLANS
Pension Plan
The Corporation maintains a defined noncontributory pension plan which
covers substantially all employees with more than one year of service. The plan
provides pension benefits that are based on the length of credited service and
final average compensation as defined in the plan. The Corporation's policy is
to fund amounts allowable for federal income tax purposes. The following table
represents reconciliations of beginning and ending balances of the benefit
obligation and fair value of plan assets as well as the funded status of the
plan for December 31, 1998 and 1997 ($ in thousands):
1998 1997
-------- --------
Change in benefit obligation
Projected benefit obligation, beginning of year $ 42,650 $ 38,836
Service cost 3,038 2,892
Interest cost 3,137 2,860
Actuarial loss (gain) 1,316 (407)
Benefit payments (1,695) (1,531)
-------- --------
Projected benefit obligation, end of year 48,446 42,650
Change in plan assets
Fair value of plan assets, beginning of year 57,749 43,448
Actual return on plan assets 3,563 12,299
Employer contributions 3,552
Benefit payments (1,695) (1,531)
Expenses (20) (19)
-------- --------
Fair value of plan assets, end of year 59,597 57,749
-------- --------
Funded status
Plan assets in excess of projected benefit obligation 11,151 15,099
Remaining unrecognized transition asset (1,304) (1,667)
Unrecognized prior service cost 1,831 2,092
Unrecognized net gain (7,533) (10,513)
======== ========
Prepaid pension assets recorded in balance sheets $ 4,145 $ 5,011
======== ========
Net pension costs included the following components ($ in thousands):
1998 1997 1996
-------- -------- --------
Service cost - benefits earned during the period $ 3,038 $ 2,892 $ 2,776
Interest cost on projected benefit obligation 3,137 2,860 2,549
Actual return on assets (3,562) (12,299) (5,570)
Net amortization and deferral (1,747) 8,474 2,233
-------- -------- --------
Net pension costs $ 866 $ 1,927 $ 1,988
======== ======== ========
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.25% in 1998 and 7.50% in
1997 and 1996. The rate of increase in future compensation was 4.0% for all
years presented. The expected long-term rate of return on plan assets was 9.0%
in 1998 and 8.5% in 1997 and 1996.
The Corporation does not provide any significant post-retirement or
post-employment benefits to its employees other than pension benefits.
Defined Contribution Plans
Effective January 1, 1997, the Corporation converted its profit sharing
plan into an employee stock ownership plan which covers substantially all
employees with more than one year of service. The contributions made to these
plans are at the Board of Directors' discretion and were $2.2 million in 1997
and $2.2 million in 1996. No contributions were made to this plan in 1998.
Also, the Corporation provides its employees with a self directed
401(k) retirement plan that allows an employee to defer the greater of 15% of
base pay or $7,000. The Corporation made an employer contribution of $2.5
million to the 401(k) plan in 1998. The Corporation did not contribute to the
401(k) plan in 1997 or 1996.
Deferred Compensation Plan
The Corporation provides a deferred compensation plan covering its
directors, key executives and senior officers. Participants of the deferred
compensation plan can defer a portion of their compensation for payment after
retirement. Life insurance contracts have been purchased which may be used to
fund payments under the plan. Net expenses related to this plan were $446
thousand in 1998, $747 thousand in 1997 and $601 thousand in 1996.
Long-Term Incentive Plan
During 1997, the Corporation adopted an incentive stock plan which
includes the granting of incentive stock options and nonqualified stock options.
Stock options are granted at a price equal to the market value of the stock at
the date of grant and are exercisable for a period not to exceed ten years from
the date of grant. The maximum number of shares that can be granted under this
plan is 7.0 million shares.
The following table summarizes the Corporation's option activities for
1998 and 1997:
1998 1997
--------------------- ---------------------
Number of Weighted Number of Weighted
Shares Avg Price Shares Avg Price
--------- --------- ------- ---------
Options outstanding at January 1 172,000 $ 13.18
Options granted 208,500 $ 22.56 172,000 $ 13.18
------- -------
Options outstanding at December 31 380,500 $ 18.32 172,000 $ 13.18
======= =======
Options exercisable at year-end 85,000 $ 12.81 56,000 $ 12.44
======= =======
Weighted average fair value of options
granted during the year $ 10.56 $ 11.52
========= =========
The Corporation accounts for the incentive stock plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
under which no compensation cost has been recognized. Had compensation expense
been recognized consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation, " pro forma net income would have been $83.0 million and $70.8
million for 1998 and 1997, respectively, while pro forma basic and diluted EPS
would not have changed.
For pro forma calculations, the fair value of each grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for grants in 1998 and 1997,
respectively: risk-free investment rate of 5.12% and 7.07%, expected volatility
of 34.46% and 23.60%, and an expected life of 10 years for both years.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Corporation currently has lease commitments for banking premises
and general offices and equipment which expire from 1999 to 2026. The majority
of these commitments contain renewal options which extend the base lease from 5
to 20 years. Rental expense approximated $3.4 million in 1998, $3.0 million in
1997 and $2.8 million in 1996.
Minimum rental commitments at December 31, 1998, under material,
noncancellable leases for banking premises and general offices and equipment,
were as follows ($ in thousands):
Year ended Minimum Rental
December 31, Commitment
------------ --------------
1999 $ 972
2000 781
2001 661
2002 499
2003 392
Thereafter 1,404
Legal Proceedings
The Corporation and its subsidiaries are parties to lawsuits and other
claims that arise in the ordinary course of business; some of the lawsuits
assert claims related to the lending, collection, servicing, investment, trust
and other business activities; and some of the lawsuits allege substantial
claims for damages. The cases are being vigorously contested. In the regular
course of business, Management evaluates estimated losses or costs related to
litigation, and provision is made for anticipated losses whenever Management
believes that such losses are probable and can be reasonably estimated. At the
present time, Management believes, based on the advice of legal counsel, that
the final resolution of pending legal proceedings will not have a material
impact on the Corporation's consolidated financial position or results of
operations.
NOTE 12 - OFF-BALANCE SHEET INSTRUMENTS
The Corporation 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. The Corporation also engages in
forward contracts in order to manage its own exposure to the risks of interest
rate fluctuations.
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. The Corporation 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.
Standby and commercial letters of credit are conditional commitments
issued by the Corporation to guarantee the performance of a customer to a third
party. Essentially, the same policies regarding credit risk and collateral which
are followed in the lending process are used when issuing letters of credit.
Forward contracts, a type of derivative financial instrument, are
agreements to purchase or sell securities or other money market instruments at a
future specified date at a specified price or yield. As of December 31, 1998,
the Corporation's exposure under forward contracts represents commitments to
sell mortgages in the future and is immaterial.
The Corporation's maximum exposure to credit loss in the event of
nonperformance by the other party for loan commitments and letters of credit is
represented by the contractual or notional amount of those instruments. However,
for forward contracts, the contractual or notional amounts do not represent the
Corporation's actual exposure to credit loss at December 31, 1998 and 1997, as
represented below ($ in thousands):
Contractual or
Notional Amount
-----------------------
1998 1997
---------- ----------
Financial instruments whose contractual
amounts represent credit risk:
Loan commitments $1,031,682 $ 795,444
Standby and commercial letters
of credit written 36,904 33,823
Financial instruments whose contractual or
notional amounts exceed the amount of
credit risk:
Forward contracts 207,450 82,675
NOTE 13 - SHAREHOLDERS' EQUITY
General
In February 1998, the Corporation's Board of Directors approved a
two-for-one stock split to shareholders of record on March 20, 1998. The
additional shares of common stock were issued on March 30, 1998. All related
share information has been restated to reflect the two-for-one split.
At the Corporation's annual shareholders' meeting held April 14, 1998,
the shareholders approved increasing the Corporation's number of authorized
shares of common stock from 100 million to 250 million. This increase allows the
Corporation to issue additional shares of common stock to consummate business
combinations, implement stock splits or for other corporate purposes.
On November 10, 1998, the Corporation's Board of Directors authorized
the repurchase of up to 7.5%, or 5.46 million shares, of common stock. In
conjunction with the share repurchase program, the Corporation has purchased 242
thousand shares of common stock. The repurchase program, which is subject to
market conditions and management discretion, has been implemented through open
market purchases or privately negotiated transactions. In connection with
business combinations, the Corporation purchased and retired 692 thousand shares
of its common stock in 1998 and 444 thousand in 1997.
Regulatory
The Corporation and the Bank 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 the Corporation and Bank.
Management believes, as of December 31, 1998, that the Corporation and
the Bank meet all capital adequacy requirements to which they are subject. At
December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency (OCC) categorized the Bank as well capitalized. To
be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios (defined in applicable
regulations) as set forth in the table below. There are no significant
conditions or events that have occurred since the OCC's notification that
Management believes has affected the Bank's present classification.
The Corporation's and the Bank's actual regulatory capital amounts and
ratios are presented in the table below ($ in thousands):
Minimum Regulatory
Actual Minimum Regulatory Provision to be
Regulatory Capital Capital Required Well Capitalized
------------------ ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ----- -------- ------
At December 31, 1998:
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $667,621 17.47% $305,761 8.00% N/A
Trustmark National Bank $654,302 17.16% $305,078 8.00% $381,348 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $619,619 16.21% $152,881 4.00% N/A
Trustmark National Bank $606,405 15.90% $152,539 4.00% $228,809 6.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $619,619 9.88% $250,749 4.00% N/A
Trustmark National Bank $606,405 9.69% $250,373 4.00% $312,966 5.00%
At December 31, 1997:
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $612,460 19.25% $254,493 8.00% N/A
Trustmark National Bank $596,304 18.81% $253,597 8.00% $316,996 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $572,395 17.99% $127,246 4.00% N/A
Trustmark National Bank $556,377 17.55% $126,798 4.00% $190,198 6.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $572,395 10.63% $215,411 4.00% N/A
Trustmark National Bank $556,377 10.35% $214,938 4.00% $268,672 5.00%
Dividends paid by the Corporation are substantially funded from
dividends received from the Bank. The Bank's regulators limit the amount of
dividends that may be declared without prior approval. At December 31, 1998,
approximately $137.4 million of undistributed earnings of the Bank included in
consolidated surplus and retained earnings was available for future distribution
to the Corporation as dividends without prior regulatory approval.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Comprehensive Income is the change in equity during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners.
In addition to net income, the Corporation has identified changes
related to other nonowner transactions in the Consolidated Statement of Changes
in Shareholders' Equity and Comprehensive Income. Changes in other nonowner
transactions consist entirely of changes in unrealized holding gains and losses
on securities available for sale.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting items that are displayed as part
of net income and other comprehensive income in that period or earlier periods.
The following table reflects the reclassification amounts and the related tax
effects of changes in unrealized holding gains and losses on securities
available for sale for the three years ended December 31, 1998, 1997 and 1996
($ in thousands):
1998 1997
------------------------------------- ------------------------------------
Before Tax Tax (Expense) After Tax Before Tax Tax (Expense) After Tax
Amount or Benefit Amount Amount or Benefit Amount
---------- ------------ --------- ---------- ------------ ---------
Net unrealized holding gains (losses)
arising during the period $ 10,972 ($ 4,197) $ 6,775 $ 12,844 ($ 4,913) $ 7,931
Reclassification adjustment for
gains included in net income (865) 331 (534) (549) 210 (339)
---------- ------------ --------- ---------- ------------ ---------
Net change in unrealized gains (losses) on securities $ 10,107 ($ 3,866) $ 6,241 $ 12,295 ($ 4,703) $ 7,592
========== ============ ========= ========== ============ =========
1996
-------------------------------------
Before Tax Tax (Expense) After Tax
Amount or Benefit Amount
---------- ------------ ---------
Net unrealized holding gains (losses)
arising during the period ($ 3,534) $ 1,352 ($ 2,182)
Reclassification adjustment for
gains included in net income (113) 43 (70)
---------- ------------ ---------
Net change in unrealized gains (losses) on securities ($ 3,647) $ 1,395 ($ 2,252)
========== ============ =========
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial instruments
at December 31,1998 and 1997, are as follows ($ in thousands):
1998 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
Financial Assets:
Cash and short-term investments $ 498,146 $ 498,146 $ 363,341 $ 363,341
Trading account securities 1,053 1,053 99 99
Securities available for sale 774,996 774,996 610,471 610,471
Securities held to maturity 1,171,513 1,192,505 1,396,928 1,407,167
Net loans 3,636,168 3,721,336 2,919,555 2,944,308
Mortgage servicing rights 33,077 46,620 25,759 44,450
Financial Liabilities:
Deposits 3,946,397 3,953,467 3,818,949 3,829,505
Short-term liabilities 1,708,088 1,708,088 1,088,758 1,088,758
The methodology and significant assumptions used in estimating the fair
values presented above are as follows:
In cases where quoted market prices are not available, fair values are
based on estimates using present value techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
for those assets or liabilities cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. The estimated fair value of financial instruments
with immediate and shorter-term maturities (generally 90 days or less) is
assumed to be the same as the recorded book value. All nonfinancial instruments,
by definition, have been excluded from these disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation.
Cash and Short-term Investments
The carrying amounts for cash and due from banks and short-term
investments (federal funds sold and securities purchased under reverse
repurchase agreements) approximate fair values due to their immediate and
shorter-term maturities.
Securities
Estimated fair values for trading account securities, securities
available for sale and securities held to maturity are based on quoted market
prices where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable instruments.
Loans
The fair values of loans are estimated for portfolios of loans with
similar financial characteristics. For variable rate loans that reprice
frequently with no significant change in credit risk, fair values are based on
carrying values. The fair values of certain mortgage loans, such as 1-4 family
residential properties, are based on quoted market prices of similar loans sold
in conjunction with securitization transactions, adjusted for differences in
loan characteristics. The fair values of other types of loans are estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Mortgage Servicing Rights
The estimated fair value of mortgage servicing rights is determined by
discounting the expected future cash flows using current market rates. For
purposes of evaluation and measuring fair value, mortgage servicing rights are
stratified using the predominant risk characteristics of the underlying loans.
These risk characteristics include loan type, maturity and interest rate.
Deposits
The fair values of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW accounts, MMDA products and savings
accounts are, by definition, equal to the amount payable on demand which is the
carrying value. Fair values for certificates of deposit are based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
Short-term Liabilities
The carrying amounts for federal funds purchased, securities sold under
repurchase agreements, short-term borrowings and other liabilities approximate
their fair values.
Off-Balance Sheet Instruments
The fair values of loan commitments, letters of credit and forward
contracts approximate the fees currently charged for similar agreements or the
estimated cost to terminate or otherwise settle similar obligations. The fees
associated with these financial instruments, or the estimated cost to terminate,
as applicable, are immaterial.
NOTE 15 - TRUSTMARK CORPORATION (Parent Company Only) FINANCIAL INFORMATION
($in thousands)
BALANCE SHEETS
December 31,
-------------------
1998 1997
-------- --------
Assets
Investment in bank $634,618 $574,894
Other assets 17,516 18,776
-------- --------
Total Assets $652,134 $593,670
======== ========
Liabilities and Shareholders' Equity
Accrued expenses $ 258 $ 45
Shareholders' equity 651,876 593,625
-------- --------
Total Liabilities and Shareholders' Equity $652,134 $593,670
======== ========
STATEMENTS OF INCOME
Year Ended December 31,
---------------------------
1998 1997 1996
------- ------- -------
Revenue
Dividends received from bank $44,522 $31,739 $17,513
Equity in undistributed earnings of subsidiaries 37,823 38,438 47,393
Other income 1,424 1,358 800
------- ------- -------
83,769 71,535 65,706
Expenses 455 471 567
------- ------- -------
Net Income $83,314 $71,064 $65,139
======= ======= =======
STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Operating Activities
Net income $ 83,314 $ 71,064 $ 65,139
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in investment in subsidiaries (37,823) (38,438) (47,393)
Other 376 410 (630)
-------- -------- --------
Net cash provided by operating activities 45,867 33,036 17,116
Investing Activities
Net cash paid in connection with business combination (1,319)
Purchases of securities available for sale (167) (733)
Proceeds from sales of securities available for sale 1,179
-------- -------- --------
Net cash provided (used) by investing activities 1,179 (1,486) (733)
Financing Activities
Cash dividends paid (25,648) (21,286) (17,455)
Common stock purchased and retired (21,365) (6,729)
-------- -------- --------
Net cash provided by financing activities (47,013) (28,015) (17,455)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 33 3,535 (1,072)
Cash and cash equivalents at beginning of year 4,920 1,385 2,457
-------- -------- --------
Cash and cash equivalents at end of year $ 4,953 $ 4,920 $ 1,385
======== ======== ========
The Corporation paid income taxes of approximately $46.5 million in
1998, $34.5 million in 1997 and $36.0 million in 1996. Interest paid by the
parent company was $12 thousand in 1998. No interest was paid during 1997 and
1996.
SELECTED FINANCIAL DATA
(unaudited)
($ in thousands except per share data)
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Consolidated Statements of Income
Total interest income $420,100 $376,892 $358,063 $348,341 $315,449
Total interest expense 191,900 172,887 164,006 162,741 125,968
-------- -------- -------- -------- --------
Net interest income 228,200 204,005 194,057 185,600 189,481
Provision for loan losses 7,771 4,682 5,783 2,439 2,786
Noninterest income 89,060 75,555 66,974 59,467 48,670
Noninterest expense 180,391 167,915 157,818 151,288 151,123
-------- -------- -------- -------- --------
Income before income taxes 129,098 106,963 97,430 91,340 84,242
Income taxes 45,784 35,899 32,291 31,582 29,237
-------- -------- -------- -------- --------
Net income $ 83,314 $ 71,064 $ 65,139 $ 59,758 $ 55,005
======== ======== ======== ======== ========
Per Share Data
Earnings per share
Basic and Diluted $1.14 $0.98 $0.93 $0.86 $0.79
===== ===== ===== ===== =====
Cash dividends per share $0.35 $0.29 $0.25 $0.22 $0.21
===== ===== ===== ===== =====
December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Consolidated Balance Sheets
Total assets $6,355,190 $5,545,158 $5,193,684 $4,992,592 $4,763,365
Securities 1,946,509 2,007,399 1,953,202 1,842,325 1,862,351
Loans 3,702,318 2,983,655 2,634,573 2,572,091 2,347,565
Deposits 3,946,397 3,818,949 3,597,436 3,530,045 3,449,229
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
(unaudited)
($ in thousands except per share data)
1998
---------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Interest income $ 98,865 $ 103,561 $ 107,179 $ 110,495
Net interest income 54,001 56,716 57,019 60,464
Provision for loan losses 799 2,168 2,221 2,583
Income before income taxes 30,605 32,197 32,678 33,618
Net income 19,625 20,506 21,177 22,006
Earnings per share
Basic and Diluted 0.27 0.28 0.29 0.30
1997
---------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Interest income $ 91,806 $ 93,826 $ 94,115 $ 97,145
Net interest income 50,264 50,299 50,883 52,559
Provision for loan losses 908 1,357 1,013 1,404
Income before income taxes 26,986 26,015 26,078 27,884
Net income 17,675 17,542 17,754 18,093
Earnings per share
Basic and Diluted 0.24 0.24 0.25 0.25
PRINCIPAL MARKETS AND PRICES OF THE CORPORATION'S STOCK
Dividends Stock Prices
Per -----------------------
Share High Low
--------- -----------------------
1998
1st Quarter $ 0.0825 25 7/8 19 1/4
2nd Quarter 0.0825 24 3/4 19 3/4
3rd Quarter 0.0825 22 9/16 15 3/8
4th Quarter 0.1050 22 7/8 15 1/8
1997
1st Quarter $ 0.07 14 3/8 12 1/8
2nd Quarter 0.07 14 3/4 12
3rd Quarter 0.07 16 1/8 13 7/8
4th Quarter 0.0825 24 14 5/8
The Corporation's common stock is listed for trading on the NASDAQ
stock market as stock symbol TRMK.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following provides a narrative discussion and analysis of
significant changes in Trustmark Corporation's (Trustmark) results of operations
and financial condition. This discussion should be read in conjunction with the
consolidated financial statements and the supplemental financial data included
elsewhere in this report.
The Private Securities Litigation Reform Act evidences Congress'
determination that the disclosure of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by Management. Specifically, Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
forward-looking statements with respect to the adequacy of the allowance for
loan losses; the effect of legal proceedings on Trustmark's financial condition,
results of operations and liquidity; Year 2000 compliance issues and market risk
disclosures. Although Management of Trustmark 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. Such forward-looking
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks materialize, or should any such underlying
assumptions prove to be significantly different, actual results may vary
materially from those anticipated, estimated, projected or expected.
FINANCIAL SUMMARY
Trustmark's net income increased 17.2% to $83.3 million in 1998
compared with $71.1 million in 1997 and $65.1 million in 1996. Basic and diluted
earnings per share were $1.14 in 1998 compared with $0.98 and $0.93 in 1997 and
1996, respectively. Trustmark's increased performance for 1998, 1997 and 1996
was directly related to increases in net interest income, significant growth in
noninterest income and controlled growth of noninterest expenses.
Three financial ratios used to measure performance are return on
average assets, return on average equity and the efficiency ratio. The return on
average assets for 1998 increased to 1.41% compared with 1.34% in 1997 and 1.27%
in 1996. The return on average equity also experienced growth in 1998 and
reached 13.53% compared with 12.67% and 13.07% in 1997 and 1996, respectively.
Trustmark's efficiency ratio for 1998 decreased to 55.8% from 59.0% in 1997 and
59.4% in 1996.
At December 31, 1998, total loans were $3.7 billion, an increase of
24.1% from levels one year earlier. Total assets were $6.4 billion at December
31, 1998, a 14.6% increase from year end 1997. Total deposits at December 31,
1998 were $3.9 billion, an increase of 3.3% from year end 1997. Shareholders'
equity was $652 million at December 31, 1998, a 9.8% increase over levels one
year earlier.
BUSINESS COMBINATIONS
Acquisitions have been a vital part of Trustmark's strategic plan.
Management is continually evaluating new markets in which to expand and provide
its financial services. On February 4, 1999, Trustmark entered into a definitive
agreement to acquire the Dan Bottrell Agency, Inc., one of Mississippi's largest
commercial insurance agencies. This transaction is another step toward
Trustmark's strategic goal of becoming a diversified financial services
corporation. This transaction, which will be accounted for as a purchase
business combination, is expected to be completed in the first quarter of 1999.
In March 1998, Smith County Bank in Taylorsville, Mississippi, was
merged with Trustmark. This purchase business combination added $104 million in
total assets at fair value, including $45 million in loans, and $88 million in
total deposits at the merger date.
In 1997, Trustmark completed two mergers with Mississippi financial
institutions. In February, Trustmark completed its merger with First Corinth
Corporation (FCC) and its subsidiary, National Bank of Commerce in a business
combination accounted for as a pooling of interests. At the merger date, FCC and
its subsidiary had $65 million in loans, $134 million in total assets and $113
million in total deposits. In September, Perry County Bank (PCB) of New Augusta,
Mississippi, was merged with Trustmark in a purchase business combination. At
the merger date, PCB had $24 million in loans, $46 million in total assets at
fair value and $37 million in total deposits.
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 its core banking activities in loans and deposits.
Management continually develops and applies cost-effective strategies to manage
these risks. In asset and liability management activities, policies are in place
that are designed to manage interest rate risk. The Asset/Liability Committee
sets the day-to-day operating guidelines and 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 effectively
invest capital and to manage and preserve the value created by its core banking
business. Trustmark utilizes an investment portfolio as well as off-balance
sheet instruments to manage the interest rate risk naturally created through its
business activities. The primary tool utilized by the Asset/Liability Committee
is a modeling system that is run quarterly in order to provide information used
to evaluate exposure to interest rate risk, to project earnings and manage
balance sheet growth. This modeling system utilizes the following scenarios in
order to give Management a method of evaluating Trustmark's interest rate, basis
and prepayment risk under different conditions:
o Rate shocked scenarios of up-and-down 100, 200 and 300 basis points.
o Yield curve twist of +/- 2 standard deviations of the change in spread
of the three-month treasury bill and the 10-year treasury note yields.
o Basis risk scenarios where federal funds/prime spread widens and
tightens 50 and 100 basis points.
o Prepayment risk scenarios, where projected prepayment speeds in an
up-and-down 200 basis point rate scenario, are compared to current
projected prepayment speeds.
Static gap analysis is an additional tool that can be utilized for
interest rate risk measurement. Management feels that this method for analyzing
interest 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,
changes in prepayment speeds or varying interest rate scenarios. This analysis
is a relatively straightforward tool which is useful mainly in highlighting
significant short-term repricing volume mismatches. Utilized in the table below
are Management's assumptions relating to prepayments of certain loans and
securities as well as the maturity for rate sensitive assets and liabilities.
The following table presents Trustmark's rate sensitivity static gap analysis at
December 31, 1998 ($ in thousands):
Interest Sensitive Within
---------------------------
90 days One Year
----------- -----------
Total rate sensitive assets $ 1,866,236 $ 2,878,290
Total rate sensitive liabilities 2,347,848 3,395,822
----------- -----------
Net gap ($ 481,612) ($ 517,532)
=========== ===========
The analysis indicates a negative gap position over the next three- and
twelve-month periods which indicates that Trustmark would benefit somewhat from
a decrease in market interest rates. 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 static gap analysis does not fully capture the impact of interest
rate movements on interest sensitive assets and liabilities. The interest rate
sensitivity tables that follow provide additional information about Trustmark's
financial instruments that are sensitive to changes in interest rates. The
quantitative information about market risk is necessarily limited because it
does not take into account operating transactions or anticipated hedging
instruments. The tabular disclosure of Trustmark's market risk is also limited
by its failure to depict accurately the effect on assumptions of significant
changes in the economy or interest rates as well as changes in Management's
expectations or intentions. The information in the interest rate sensitivity
tables below reflect contractual interest rate repricing dates and contractual
maturity (including principal amortization) dates except where altered by the
following assumptions:
o The scheduled maturities of mortgage-backed securities and CMOs are
adjusted by the industry dealer prepayment speed for various coupon
segments of the portfolio.
o Principal repayments of loans (other than residential mortgages) and
early withdrawals of deposits include assumptions based on Management's
experience and judgement.
o Changes in prepayment behavior of the residential mortgage portfolio
are based on the current patterns of comparable mortgage-backed
securities.
o For indeterminate maturity deposit products (money market, NOW and
savings accounts), the tables present principal cash flows based on
Trustmark's historical experience, Management's judgement and
statistical analysis, as applicable, concerning their most likely
withdrawal behaviors.
o Weighted average floating rates are based on the rate for that product
as of December 31, 1998 and 1997.
The tables below present principal amounts and related weighted average
interest rates by year of maturity for Trustmark's financial assets and
liabilities at December 31, 1998 and 1997 ($ in thousands):
INTEREST RATE SENSITIVITY
December 31, 1998
Estimated
1999 2000 2001 2002 2003 Beyond Total Fair Value
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Loans, Net
Fixed Rate $ 956,598 $ 477,453 $ 345,481 $ 244,316 $ 177,240 $ 386,682 $2,587,770 $2,669,558
Average Int Rate 8.28% 8.19% 8.21% 7.77% 7.66% 7.00% 7.97%
Floating Rate $ 468,727 $ 137,022 $ 80,007 $ 66,648 $ 59,193 $ 236,801 $1,048,398 $1,051,778
Average Int Rate 8.69% 9.54% 9.94% 8.16% 8.15% 7.90% 8.65%
Investment securities
Fixed Rate $ 523,275 $ 345,356 $ 483,318 $ 295,677 $ 67,738 $ 179,459 $1,894,823 $1,915,815
Average Int Rate 5.90% 6.20% 6.43% 6.38% 6.11% 6.02% 6.19%
Floating Rate $ 947 $ 589 $ 709 $ 2,123 $ 10,194 $ 38,177 $ 52,739 $ 52,739
Average Int Rate 6.21% 6.25% 6.01% 6.54% 5.97% 5.90% 5.80%
Other earning assets
Floating Rate $ 185,619 $ 185,619 $ 185,619
Average Int Rate 7.95% 7.95%
Deposits
Fixed Rate $1,296,600 $ 162,773 $ 41,003 $ 20,714 $ 16,562 $ 406 $1,538,058 $1,545,128
Average Int Rate 5.07% 5.31% 5.19% 5.54% 5.22% 6.60% 5.10%
Floating Rate $ 508,156 $ 257,471 $ 257,471 $ 160,526 $ 160,526 $ 109,979 $1,454,129 $1,454,129
Average Int Rate 2.68% 2.11% 2.11% 2.12% 2.12% 1.64% 2.28%
Other int-bearing
liabilities
Fixed Rate $ 49,543 $ 49,543 $ 49,543
Average Int Rate 7.47% 7.47%
Floating Rate $1,497,644 $ 85,941 $ 74,960 $1,658,545 $1,658,545
Average Int Rate 6.80% 4.91% 4.67% 6.60%
INTEREST SENSITIVITY TABLE
December 31, 1997
Estimated
1998 1999 2000 2001 2002 Beyond Total Fair Value
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Loans
Fixed Rate $ 731,303 $ 381,723 $ 294,039 $ 205,996 $ 134,917 $ 181,817 $1,929,795 $1,949,023
Average Int Rate 8.62% 8.68% 8.80% 8.26% 8.24% 7.72% 8.51%
Floating Rate $ 436,428 $ 126,312 $ 77,185 $ 60,339 $ 53,734 $ 235,762 $ 989,760 $ 995,285
Average Int Rate 9.16% 9.33% 9.83% 7.14% 6.62% 7.50% 8.58%
Investment securities
Fixed Rate $ 449,551 $ 414,141 $ 335,143 $ 388,290 $ 196,627 $ 223,746 $2,007,498 $2,017,737
Average Int Rate 5.87% 6.10% 6.23% 6.52% 6.55% 6.58% 6.25%
Other earning assets
Floating Rate $ 70,786 $ 70,786 $ 70,786
Average Int Rate 6.12% 6.12%
Deposits
Fixed Rate $1,138,075 $ 430,198 $ 34,586 $ 19,149 $ 16,582 $ 586 $1,639,176 $1,649,732
Average Int Rate 5.21% 5.83% 5.80% 5.31% 5.62% 6.46% 5.39%
Floating Rate $ 448,654 $ 228,162 $ 228,162 $ 140,416 $ 140,416 $ 95,284 $1,281,094 $1,281,094
Average Int Rate 2.99% 2.46% 2.46% 2.47% 2.47% 2.03% 2.62%
Other int-bearing
liabilities
Fixed Rate $ 90,058 $ 90,058 $ 90,058
Average Int Rate 5.81% 5.81%
Floating Rate $ 998,700 $ 998,700 $ 998,700
Average Int Rate 5.37% 5.37%
Derivative Financial Instruments
Derivatives are used to hedge interest rate exposures by modifying the
interest rate characteristics of specific balance sheet instruments. Trustmark
regularly enters into certain derivative financial instruments in the form of
forward interest rate contracts, as part of its normal asset/liability
management strategies. Trustmark's obligations under forward contracts consist
of commitments to sell mortgage loans originated and/or purchased in the
secondary market at a future date. These obligations are entered into in order
to fix the interest rate at which Trustmark can offer mortgage loans to its
customers or purchase mortgage loans from other financial institutions. Any
decline in market value of mortgages held for sale by Trustmark at the end of a
financial reporting period is recognized at that time. At December 31, 1998,
Trustmark's exposure under commitments to sell mortgages is immaterial.
Liquidity
Trustmark's goal is to maintain an adequate liquidity position to
compensate for expected and unexpected balance sheet fluctuations and to provide
funds for growth. The Asset/Liability Committee establishes guidelines by which
they monitor the current liquidity position to ensure adequate funding capacity.
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 Trustmark'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 December 31, 1998 were $5.836
billion, or 91.82% of total assets, compared with $5.062 billion, or 91.29% of
total assets for December 31, 1997, an increase of $774 million, or 15.3%, and
is primarily the result of growth in the loan portfolio as well as the business
combination completed during 1998.
Loans
Loans, the largest category of earning assets for Trustmark, produce
the highest level of interest income. At December 31, 1998, total loans were
$3.702 billion, an increase of $718.7 million, or 24.1%, from the $2.984 billion
reported at December 31, 1997. The business combination completed during 1998
was responsible for $39.7 million of this growth. At December 31, 1998, loans
were 63.4% of Trustmark's earning assets compared with 58.9% at December 31,
1997. While loan growth was significant, it was well diversified between
commercial, consumer and 1-4 family mortgage loans. The most significant
increase, $407.2 million or 58.2%, was seen in 1-4 family mortgage loans which
resulted from a Management strategy to retain 10- to 15-year conventional
mortgages in its portfolio and the active promotion of the equity line product
during the second and third quarter of 1998.
Trustmark's lending policies have produced consistently strong asset
quality. Asset quality in the financial services industry is measured by the
level of nonperforming assets which include nonperforming loans, consisting of
nonaccrual and restructured loans, and other real estate. Trustmark's
nonperforming assets at December 31, 1998 and 1997 are shown in the following
table ($ in thousands):
December 31,
------------------
1998 1997
------- -------
Nonaccrual and restructured loans $13,253 $14,242
Other real estate (ORE) 1,859 2,340
------- -------
Total nonperforming assets $15,112 $16,582
======= =======
Accruing loans past due 90 days or more $ 2,431 $ 2,570
======= =======
Nonperforming assets/total loans and ORE 0.41% 0.56%
======= =======
As indicated in the table above, at December 31, 1998, the level of
nonperforming assets has decreased when compared to December 31, 1997 and
continues to be less than its peer group. Nonperforming assets remain controlled
because of strong underwriting standards, consistent credit reviews and a
prudent loan charge-off policy. At December 31, 1998, 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 analysis is prepared quarterly to assess the risk in
the loan portfolio and to determine the adequacy of the allowance for loan
losses. Specifically, the analysis is based on factors such as historical loss
experience based on volume and types of loans, volume and trends in
delinquencies and nonaccruals, national and local economic conditions and other
pertinent information. This analysis is presented to the Credit Policy Committee
with subsequent review and approval by the Board of Directors. At December 31,
1998, the allowance for loan losses was $66.2 million, representing 1.79% of
total loans outstanding while coverage of nonperforming loans was 499.1%. This
compares with an allowance for loan losses of $64.1 million at December 31,
1997, representing 2.15% of total loans outstanding and a 450.1% coverage of
nonperforming loans. The increase of $2.1 million in the allowance for loan
losses is primarily the result of the business combination completed during
1998.
Net charge-offs were $7.0 million or 0.21% of average loans for the
year ended December 31, 1998, compared with $4.9 million or 0.18% of average
loans for the year ended December 31, 1997. Trustmark's level of net charge-offs
to average loans for 1998 continues to compare favorably to its peer group.
Securities
The securities portfolio is utilized to provide a quality investment
alternative for available funds, a stable source of interest income and serves
as collateral for pledges for public deposits and securities sold under
agreements to repurchase. At December 31, 1998, securities available for sale
(AFS), with a carrying value of $775.0 million, and securities held to maturity
(HTM), with a carrying value of $1.172 billion, combined to create a securities
portfolio totaling $1.947 billion, a decrease of $60.9 million or 3.0% from
December 31, 1997. As a percentage of earning assets, the securities portfolio
declined from 39.7% at December 31, 1997 to 33.4% at December 31, 1998 as
Trustmark utilized the liquidity within the securities portfolio to partially
satisfy the funding needed to support loan growth.
Management continues to stress 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 and U. S. Government agency obligations.
The REMIC and CMO issues held in the securities portfolio are entirely U. S.
Government agency issues. In order to avoid excessive yield volatility from
unexpected prepayments, Trustmark's normal practice is to purchase investment
securities at or near par value to reduce the risk of premium write-offs.
At December 31, 1998, securities AFS had a carrying value of $775.0
million and an amortized cost of $747.4 million. This compares with a carrying
value of $610.5 million and an amortized cost of $593.0 million at December 31,
1997. As a percentage of the securities portfolio, securities AFS increased from
30.4% at December 31, 1997 to 39.8% at year end 1998. While the overall
securities portfolio decreased when compared with December 31, 1997, securities
AFS increased $164.5 million, or 27.0%, as Trustmark sought to improve the price
performance and liquidity of the portfolio. At December 31, 1998, gross
unrealized gains were $28.1 million on securities AFS while gross unrealized
losses were $452 thousand. Net unrealized gains are shown in shareholders'
equity as accumulated other comprehensive income, net of taxes and equaled $17.0
million at December 31, 1998.
The carrying value of securities HTM was $1.172 billion at December 31,
1998 compared with $1.397 billion at year end 1997. The fair value of HTM
securities at December 31, 1998 was $1.193 billion compared with $1.407 billion
at year end 1997. Gross unrealized gains were $21.5 million and gross unrealized
losses were $532 thousand on securities HTM at December 31, 1998.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase
agreements were $185.6 million at December 31, 1998, an increase of $114.8
million when compared with year end 1997. 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. Total deposits were
$3.946 billion at December 31, 1998, an increase of $127.4 million, or 3.3%,
over year end 1997. The business combination completed during 1998 was
responsible for $74.6 million of this growth.
As a component of average deposits, average noninterest-bearing
deposits increased to 22.1% in 1998 compared with 21.3% during 1997. At the same
time, average interest-bearing demand deposits decreased to 18.8% of average
deposits from 19.6%, average savings deposits increased to 16.9% from 15.4% and
average time deposits decreased to 42.2% in 1998 from 43.7% the prior year.
In order to provide adequate liquidity for the growth of earning
assets, Trustmark has relied heavily on short-term borrowings as an alternate
funding source during 1998. During October 1998, Trustmark became a member of
the Federal Home Loan Bank (FHLB) in order to secure another source of low cost
funding. At that time, Trustmark received advances of $340 million that mature
in October 1999 and have floating interest rates ranging from 5.02% to 5.39%.
These advances are collateralized by a blanket lien on Trustmark's 1-4 family
mortgage loans. Other short-term borrowings which contributed additional funds
during 1998 include federal funds purchased, an increase of $53.1 million when
compared with year end 1997 and securities sold under repurchase agreements, an
increase of $316.8 million from year end 1997. At December 31, 1998, the balance
of the treasury tax and loan note option account was $33.1 million compared with
$73.9 million at December 31, 1997.
CONTINGENCIES
Trustmark and its subsidiaries are parties to lawsuits and other claims
that arise in the ordinary course of business; some of the lawsuits assert
claims related to the lending, collection, servicing, investment, trust and
other business activities; and some of the lawsuits allege substantial claims
for damages. The cases are being vigorously contested. In the regular course of
business, Management evaluates estimated losses or costs related to litigation,
and provision is made for anticipated losses whenever Management believes that
such losses are probable and can be reasonably estimated. At the present time,
Management believes, based on the advice of legal counsel, that the final
resolution of pending legal proceedings will not have a material impact on
Trustmark's consolidated financial position or results of operations.
SHAREHOLDERS' EQUITY
Regulatory
Trustmark and Trustmark National Bank (Bank) 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 the Bank.
Management believes, as of December 31, 1998, that Trustmark and the
Bank meet all capital adequacy requirements to which they are subject. At
December 31, 1998, the most recent notification from the Office of the
Comptroller (OCC) categorized the Bank as well-capitalized. To be categorized in
this manner, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios (defined in applicable regulations) as set forth in
the table below. There are no significant conditions or events that have
occurred since the OCC's notification that Management believes have affected the
Bank's present classification.
Actual and minimum regulatory capital amounts and ratios at December
31, 1998, for Trustmark and the Bank are as follows ($ in thousands):
Actual Minimum Regulatory
Regulatory Capital Capital Required
------------------ ------------------
Amount Ratio Amount Ratio
-------- ------ -------- -----
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $667,621 17.47% $305,761 8.00%
Trustmark National Bank $654,302 17.16% $305,078 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $619,619 16.21% $152,881 4.00%
Trustmark National Bank $606,405 15.90% $152,539 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $619,619 9.88% $250,749 4.00%
Trustmark National Bank $606,405 9.69% $250,373 4.00%
General
At December 31, 1998, Trustmark had shareholders' equity of $651.9
million compared with $593.6 million at year end 1997, an increase of $58.3
million or 9.8%. The shareholders' equity to assets ratio was 10.26% at December
31, 1998 compared with 10.71% at December 31, 1997.
In February 1998, Trustmark's Board of Directors approved a two-for-one
stock split to shareholders of record on March 20, 1998. The additional shares
of common stock were issued on March 30, 1998.
At Trustmark's annual shareholders' meeting held April 14, 1998, the
shareholders approved a proposal increasing Trustmark's number of authorized
shares of common stock from 100 million to 250 million. This increase allows
Trustmark to issue additional shares of common stock to consummate business
combinations, implement stock splits or dividends or for other corporate
purposes.
On November 10, 1998, as part of Trustmark's overall capital management
plan, the Board of Directors authorized the repurchase of up to 7.5%, or 5.46
million shares, of common stock. In conjunction with the share repurchase
program, Trustmark has purchased 242 thousand shares of common stock through
December 31, 1998. The repurchase program, which is subject to market conditions
and management discretion, has been implemented through open market purchases or
privately negotiated transactions. In addition to the repurchase plan, Trustmark
purchased and retired 692 thousand shares of common stock in 1998 and 444
thousand in 1997 in connection with business combinations.
Cash dividends paid in 1998 totaled $25.6 million, an increase of $4.3
million or 20.5% from $21.3 million paid in 1997. The payout ratio of cash
dividends paid to net income was 30.92% in 1998 and 30.26% in 1997. Dividends
for 1998 were $0.35 per share compared with $0.29 per share for 1997 and $0.25
for 1996. The fourth quarter dividend of $0.105 per share was 27.3% higher than
the $0.0825 per share paid in the third quarter of 1998. Trustmark's book value
at December 31, 1998 was $8.99, an increase of 10.2% from $8.16 one year
earlier.
NET INTEREST INCOME
Net interest income (NII) is interest income generated by earning
assets reduced by the interest expense of funding those assets and is
Trustmark's principal source of income. Consequently, changes in the mix and
volume of earning assets and interest-bearing liabilities, and their related
yields and interest rates, can have a significant impact on earnings.
During 1998, the level of NII grew by $24.2 million, or 11.9%, when
compared with 1997. NII was positively impacted during 1998 by the substantial
growth in earning assets which more than offset growth in interest-bearing
liabilities during a period of slightly declining interest rates. The business
combination completed during 1998 contributed $514 thousand to this increase.
For 1997, Trustmark's level of NII increased by $9.9 million, or 5.1%,
when compared with 1996. Business combinations completed during 1997 contributed
$2.5 million to NII with the remaining increase coming primarily from more rapid
growth of average earning assets when compared to interest-bearing liabilities
during a period of relatively stable interest rates.
Average earning assets increased 11.8% during 1998 primarily fueled by
a 20.7% increase in average loans. However, because the interest rate
environment was generally declining during 1998, the yield on average earning
assets decreased by one basis point when compared to 1997. The combination of
these factors resulted in interest income increasing by $43.2 million, or 11.5%,
during 1998. The business combination completed during 1998 contributed $3.0
million to this increase.
For 1997, average earning assets increased 4.3% when compared to the
same period in 1996. This was driven by an 8.4% 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 1996.
This combination resulted in an increase in total interest income of $18.8
million, or 5.3%, when comparing 1997 with 1996. Business combinations completed
during 1997 contributed $6.7 million to this increase.
The composition of average interest-bearing liabilities changed
dramatically during 1998 as Trustmark sought additional funding sources to
support the substantial growth of earning assets. Average interest-bearing
liabilities increased by 12.0% during 1998 primarily from growth in federal
funds purchased, securities sold under repurchase agreements and short-term
borrowings; however, the average yield on these categories was slightly lower
when comparing 1998 to 1997. Interest expense for 1998 increased $19.0 million,
or 11.0%, as a result of these factors. The business combination completed
during 1998 contributed $2.5 million to this increase.
Average interest-bearing liabilities grew by 2.2% during 1997.
Interest-bearing deposits experienced growth of 4.2% during 1997 while average
funds purchased and securities sold under repurchase agreements declined 5.9%.
In addition, Trustmark's increased utilization of the treasury tax and loan note
option account during 1997 led to substantial growth in this category when
comparing 1997 and 1996. As a result of these factors, total interest expense
increased by $8.9 million when comparing 1997 to 1996. Business combinations
completed during 1997 contributed $4.3 million to this increase.
The table below illustrates the changes in the net interest margin as a
percentage of average earning assets for the periods shown:
Year Ended December 31,
-----------------------
1998 1997 1996
----- ----- -----
Yield on interest-earning assets-FTE 7.87% 7.88% 7.80%
Rate on interest-bearing liabilities 3.54% 3.56% 3.53%
----- ----- -----
Net interest margin-FTE 4.33% 4.32% 4.27%
===== ===== =====
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.
Trustmark will continue its interest rate risk policies to manage 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 inherent 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 1998, Trustmark's provision for loan losses was $7.8 million
compared with $4.7 million in 1997 and $5.8 million in 1996. The provision to
average loans was 0.23% for 1998 compared with 0.17% for 1997 and 0.23% for
1996. Trustmark's ratio of the provision for loan losses to average loans
continues to compare favorably to the peer group.
NONINTEREST INCOME
Trustmark stresses the importance of growth in noninterest income as
one of its key long-term strategies. This was accomplished during 1998, as
noninterest income, excluding securities gains, increased $13.2 million, or
17.6%, when compared with 1997. The growth in noninterest income was well
diversified between investment services, mortgage activities and substantial
growth in the number of new checking accounts. The business combination
completed during 1998 contributed approximately $650 thousand to this increase.
Noninterest income grew $8.1 million, or 12.2%, when comparing 1997 with 1996.
The largest single category of noninterest income, service charges on
deposit accounts, grew by $5.4 million, or 21.4%, when 1998 is compared with
1997. During the third quarter of 1998, Trustmark completed implementation of
its new customer-focused sales process which was named Pinnacle. As a result of
Pinnacle and a focused marketing effort on the Umbrella Plan, the Bank's
packaged consumer checking product, 15 thousand accounts were opened. Overall,
the number of deposit accounts grew by over 26 thousand during 1998. Service
charges increased $1.8 million, or 7.8%, when 1997 is compared with 1996. This
increase can be attributed to an increase in the number of accounts and a higher
volume of consumer account activity.
Other account charges, fees and commissions, increased $4.6 million, or
22.4%, when 1998 is compared with 1997 and also experienced an increase of $2.2
million, or 11.7%, when 1997 is compared with 1996. Major contributors to the
growth in this category during these periods were revenues generated from
investment services, credit cards, ATMs and a variety of other products and
services.
Mortgage servicing fees grew by $417 thousand and $1.3 million during
1998 and 1997, respectively. During 1998, Trustmark chose to retain 10- to
15-year conventional mortgages in its portfolio thus reducing the amount of
growth in loans serviced for others and the opportunity to earn mortgage
servicing fees. At December 31, 1998, Trustmark serviced approximately $3.4
billion in mortgages.
Trust service income increased by $1.2 million, or 9.9%, during 1998 as
Trustmark continued to be one of the largest providers of asset management
services in Mississippi. At December 31, 1998, Trustmark had trust accounts with
assets under administration with fair values of approximately $5.5 billion. When
comparing 1997 to 1996, trust service income increased by $2.3 million, or
22.8%.
Other income increased $1.5 million, or 44.7%, when comparing 1998 to
1997 primarily from gains on the sale of loans. During 1998, Trustmark
originated and purchased a larger volume of 1-4 family mortgage loans that were
ultimately sold to investors thus creating the opportunity for growth in gains
on the sale of these loans. When comparing 1997 to 1996, other income increased
by $515 thousand, or 17.8%.
Gross securities gains of $755 thousand and losses of $12 thousand were
realized during 1998 because of calls and dispositions of securities classified
as available for sale. There were no sales of securities held to maturity during
1998. Gross securities gains of $122 thousand were realized on calls and other
dispositions of held to maturity securities during that period.
NONINTEREST EXPENSE
Another long-term strategy of Trustmark 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 55.8% for the year ended December 31, 1998,
compared with 59.0% for 1997 and 59.4% for 1996. Total noninterest expense
increased $12.5 million, or 7.4%, during 1998 compared with $10.1 million, or
6.4% growth during 1997. Business combinations completed during 1998 and 1997
contributed $1.5 million and $2.8 million, respectively, to the increases in
noninterest expenses.
Salaries and employee benefits continue to comprise the largest portion
of noninterest expenses and increased $4.5 million, or 5.3%, when comparing 1998
with 1997 and $8.0 million, or 10.3%, when comparing 1997 with 1996. The
business combination completed during 1998 contributed $928 thousand to this
increase. The number of full-time equivalent employees totaled 2,258 at December
31, 1998; 2,309 at December 31, 1997 and 2,247 at December 31, 1996.
Occupancy expense has remained well controlled as seen by the $105
thousand, or 1.1%, increase in 1998 and a $395 thousand, or 4.2%, increase in
1997. Equipment expenses have shown only slight increases of $473 thousand in
1998 and $300 thousand in 1997. Lower depreciation and rental costs have helped
to offset Year 2000 expenditures during 1998 and 1997.
Services and fees increased $4.9 million, or 21.8%, when comparing 1998
to 1997. Included in the totals for both 1998 and 1997 are Year 2000 related
expenditures. Increased costs for professional fees, legal fees, software
related costs and communications expense contributed to the 1998 increase.
During 1997, services and fees increased by $1.6 million, or 7.5%, when compared
to 1996. This growth came primarily from increased costs for professional fees
and communications expense.
The amortization of intangible assets increased $939 thousand, or
10.0%, when comparing 1998 with 1997 and $969 thousand, or 11.6%, when comparing
1997 to 1996. Growth in the mortgage servicing portfolio was 10.6% during 1998
and 9.0% during 1997 and has provided a larger base of mortgage servicing rights
that began amortization during those years.
Increased expenses related to the mortgage servicing portfolio and home
equity loans comprised the major portion of the $1.5 million increase in other
expenses during 1998. Other expenses decreased by $1.2 million, or 4.1%, when
comparing 1997 with 1996. Increased loan fees related to the mortgage servicing
portfolio and operational expenses were offset by a decline in the FDIC
assessment experienced during 1997.
Management will continue to monitor closely the level of noninterest
expenses as part of its effort to continue to improve the profitability of
Trustmark.
INCOME TAXES
For the year ended December 31, 1998, Trustmark's combined effective
tax rate was 35.5% compared with 33.6% for 1997 and 33.1% in 1996. The increase
in Trustmark's effective tax rate for 1998 is due primarily to a decrease in
tax-exempt interest for federal and state income tax purposes as well as changes
to various other permanent items as a percentage of pre-tax income.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. This statement was effective for
fiscal years beginning after December 15, 1997. Trustmark's principal activities
did not constitute separate segments of its business but encompassed traditional
banking activities which offered similar products and services within the same
primary geographic area and regulatory and economic environment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The adoption of this statement will not have a material
impact on Trustmark's consolidated financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities" and will affect
accounting and reporting standards for classifying securitized mortgage loans
held for sale. This statement shall be effective for the first fiscal quarter
beginning after December 15, 1998. The adoption of this statement will not have
a material impact on Trustmark's consolidated financial statements.
YEAR 2000 COMPLIANCE
A Year 2000 compliance plan has been developed and approved by the
Board of Directors, providing for all technical systems to be compliant by June
30, 1999. The following represents the status of Trustmark's Year 2000 readiness
program through December 31, 1998.
An inventory of all technical systems, including personal computers,
has been completed. Trustmark's major systems are licensed from software
vendors, all of which have provided or are in the process of providing Year 2000
compliant systems. The renovation of most of the mission-critical systems has
been completed. The validation testing of these mission-critical systems started
in September 1998 and is substantially complete. Eighty-five percent of all
technical systems have already been placed in operation as Year 2000 ready. The
remaining systems are in various stages of renovation and certification testing
and are expected to be completed on or before the due date. The overall
corporate wide project is estimated to be seventy-five to eighty percent
complete and is on schedule. The development and validation of a contingency
plan that includes all mission-critical business functions was completed during
1998.
Some of the information shown above has been provided to Trustmark by
its vendors and other parties and may be affected by their failure to perform.
At this time, Trustmark does not anticipate any significant delays in
implementing Year 2000 ready systems.
To date, Trustmark has incurred and expensed approximately $5.1 million
related to the assessment of the Year 2000 compliance plan. The total remaining
cost of the Year 2000 compliance plan will be expensed as incurred during 1999
and is not expected to have a material adverse effect on Trustmark's results of
operations.
PRINCIPAL OCCUPATION OF TRUSTMARK'S DIRECTORS AND EXECUTIVE OFFICERS
This information is included elsewhere in this report in conjunction
with listings of Directors and Officers.
SECURITIES AND EXCHANGE COMMISSION (SEC) FORM 10-K
A copy of the annual report on Form 10-K, as filed with the SEC, may be
obtained without charge by directing a written request to:
Gerard R. Host
Trustmark Corporation
Post Office Box 291
Jackson, Mississippi 39205-0291