FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-3683
TRUSTMARK CORPORATION
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Mississippi 64-0471500
Trustmark Corporation
248 East Capitol Street
Jackson, MS 39201
(601) 354-5111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of April 30, 1999.
Title Outstanding
Common stock, no par value 72,640,785
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands except share data)
(Unaudited)
March 31, December 31,
1999 1998
---------- ----------
Assets
Cash and due from banks (noninterest-bearing) $ 290,767 $ 312,527
Federal funds sold and securities purchased
under reverse repurchase agreements 267,210 185,619
Trading account securities 287 1,053
Securities available for sale (at fair value) 769,236 774,996
Securities held to maturity (fair value:
$1,260,176-1999; $1,192,505-1998) 1,243,940 1,171,513
Loans 3,737,610 3,702,318
Less allowance for loan losses 66,150 66,150
---------- ----------
Net loans 3,671,460 3,636,168
Premises and equipment 72,150 70,750
Intangible assets 51,951 50,349
Other assets 164,967 152,215
---------- ----------
Total Assets $6,531,968 $6,355,190
========== ==========
Liabilities
Deposits:
Noninterest-bearing $ 889,653 $ 954,210
Interest-bearing 3,078,915 2,992,187
---------- ----------
Total deposits 3,968,568 3,946,397
Federal funds purchased 459,610 336,546
Securities sold under repurchase agreements 990,087 981,999
Short-term borrowings 401,826 389,543
Other liabilities 60,897 48,829
---------- ----------
Total Liabilities 5,880,988 5,703,314
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 71,899,116
shares-1999; 72,531,636 - 1998 14,979 15,111
Surplus 227,898 241,155
Retained earnings 395,139 378,567
Accumulated other comprehensive income, net of tax 12,964 17,043
---------- ----------
Total Shareholders' Equity 650,980 651,876
---------- ----------
Total Liabilities and Shareholders' Equity $6,531,968 $6,355,190
========== ==========
See notes to consolidated financial statements.
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands except share data)
(Unaudited)
Three Months Ended
March 31,
-------------------
1999 1998
-------- -------
Interest Income
Interest and fees on loans $76,035 $66,477
Interest on securities:
Taxable interest income 28,220 30,127
Interest income exempt from federal income taxes 1,622 1,433
Interest on federal funds sold and securities
purchased under reverse repurchase agreements 3,585 828
-------- -------
Total Interest Income 109,462 98,865
Interest Expense
Interest on deposits 27,642 31,025
Interest on federal funds purchased and securities
sold under repurchase agreements 15,984 12,211
Other interest expense 4,843 1,628
-------- -------
Total Interest Expense 48,469 44,864
-------- -------
Net Interest Income 60,993 54,001
Provision for loan losses 1,966 799
-------- -------
Net Interest Income After
Provision for Loan Losses 59,027 53,202
Noninterest Income
Service charges on deposit accounts 8,870 6,958
Other account charges, fees and commissions 6,427 5,287
Mortgage servicing fees 3,500 3,377
Trust service income 3,619 3,316
Other income 1,308 838
-------- -------
Total Noninterest Income 23,724 19,776
Noninterest Expenses
Salaries and employee benefits 24,106 22,261
Net occupancy - premises 2,469 2,275
Equipment expenses 3,315 2,970
Services and fees 6,402 6,577
Amortization of intangible assets 2,544 2,381
Other expense 6,473 5,909
-------- -------
Total Noninterest Expenses 45,309 42,373
-------- -------
Income Before Income Taxes 37,442 30,605
Income taxes 13,316 10,980
-------- -------
Net Income $24,126 $19,625
======== =======
Earnings Per Share
Basic and Diluted $0.33 $0.27
======== =======
See notes to consolidated financial statements.
TRUSTMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
Three months ended March 31,
---------------------------
1999 1998
------------- ----------
Operating Activities
Net income $24,126 $19,625
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,966 799
Depreciation and amortization 5,025 4,708
Net amortization (accretion) of securities 55 (591)
Net increase in intangible assets (4,155) (3,047)
Net (increase) decrease in deferred income taxes (191) 56
Net (increase) decrease in other assets (10,257) 1,144
Net increase in other liabilities 12,068 13,470
Other operating activities, net (1,254) (585)
------------- ----------
Net cash provided by operating activities 27,383 35,579
------------- ----------
Investing Activities
Proceeds from calls and maturities of securities available for sale 44,606 22,491
Proceeds from calls and maturities of securities held to maturity 126,006 95,929
Proceeds from sales of securities available for sale 101
Purchases of securities available for sale (45,522) (90,439)
Purchases of securities held to maturity (198,418) (40,381)
Net increase in federal funds sold and securities
purchased under reverse repurchase agreements (81,591) (17,517)
Net increase in loans (36,119) (113,632)
Purchases of premises and equipment (3,460) (1,791)
Proceeds from sales of premises and equipment 14
Proceeds from sales of other real estate 692 375
Cash received in business combinations 13,035
------------- ----------
Net cash used by investing activities (193,806) (131,815)
------------- ----------
Financing Activities
Net increase in deposits 22,171 94,191
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements 131,152 (32,886)
Net increase in short-term borrowings 12,283 45,639
Cash dividends (7,554) (6,001)
Common stock purchased and retired (13,389)
------------- ----------
Net cash provided by financing activities 144,663 100,943
------------- ----------
(Decrease) increase in cash and cash equivalents (21,760) 4,707
Cash and cash equivalents at beginning of year 312,527 292,555
------------- ----------
Cash and cash equivalents at end of period $290,767 $297,262
============= ==========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Management, all adjustments (consisting of normal recurring
accruals) considered necessary for the fair presentation of these consolidated
financial statements have been included. The notes included herein should be
read in conjunction with the notes to the consolidated financial statements
included in Trustmark Corporation's (Trustmark) 1998 annual report on Form 10-K.
The consolidated financial statements include the accounts of Trustmark,
its wholly-owned subsidiary, Trustmark National Bank (the Bank) and the Bank's
wholly-owned subsidiaries, Trustmark Financial Services, Inc. and Trustmark
Insurance Agency, Inc. All intercompany profits, balances and transactions have
been eliminated.
NOTE 2 - BUSINESS COMBINATIONS
On April 9, 1999, Trustmark completed its acquisition of the Dan
Bottrell Agency, Inc. (Bottrell), an independent insurance agency with
approximately $9 million in total assets located in Jackson, Mississippi.
Trustmark issued approximately 872 thousand shares in exchange for all of the
issued and outstanding common stock of Bottrell. This transaction will be
accounted for as a purchase business combination.
NOTE 3 - LOANS
The following table summarizes the activity in the allowance for loan
losses for the three month periods ended March 31, 1999 and 1998 ($ in
thousands):
1999 1998
-------- -------
Balance at beginning of year $66,150 $64,100
Provision charged to expense 1,966 799
Loans charged off (3,548) (2,334)
Recoveries 1,582 1,535
Allowance applicable to loans
of acquired bank 1,300
-------- -------
Balance at end of period $66,150 $65,400
======== =======
At March 31, 1999 and 1998, the carrying amounts of nonaccrual loans
were $13.7 million and $14.4 million, respectively. Included in these nonaccrual
loans at March 31, 1999 and 1998, are loans that are considered to be impaired
and totaled $9.8 million and $11.1 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 the first
quarter of 1999 and 1998 were $10.6 million and $11.4 million, respectively. No
material amounts of interest income were recognized on impaired loans or
nonaccrual loans for the first quarter of 1999 or 1998.
NOTE 4 - 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.
NOTE 5 - SHAREHOLDERS' EQUITY
Basic earnings per share (EPS) was computed by dividing net income by
the weighted average shares of common stock outstanding, 72,144,447 for the
first quarter of 1999 and 72,885,784 for the first quarter of 1998. Diluted EPS
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 during
the first quarter of 1999 and 1998. The effect of the stock options was to
increase the weighted average number of shares by 64,552 for the first quarter
of 1999 and 72,308 for the first quarter of 1998.
NOTE 6 - STATEMENTS OF CASH FLOWS
During the three months ended March 31, 1999 and 1998, Trustmark paid
income taxes approximating $2.7 million and $1.5 million, respectively. Interest
paid on deposit liabilities and other borrowings approximated $48.9 million for
the first quarter of 1999 and $44.5 million for the first quarter of 1998. For
the three months ended March 31, 1999 and 1998, noncash transfers from loans to
foreclosed properties were $726 thousand and $346 thousand, respectively.
NOTE 7 - RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The adoption of this statement will not
have a material impact on the Corporation's consolidated financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities" and will affect
accounting and reporting standards for classifying securitized mortgage loans
held for sale. The adoption of this statement during the first quarter of 1999
did not have a material impact on the Corporation's consolidated financial
statements.
NOTE 8- COMPREHENSIVE INCOME
Comprehensive income is the change in equity during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. For Trustmark, changes in
comprehensive income consist entirely of changes in unrealized holding gains and
losses on securities available for sale. The following table reflects the
calculation of comprehensive income for Trustmark for the three months ended
March 31, 1999 and 1998, respectively ($ in thousands):
Three Months Ended March 31,
----------------------------
1999 1998
----------- ---------
Net income per consolidated statements of income $24,126 $19,625
Net change in unrealized holding gains/(losses) on
securities available for sale, net of tax (4,079) 317
----------- ---------
Comprehensive income $20,047 $19,942
=========== =========
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 22.9% to $24.1 million for the first
quarter of 1999 compared with $19.6 million in the same period in 1998. Basic
and diluted earnings per share for the first quarter 1999 were $0.33 compared
with $0.27 in the first quarter 1998. Diversified loan growth along with
excellent growth in fee income produced record earnings for the quarter.
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 the first quarter of 1999 increased to 1.51% compared with 1.43% for
the same period in 1998. The return on average equity also experienced growth
and reached 15.36% for the quarter ended March 31, 1999, compared with 13.38%
for the same period in 1998. Trustmark's efficiency ratio for the first quarter
1999 decreased to 52.34% from 56.3% in the first quarter of 1998.
At March 31, 1999, total loans were $3.7 billion, an increase of 1.0%
from year end 1998. Total assets were $6.5 billion at March 31, 1999, a 2.8%
increase from year end 1998. Total deposits at March 31, 1999, were $4.0 billion
compared with $3.9 billion at December 31, 1998. Shareholders' equity was $651
million at March 31, 1999, a slight decrease from December 31, 1998 and was the
result of a share repurchase program that began in November 1998.
BUSINESS COMBINATIONS
Management is continually evaluating new markets in which to expand and
provide its financial services. On April 9, 1999, Trustmark completed its
acquisition of the Dan Bottrell Agency, Inc. (Bottrell), an independent
insurance agency with approximately $9 million in total assets located in
Jackson, Mississippi. Trustmark issued approximately 872 thousand shares in
exchange for all of the issued and outstanding common stock of Bottrell. This
transaction will be accounted for as a purchase business combination.
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. 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 monthly 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
March 31, 1999 ($ in thousands):
Interest Sensitive Within
-----------------------------
90 days One Year
----------- -----------
Total rate sensitive assets $1,952,213 $2,817,984
Total rate sensitive liabilities 2,438,140 3,529,917
----------- -----------
Net gap ($485,927) ($711,933)
============ ============
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.
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 March 31, 1999,
Trustmark's exposure under commitments to sell mortgages is immaterial.
Liquidity
Trustmark's goal is to maintain an adequate liquidity position to
compensate for balance sheet fluctuations and to provide funds for growth. The
Asset/Liability Committee establishes guidelines by which the current liquidity
position is monitored 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 March 31, 1999 were $6.018
billion, or 92.14% of total assets, compared with $5.835 billion, or 91.82% of
total assets for December 31, 1998, an increase of $183 million, or 3.1%, and is
the result of growth in all major categories.
Loans
Loans, the largest category of earning assets for Trustmark, produce the
highest level of interest income. At March 31, 1999, total loans were $3.738
billion, an increase of $35.3 million, or 1.0%, from the $3.702 billion reported
at December 31, 1998. At March 31, 1999, loans were 62.1% of Trustmark's earning
assets compared with 63.4% at December 31, 1998. Loan growth was diversified
between commercial, consumer and home mortgage lending.
Trustmark's lending policies have produced consistently strong asset
quality. Asset quality in the financial services industry is measured by the
level of nonperforming assets which include nonperforming loans, consisting of
nonaccrual and restructured loans, and other real estate. Trustmark's
nonperforming assets at March 31, 1999 and December 31, 1998 are shown in the
following table ($ in thousands):
3/31/99 12/31/98
-------- --------
Nonaccrual and restructured loans $13,669 $13,253
Other real estate (ORE) 2,047 1,859
-------- --------
Total nonperforming assets $15,716 $15,112
======== ========
Accruing loans past due 90 days or more $1,588 $2,431
======== ========
Nonperforming assets/total loans and ORE 0.42% 0.41%
======== ========
As indicated in the table above, at March 31, 1999, the level of
nonperforming assets has remained steady when compared to December 31, 1998 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 March 31, 1999, 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 March 31,
1999, the allowance for loan losses was $66.2 million, representing 1.77% of
total loans outstanding compared with an allowance for loan losses of $66.2
million at December 31, 1998, representing 1.79% of total loans outstanding.
Net charge-offs were $2.0 million or 0.21% of average loans for the
quarter ended March 31, 1999, compared with $799 thousand or 0.11% of average
loans for first quarter 1998. Trustmark's level of net charge-offs to average
loans continues to compare favorably to its peer group.
Securities
The securities portfolio is utilized to provide an 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 March 31, 1999, securities available for sale
(AFS), with a carrying value of $769.2 million, and securities held to maturity
(HTM), with a carrying value of $1.244 billion, combined to create a securities
portfolio totaling $2.013 billion, an increase of $66.7 million or 3.4% from
December 31, 1998. As a percentage of earning assets, the securities portfolio
increased from 33.4% at December 31, 1998 to 33.5% at March 31, 1999.
Asset quality of the securities portfolio is strong as evidenced by the
investment of over 86% 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 March 31, 1999, securities AFS had a carrying value of $769.2 million
and an amortized cost of $748.2 million. This compares with a carrying value of
$775.0 million and an amortized cost of $747.4 million at December 31, 1998. As
a percentage of the securities portfolio, securities AFS decreased from 39.8% at
December 31, 1998 to 38.2% at March 31, 1999. At March 31, 1999, gross
unrealized gains were $21.9 million on securities AFS while gross unrealized
losses were $875 thousand. Net unrealized gains are shown in shareholders'
equity as accumulated other comprehensive income, net of taxes and equaled $13.0
million at March 31, 1999.
The carrying value of securities HTM was $1.244 billion at March 31,
1999 compared with $1.172 billion at year end 1998. The fair value of HTM
securities at March 31, 1999 was $1.260 billion compared with $1.193 billion at
year end 1998. Gross unrealized gains were $17.2 million and gross unrealized
losses were $956 thousand on securities HTM at March 31, 1999.
Other Earning Assets
Federal funds sold and securities purchased under reverse repurchase
agreements were $267.2 million at March 31, 1999, an increase of $81.6 million
when compared with year end 1998. 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
$3.969 billion at March 31, 1999, an increase of $22.2 million over year end
1998.
As a component of average deposits, average noninterest-bearing deposits
decreased to 22.5% in the first quarter of 1999 compared with 23.2% for the
fourth quarter of 1998. At the same time, average interest-bearing demand
deposits increased to 19.6% of average deposits during the first quarter of 1999
from 19.1% in the prior quarter, average savings deposits increased to 17.7%
from 17.3% and average time deposits decreased to 40.2% of average deposits from
40.5% in the prior quarter.
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 in 1999 and 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. Short-term borrowings which contributed additional funds during
the first quarter of 1999 include federal funds purchased, an increase of $123.1
million when compared with year end 1998 and securities sold under repurchase
agreements, an increase of $8.1 million from year end 1998. At March 31, 1999,
the balance of the treasury tax and loan note option account was $44.7 million
compared with $33.1 million at December 31, 1998.
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
At March 31, 1999, Trustmark had shareholders' equity of $651.0 million
a slight decrease when compared with year end 1998. The shareholders' equity to
assets ratio was 9.97% at March 31, 1999 compared with 10.26% at December 31,
1998.
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. Through March 31, 1999, Trustmark had purchased
approximately 875 thousand shares including approximately 633 thousand during
the first quarter of 1999. The repurchase program, which is subject to market
conditions and management discretion, has been implemented through open market
purchases or privately negotiated transactions.
Cash dividends paid during the first quarter of 1999 totaled $7.6
million, an increase of $1.6 million or 25.9% from $6.0 million paid during the
same period in 1998. The payout ratio of cash dividends paid to net income was
31.82% in the first quarter of 1999 and 30.56% in the first quarter of 1998. The
first quarter dividend of $0.105 per share was 27.3% higher than the $0.0825 per
share paid in the first quarter of 1998. Trustmark's book value at March 31,
1999 was $9.05, an increase of 6.7% from $8.48 one year earlier.
Regulatory - Risk Based Capital
Trustmark and Trustmark National Bank (Bank) are subject to minimum
capital requirements which are administered by various Federal regulatory
agencies. These capital requirements, as defined by Federal guidelines, involve
quantitative and qualitative measures of assets, liabilities and certain
off-balance sheet instruments. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements of both Trustmark and the Bank.
Management believes, as of March 31, 1999, that Trustmark and the Bank
meet all capital adequacy requirements to which they are subject. At March 31,
1999, the most recent notification from the Office of the Comptroller (OCC)
categorized the Bank as well-capitalized. To be categorized in this manner, the
Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios (defined in applicable regulations) as set forth in the table
below. There are no significant conditions or events that have occurred since
the OCC's notification that Management believes have affected the Bank's present
classification.
Actual and minimum regulatory capital amounts and ratios at March 31,
1999, for Trustmark and the Bank are as follows ($ in thousands):
Actual Minimum Regulatory
Regulatory Capital Capital Required
--------------------------- -------------------------
Amount Ratio Amount Ratio
----------- ------------ ----------- ----------
Total Capital (to Risk Weighted Assets)
Trustmark Corporation $677,080 17.30% $313,035 8.00%
Trustmark National Bank $662,722 16.99% $312,007 8.00%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation $623,196 15.93% $156,518 4.00%
Trustmark National Bank $613,756 15.74% $156,004 4.00%
Tier 1 Capital (to Average Assets)
Trustmark Corporation $623,196 9.64% $258,554 4.00%
Trustmark National Bank $613,756 9.51% $258,213 4.00%
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 the first quarter of 1999, the level of NII grew by $7.0 million,
or 13.0%, when compared with the first quarter of 1998. NII was positively
impacted during 1999 by the substantial growth in earning assets which more than
offset growth in interest-bearing liabilities.
Average earning assets increased 16.6% during the first quarter of 1999
primarily fueled by a 22.7% increase in average loans when compared with the
same period in the prior year. The combination of these factors resulted in
interest income increasing by $10.6 million, or 10.7%, during the first three
months of 1999 when compared to the same period in 1998. The composition of
average interest-bearing liabilities has continued to change as Trustmark seeks
additional funding sources to support the substantial growth of earning assets.
Average interest-bearing liabilities increased by 19.6% during the quarter of
1999 over the first quarter of 1998 primarily from growth in federal funds
purchased, securities sold under repurchase agreements and short-term
borrowings. Interest expense for the first quarter of 1999 increased $3.6
million, or 8.0% over the same period in 1998, as a result of these factors.
The table below illustrates the changes in the net interest margin as a
percentage of average earning assets for the periods shown:
Quarter Ended March 31,
-----------------------
1999 1998
-------- --------
Yield on interest-earning assets-FTE 7.59% 7.98%
Rate on interest-bearing liabilities 3.30% 3.57%
-------- --------
Net interest margin-FTE 4.29% 4.41%
======== ========
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 the first quarter of 1999, Trustmark's provision for loan
losses was $2.0 million compared with $799 thousand for the same period in 1998.
The provision to average loans was 0.21% for the first quarter of 1999 compared
with 0.11% for the first quarter of 1998. 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 the first quarter
of 1999, as noninterest income increased $3.9 million, or 20.0%, when compared
with the first quarter of 1998. The growth in noninterest income was well
diversified between investment and insurance services, mortgage services and
substantial growth in the number of new checking accounts.
The largest single category of noninterest income, service charges on
deposit accounts, grew by $1.9 million, or 27.5%, when the first quarter of 1999
is compared with the same period in 1998. Through the first quarter of 1999,
Trustmark was continuing the implementation of its new customer-focused sales
process named Pinnacle. As a result of Pinnacle, the number of accounts has
grown significantly.
Other account charges, fees and commissions, increased $1.1 million, or
21.6%, when the first three months of 1999 is compared with the same period in
1998. Major contributors to the growth in this category during these periods
were revenues generated from cash management and insurance services, credit
cards and a variety of other products and services.
Mortgage servicing fees grew by $123 thousand during the first quarter
of 1999 when compared to the first quarter of 1998. Trustmark continues 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 March 31, 1999, Trustmark serviced approximately
$3.5 billion in mortgages.
Trust service income increased by $303 thousand, or 9.1%, during the
first quarter of 1999 when compared to the same period in 1998 as Trustmark
continues to be one of the largest providers of asset management services in
Mississippi. At March 31, 1999, Trustmark had trust accounts with assets under
administration with fair values of approximately $5.5 billion.
Other income increased $470 thousand, or 56.1%, when comparing the first
quarter of 1999 to the same period in 1998 primarily from gains on the sale of
loans.
NONINTEREST EXPENSE
Trustmark continues to provide quality service to customers within the
context of economic discipline. Total noninterest expense increased $2.9
million, or 6.9%, during the first quarter of 1999 compared with the first
quarter of 1998.
Salaries and employee benefits continue to comprise the largest portion
of noninterest expenses and increased $1.8 million, or 8.3%, when comparing the
first quarter of 1999 with the first quarter of 1998. The number of full-time
equivalent employees totaled 2,255 at March 31, 1999 and 2,284 at March 31,
1998.
Occupancy expense increased $194 thousand, or 8.5%, in the first three
months of 1999 as compared to the same period in 1998. This increase is the
result of higher repair and maintenance costs. Equipment expenses have shown an
increase of $345 thousand in the first quarter of 1999 compared to the same
period in 1998. This increase is the result of higher costs related to
maintenance contracts, depreciation and Year 2000 expenses.
Services and fees decreased $175 thousand, or 2.7%, when comparing the
first quarter of 1999 to the same period in 1998. This decrease is primarily the
result of a decline in legal expenses.
The amortization of intangible assets increased $163 thousand, or 6.9%,
when comparing the first quarter of 1999 with the first quarter of 1998. Growth
in the mortgage servicing portfolio was 13.3% during the first quarter of 1999
compared with the same period in 1998 and has provided a larger base of mortgage
servicing rights that began amortization.
Increased expenses related to the mortgage servicing portfolio comprised
the major portion of the $564 thousand increase in other expenses during the
first three months of 1999 over 1998. Operational expenses also contributed to
this increase.
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 quarter ended March 31, 1999, Trustmark's combined effective tax
rate was 35.6% compared with 35.9% for the same period in 1998. The effective
rate shows little change between the two periods due to the fact that there was
no significant variance between tax exempt interest and other permanent
differences.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. The adoption of this statement during the first quarter of 1999
did not have a material impact on the Corporation'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 March 31, 1999.
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 remediation and validation process for all mission-
critical systems and services has been achieved. All of these systems and
services, which includes our core banking systems, have already been placed in
production as Year 2000 ready. Throughout the remainder of 1999, we will be
performing additional validation testing and reconfirming the Year 2000
readiness of the bank's technical systems. 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 $5.8 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.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments for the quarter ended March 31, 1999
other than those disclosed in the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
1. The following exhibits are included herein:
(27) Financial Data Schedule
2. On January 12, 1999, Trustmark filed a Form 8-K disclosing that through
December 31, 1998, Trustmark had purchased approximately 242,000 shares of
Trustmark Corporation common stock as a result of the repurchase program which
was authorized by its board of directors on November 10, 1998.
On February 9,1999, Trustmark filed a Form 8-K announcing the retirement
of Trustmark National Bank Chairman of the Board Frank Day. In addition,
Trustmark announced that Ted H. Kendall, III was elected by the board of
directors to serve as Chairman of the Board of the Bank.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRUSTMARK CORPORATION
BY: /s/ Richard G. Hickson BY: /s/ Gerard R. Host
----------------------------- --------------------
Richard G. Hickson Gerard R. Host
President & Chief Treasurer (Chief
Executive Officer Financial and Accounting
Officer)
DATE: May 13, 1999 DATE: May 13, 1999
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------
27 Financial Data Schedule