1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER 0-3683
TRUSTMARK CORPORATION
(Exact name of Registrant as specified in its charter)
MISSISSIPPI 64-0471500
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
248 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (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 issuer's classes of
common stock as of November 10, 1994:
COMMON STOCK, NO PAR VALUE 34,910,683
Class Number of shares
2
TRUSTMARK CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1994 and December 31, 1993
Consolidated Statements of Income
Three and Nine Months Ended
September 30, 1994 and 1993
Consolidated Statements of
Cash Flows - Nine Months
Ended September 30, 1994 and 1993
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
SIGNATURES
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUSTMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30,
1994 DECEMBER 31,
(UNAUDITED) 1993*
-------------- --------------
ASSETS
Cash and due from banks (noninterest-bearing) $ 283,783 $ 238,433
Federal funds sold and securities purchased
under reverse repurchase agreements 85,598 91,506
Trading account securities 112 2,555
Securities:
Available for sale, at fair value 493,775
At lower of aggregate cost or fair value (fair value: $84,346) 84,278
Held to maturity (fair value: $1,296,369-1994;
$1,838,485-1993) 1,350,164 1,796,828
Loans 2,175,958 2,116,938
Less: Unearned income 22,127 33,112
Allowance for possible loan losses 62,636 62,650
-------------- --------------
Net loans 2,091,195 2,021,176
Premises and equipment, net 59,594 58,749
Accrued interest receivable 36,419 34,982
Intangible assets 39,153 40,426
Other assets 80,718 63,093
-------------- --------------
TOTAL ASSETS $ 4,520,511 $ 4,432,026
============== ==============
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 659,255 $ 676,601
Interest-bearing deposits 2,510,364 2,512,604
-------------- --------------
Total deposits 3,169,619 3,189,205
Federal funds purchased 192,241 84,295
Securities sold under repurchase agreements 730,782 760,840
Accrued expenses and other liabilities 43,614 39,059
-------------- --------------
TOTAL LIABILITIES 4,136,256 4,073,399
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized, 40,000,000 shares
Issued and outstanding: 31,172,907 shares 12,989 12,989
Surplus 220,888 220,888
Retained earnings 155,782 124,750
Net unrealized loss on securities available for sale, net of tax (5,404)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 384,255 358,627
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,520,511 $ 4,432,026
============== ==============
*Derived from audited financial statements
See notes to consolidated financial statements
4
TRUSTMARK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1994 1993 1994 1993
----------- ------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 44,984 $ 42,237 $ 129,342 $ 120,761
Interest and dividends on securities:
Taxable interest and dividend income 26,572 28,656 79,448 87,169
Interest income exempt from federal
income taxes 1,563 1,809 4,786 5,475
Interest on federal funds sold and securities purchased
under reverse repurchase agreements 1,251 1,015 4,884 3,726
----------- ------------ ------------ ------------
TOTAL INTEREST INCOME 74,370 73,717 218,460 217,131
INTEREST EXPENSE
Interest on deposits 20,997 21,294 61,103 66,466
Interest on federal funds purchased and securities sold
under repurchase agreements 8,732 5,697 23,189 15,890
----------- ------------ ------------ ------------
TOTAL INTEREST EXPENSE 29,729 26,991 84,292 82,356
----------- ------------ ------------ ------------
NET INTEREST INCOME 44,641 46,726 134,168 134,775
Provision for loan losses 543 6,759 1,081 14,763
----------- ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 44,098 39,967 133,087 120,012
OTHER INCOME
Trust service income 2,086 1,984 6,479 5,935
Service charges on deposit accounts 4,498 4,623 12,893 12,739
Other account charges, fees and commissions 4,896 4,499 13,726 11,836
Securities gains 127 71 167 116
Other 285 919 1,151 2,626
----------- ------------ ------------ ------------
TOTAL OTHER INCOME 11,892 12,096 34,416 33,252
OTHER EXPENSES
Salaries 14,443 13,850 43,129 40,020
Employee benefits 2,392 2,336 7,928 7,365
Net occupancy - premises 2,063 1,977 5,797 5,276
Equipment expense 3,018 2,942 9,066 8,474
Services and fees 4,490 4,095 12,986 11,809
Other real estate expenses 64 314 287 1,774
FDIC insurance assessment 1,784 1,808 5,347 5,367
Amortization of intangible assets 1,742 2,636 5,136 6,459
Other 5,460 5,691 16,560 15,882
----------- ------------ ------------ ------------
TOTAL OTHER EXPENSES 35,456 35,649 106,236 102,426
----------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 20,534 16,414 61,267 50,838
Income taxes 7,160 3,808 20,883 14,694
----------- ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 13,374 12,606 40,384 36,144
Cumulative effect on prior years (to December 31, 1992) of
change in accounting for income taxes 1,519
----------- ------------ ------------ ------------
NET INCOME $ 13,374 $ 12,606 $ 40,384 $ 37,663
=========== ============ ============ ============
PER SHARE DATA
Income before cumulative effect of change in
accounting principle $ 0.43 $ 0.41 $ 1.30 $ 1.21
Cumulative effect on prior years (to December 31, 1992) of
change in accounting for income taxes 0.05
----------- ------------ ------------ ------------
NET INCOME PER SHARE $ 0.43 $ 0.41 $ 1.30 $ 1.26
=========== ============ ============ ============
DIVIDENDS PER SHARE $ 0.1000 $ 0.0933 $ .3000 $ .2799
=========== ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 31,172,907 30,601,252 31,172,907 29,855,460
=========== ============ ============ ============
See notes to consolidated financial statements
5
TRUSTMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1994 1993
--------- ---------
OPERATING ACTIVITIES
Net income $ 40,384 $ 37,663
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,081 14,763
Provision for depreciation and amortization 12,017 12,740
Writedowns and (gains)/losses on other real estate (7) 1,258
Amortization of security discounts (4,679) (5,368)
Gains on sales of securities (167) (116)
Other 1,150 (802)
(Increase) decrease in accrued interest receivable (1,437) 758
Increase in intangible assets (3,863) (4,035)
Increase in deferred income taxes (891) (9,939)
Increase in other assets (11,870) (2,854)
Increase (decrease) in other liabilities 4,555 (1,847)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 36,273 42,221
--------- ---------
INVESTING ACTIVITIES
Cash equivalents of acquired bank, net of cash paid 20,601
Proceeds from calls and maturities of securities available for sale 203,759
Proceeds from calls and maturities of securities carried at lower of
aggregate cost or fair value 156,137
Proceeds from calls and maturities of securities held to maturity 262,045 430,670
Proceeds from sales of securities available for sale 246,200
Proceeds from sales of securities carried at lower of aggregate
cost or fair value 59,257
Purchases of securities available for sale (245,682)
Purchases of securities carried at lower of aggregate cost or fair value (196,124)
Purchases of securities held to maturity (433,061) (569,554)
Net decrease (increase) in federal funds sold and securities
purchased under reverse repurchase agreements 5,908 (11,389)
Net increase in loans (72,163) (42,072)
Purchases of premises and equipment (7,010) (6,016)
Proceeds from sales of premises and equipment 131 214
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (39,873) (158,276)
--------- ---------
FINANCING ACTIVITIES
Net decrease in deposits (19,586) (113,259)
Net increase in federal funds purchased
and securities sold under repurchase agreements 77,888 228,604
Cash dividends (9,352) (8,412)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 48,950 106,933
--------- ---------
Increase (decrease) in cash and cash equivalents 45,350 (9,122)
Cash and cash equivalents at beginning of year 238,433 252,410
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 283,783 $ 243,288
========= =========
See notes to consolidated financial statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) In the opinion of Management, the accompanying unaudited and audited
consolidated financial statements contain all adjustments (consisting solely of
normal recurring adjustments) necessary to present fairly Trustmark
Corporation's financial position as of September 30, 1994 and December 31,
1993, the results of operations for the three and nine month periods ended
September 30, 1994 and 1993 and the cash flows for the nine month period ended
September 30, 1994 and 1993.
(2) During the first nine months of 1994, the Corporation paid approximately
$22,507,000 in income taxes and $85,522,000 in interest on deposit liabilities
and other borrowings. This compares to $22,760,000 for income taxes and
$84,060,000 for interest on deposits and other borrowings for the first nine
months of 1993.
(3) For the nine months ended September 30, 1994 and 1993, noncash transfers
from loans to foreclosed properties were $1,111,000 and $2,793,000,
respectively. On January 1, 1994, noncash transfers to securities
available-for-sale were $84,000,000 from securities held-for-sale and
$629,000,000 from securities held-to-maturity.
(4) On January 1, 1994 the Corporation adopted SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." Debt securities not
classified as trading account securities or investment securities expected to
be held to maturity and all equity securities are classified as
available-for-sale securities and reported at fair value, with net unrealized
gains and losses reported, net of income tax, as a separate component of
stockholders' equity. The net unrealized loss reported in stockholders' equity
at September 30, 1994 is $5,404,000.
(5) Effective October 7, 1994, First National Financial Corporation (FNFC) of
Vicksburg, Mississippi, the parent company of First National Bank of Vicksburg,
merged with Trustmark Corporation (Corporation) in a business combination
accounted for as a pooling-of-interests. The stockholders of FNFC received
approximately 3.6 million shares of the Corporation's common stock and
approximately $1.1 million in cash in connection with the merger. There have
been no material adjustments of net assets of FNFC as a result of adopting the
Corporation's accounting policies. Had the merger taken place prior to
September 30, 1994, results of operations would have been restated as follows
($ in thousands):
7
Three Months Ended Three Months Ended
September 30, 1994 September 30, 1993
------------------ ------------------
Interest income
(as reported) $74,370 $73,717
Interest income
of acquired bank 4,889 5,058
------- -------
Pro forma interest income $79,259 $78,775
======= =======
Net income
(as reported) $13,374 $12,606
Net income
of acquired bank 566 641
------- -------
Pro forma net income $13,940 $13,247
======= =======
Pro forma earnings
per share $ .40 $ .39
======= =======
Nine Months Ended Nine Months Ended
September 30, 1994 September 30, 1993
------------------ ------------------
Interest income
(as reported) $218,460 $217,131
Interest income
of acquired bank 14,895 15,225
-------- --------
Pro forma interest income $233,355 $232,356
======== ========
Net income
(as reported) $ 40,384 $ 37,663
Net income
of acquired bank 2,072 2,195
-------- --------
Pro forma net income $ 42,456 $ 39,858
======== ========
Pro forma earnings
per share $ 1.22 $ 1.19
======== ========
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated statements found elsewhere in this report.
ACQUISITIONS
Effective October 7, 1994, First National Financial Corporation (FNFC) of
Vicksburg, Mississippi, the parent company of First National Bank of Vicksburg,
merged with Trustmark Corporation (Corporation) in a business combination
accounted for as a pooling-of-interests. The stockholders of FNFC received
approximately 3.6 million shares of the Corporation's common stock and
approximately $1.1 million in cash in connection with the merger. At September
30, 1994, FNFC had total consolidated assets of approximately $278 million and
total consolidated deposits of approximately $243 million. With this
acquisition, Trustmark Corporation now has 165 total locations serving 44
cities in Mississippi.
After the close of business on July 31, 1993, UniSouth Banking Corporation
(UniSouth), of Columbus, Mississippi, was merged with Trustmark National Bank.
This business combination has been accounted for by the purchase method of
accounting. Accordingly, the consolidated statements of income and cash flows
for the three and nine month periods ended September 30, 1993 include the
effect of this merger only since its consummation.
EARNINGS SUMMARY
Trustmark Corporation reported net income for the third quarter of 1994 of
$13.4 million or $.43 per share compared to $12.6 million or $.41 per share for
the same time period in 1993. Earnings for the nine months ended September 30,
1994, were $40.4 million or $1.30 per share compared to $37.7 million or $1.26
per share for the same time period in 1993. The Corporation was able to
increase its profitability as a result of a substantially lower provision for
loan losses combined with modest growth in noninterest income and effective
management of noninterest expenses. It should also be noted that net income
for the nine months ended September 30, 1993 was positively impacted by the
adoption of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," as of January 1, 1993. The cumulative effect of
this change in accounting principle was to increase net income by $1.5 million
or $.05 per share.
The return on average assets (ROA) for the third quarter of 1994 was 1.19%
compared to 1.15% for the same time period in 1993. For the nine months ended
September 30, 1994, ROA was 1.20% compared to 1.19% for the first nine months
of 1993. The return on average equity (ROE) was 13.76% for the third quarter
of 1994 compared to 14.84% for the same time period in 1993. For the nine
months ended September 30, 1994, ROE was 14.39% compared to 15.91% for the
first nine months of 1993.
ASSET/LIABILITY MANAGEMENT AND LIQUIDITY
A key objective of asset/liability management is to manage the
Corporation's assets and liabilities to optimize and maintain the
9
spread between interest earned and interest paid while ensuring an adequate
liquidity position. The Asset/Liability Committee monitors and adjusts the
Corporation's exposure to interest rates, within specific policy guidelines,
based on its view of current and expected market conditions. The primary tool
utilized by this committee is an asset/liability modeling system which is used
to evaluate exposure to interest rate risk and to project earnings and balance
sheet growth. Each month, the committee reviews the output of this model with
respect to the estimated impact of various interest rate scenarios on net
interest income and its compliance with policy guidelines. At September 30,
1994, the Corporation's net interest income forecasts for the six month, twelve
month and second twelve month periods were within policy guidelines.
Another tool used to monitor the Corporation's overall interest rate
sensitivity is a gap analysis. The table below represents the Corporation's 90
day and one year gap position as of September 30, 1994 ($ in thousands):
Interest Sensitive Within
90 days One Year
---------- ----------
Total rate sensitive assets $ 989,416 $1,573,436
Total rate sensitive liabilities 1,793,927 2,338,154
---------- ----------
Net gap $ (804,511) $ (764,718)
========== ==========
The analysis indicates that the Corporation is in a negative gap position
over the next three month and twelve month time horizons. Management believes
that it has adequate flexibility to alter the overall rate sensitivity
structure as necessary to minimize exposure to changes in interest rates. As
such, the Corporation's negative gap position has decreased by approximately
8.1% in the three month time horizon and by approximately 11.5% in the twelve
month time horizon since December 31, 1993 in response to rising interest rates
and uncertain market conditions.
The Asset/Liability Committee is also responsible for maintaining
guidelines that provide for an adequate liquidity position to compensate for
expected and unexpected balance sheet fluctuations and to provide funds for
growth. Historically, the Corporation has maintained its liquidity from
deposits, excess funds purchased from downstream correspondent banks and
repurchase agreements with larger customers.
EARNING ASSETS
At September 30, 1994, earning assets were $4.083 billion compared to
$4.059 billion at December 31, 1993. The decline in securities experienced
during the first nine months of 1994 was more than offset by an increase in
loans with federal funds sold and securities purchased under reverse repurchase
agreements showing very little change since year end.
Total loans increased by $70.0 million during the first nine months of
1994. Commercial and industrial loans grew by $45.3 million during the first
nine months of 1994 and have benefited from the improving economic atmosphere
within the state. The most
10
significant increases have come from the public utility, construction and
services industries. In addition, consumer loans have grown by $46.4 million
primarily from the area of automobile loans. The most substantial decrease in
the loan portfolio was seen in real estate loans which declined by $35.9
million. This decline can be traced to two major factors. First, interest
rates on mortgage loans have been rapidly rising during the first three
quarters of 1994, slowing the volume of mortgages refinanced. Second, the
Corporation continues to be committed to the growth of its mortgage servicing
portfolio. The Corporation intends to package and sell substantially all
qualified mortgage loans that the Corporation has originated or purchased while
retaining the right to service these mortgages. At September 30, 1994, the
Corporation's volume of residential mortgage loan servicing was approximately
$2.02 billion compared to $1.68 billion at the end of 1993. This 20.2%
increase can be attributed to the strong growth of loans purchased in the
correspondent market and the utilization of loans originated within the
Corporation.
The Corporation's emphasis on credit quality has produced a healthy loan
portfolio and a conservative approach to providing for potential loan losses.
This emphasis on credit quality is reflected in Management's ongoing support of
credit administration systems that monitor policy compliance and adequacy of
supporting loan documentation as well as those designed to identify and
strengthen actual and potential credit problems.
The allowance for loan losses is maintained at a level which 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. The adequacy of
the allowance is reviewed on a quarterly basis by using the criteria specified
in revised Comptroller of the Currency Banking Circular 201 as well as guidance
provided in the Interagency Policy Statement received in January 1994. Each
review includes analyses of historical loss experience, trends in portfolio
volume and composition, ratio analysis related to overall credit quality,
consideration of current economic conditions, estimated future losses in
significant criticized loans, changes in lending policies and procedures and
other pertinent information. This review is presented to the Credit Policy
Committee with subsequent review and approval by the Board of Directors.
The allowance for loan losses has remained at substantially the same level
as December 31, 1993. The allowance currently approximates 2.91% of total
loans outstanding and provides the Corporation with a more than adequate
reserve coverage of nonperforming loans. Because of the imprecision and
subjectivity inherent in most estimates of expected credit losses, Management
will continue to take a prudent approach in the evaluation of the allowance for
loan losses.
Net charge-offs totaled $1.095 million for the first nine months of 1994
which resulted in an annualized net charge-off ratio of .07%. The current level
of net charge-offs for the Corporation remains well below that of banks within
its peer group.
A measure of asset quality in the financial institutions
11
industry is the level of nonperforming assets. Nonperforming assets include
nonperforming loans, consisting of nonaccrual and restructured loans, and other
real estate. See the table below for more details ($ in thousands):
9/30/94 12/31/93
------- --------
Loans accounted for on a nonaccrual basis $10,162 $ 9,784
Other real estate 3,384 3,961
Loans past due 90 days or more and still accruing 936 1,217
------- -------
Total nonperforming assets and past due loans $14,482 $14,962
======= =======
Asset quality of the Corporation is considered to be very good. The
overall volume of classified assets, which is comprised of classified loans and
other real estate owned, remains at approximately the same level reported at
year end and is favorable. As the table above illustrates, overall
nonperforming assets and past due loans remain well-controlled and continue to
compare favorably to peer levels. As of September 30, 1994, the Corporation
knows of no additional loans, other than those identified above, that
Management has serious doubts as to the ability of such borrowers to repay
principal and interest.
The securities portfolio is utilized to provide a quality investment
alternative for available funds and to provide a stable source of interest
income. The overall balance of the securities portfolio declined by $37.2
million during the first nine months of 1994. This is partially attributable
to the Corporation's decision to utilize this liquidity to reduce its overnight
borrowing position and to provide funds for loan growth. Within the securities
portfolio, the available-for-sale portfolio has been reduced since the end of
the first quarter of 1994 due to instability in the bond market. Reinvestment
activity has primarily been in held-to-maturity securities with higher yields
with the balance going to overnight funds. During the third quarter, the
Corporation decreased the size of its short-term investment portfolio as it
sought funds for loan growth and the reduction of its overnight borrowing
needs. As necessary, this portfolio is utilized as an alternative to the
overnight funds market and has contributed an additional $644 thousand in
interest income when compared to investments in the overnight funds market.
The short-term portfolio will continue to play a vital role in maintaining the
Corporation's liquidity and profitability.
The latest comparisons of the tax equivalent yield of the investment
portfolio show the Corporation remaining in the upper quartile when compared to
its peer group. This has been accomplished while maintaining the quality of
the portfolio.
On January 1, 1994, the Corporation adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under this new accounting
standard, debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as held-to-maturity and reported at
amortized cost. Debt and equity securities which are not classified as
held-to-
12
maturity or as trading securities are classified as available-for-sale and
reported at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity, net of income taxes. At September 30, 1994,
the carrying values and fair values of securities classified as
available-for-sale were $502.5 million and $493.8 million, respectively. This
resulted in an unrecognized loss, net of tax, of approximately $5.40 million as
a separate component of stockholders' equity.
For the first nine months of 1994, realized gains were $4.091 million on
securities available-for-sale while realized losses totaled $3.924 million
resulting in net security gains of $167 thousand. Gross unrealized gains
approximated $3.8 million while gross unrealized losses approximated $12.6
million on these securities. There were no realized gains or losses on the sale
of securities classified as held-to-maturity. Gross unrealized gains
approximated $6.1 million and gross unrealized losses approximated $59.9
million on securities classified as held-to-maturity at September 30, 1994.
Federal funds sold and securities purchased under reverse repurchase
agreements decreased by $5.9 million when compared to the end of 1993. Market
conditions and liquidity needs are the driving forces behind the utilization of
federal funds sold and securities purchased under reverse repurchase agreements
as a short-term investment product.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits provide the Corporation with its primary source of funds. Total
deposits at September 30, 1994 decreased by $19.6 million when compared to
December 31, 1993. Interest-bearing deposits decreased by $2.2 million while
noninterest-bearing deposits fell by $17.4 million during that time period.
Certificates of deposit have shown little change overall since year end while
balances in short-term savings products have dropped. In order to retain its
core deposit customers, the Corporation has recently begun to offer a
certificate of deposit product that allows the customer the option to change to
a higher market rate one time during the life of the instrument.
Federal funds purchased increased $57.9 million when compared to December
31, 1993. This can be traced to an increase in funds purchased from
correspondent banks. With current market conditions uncertain, the Corporation
plans to reduce its position in federal funds purchased with excess funds from
maturing investment securities.
Securities sold under repurchase agreements fell by $30.1 million during
the first nine months of 1994. With interest rates on the rise, some customers
who had purchased securities sold under repurchase agreements have sought
alternative products that would provide additional yield. However, this
remains a very popular alternative to traditional deposit products.
STOCKHOLDERS' EQUITY
The Corporation has always placed a great emphasis on maintaining its
strong capital base. The Corporation's Management and Board of Directors
continually evaluate business decisions that
13
may have an impact on the level of stockholders' equity. It is their goal that
the Corporation maintain a "well capitalized" equity position. Based on the
capital levels defined by banking regulators, a "well capitalized" institution
is one that has at least a 10% total risk-based capital ratio, a 6% Tier 1
risk-based capital ratio and a 5% Tier 1 leverage ratio. The Corporation's
solid capital base is reflected in its regulatory capital ratios. The table
below illustrates these ratios at September 30, 1994 ($ in thousands):
Tier 1 Capital $378,636
Tier 2 Capital 31,770
--------
Total Qualifying Capital $410,406
========
Total Risk Weighted Assets $2,510,731
==========
Tier 1/Risk Weighted Assets 15.08%
Tier 2/Risk Weighted Assets 1.27%
-----
Total Qualifying Capital/Risk Weighted Assets 16.35%
=====
Leverage Ratio 8.48%
=====
As shown in the table above, the Corporation's capital ratios surpass the
minimum requirements of 4% for the Tier 1 capital ratio and 8% for the total
risk-based capital ratio. The Tier 1 leverage ratio generally must exceed 3%
and is driven by evaluation and discretion of the regulators.
At September 30, 1994, the Corporation had stockholders' equity of $384.3
million which contained a net unrealized loss on securities available-for-sale,
net of taxes, of $5.40 million. Based on its dividend payout ratio of 23.1%,
the Corporation retained 76.9% of its earnings for the nine months ended
September 30, 1994, generating an internal capital growth rate of 11.1%.
Dividends for the third quarter of 1994 remained at $.10 per share resulting in
an annual dividend rate of $.40 per share. The Corporation has recently
announced that it will raise its quarterly dividend from $.10 per share to
$.1075 cents per share, payable on December 15th, to shareholders of record on
December 1st. This action raises the annual rate to $.43 per share. Book value
for the Corporation's common stock was $12.33 at September 30, 1994, compared
to the closing market price of $19.50.
NET INTEREST INCOME
Net interest income is an effective measurement of how well Management has
managed the Corporation's interest rate sensitive assets and liabilities. Net
interest income for the nine months ended September 30, 1994 was at
approximately the same level as the same time period in 1993. The Corporation
has been able to offset
14
increased interest expenses from federal funds purchased and securities
purchased under reverse repurchase agreements with an increase in interest and
fees earned from loans.
When compared to the first nine months of 1993, average earning assets
rose 5.7% during 1994. During the same time period, the yield on average
earning assets declined by 37 basis points. This combination resulted in
interest income generated by earning assets increasing $1.3 million for the
nine months ended September 30, 1994 when compared to the same time period in
1993. Declines in interest earned from securities were more than offset by the
increase in interest and fees on loans and federal funds sold and securities
purchased under reverse repurchase agreements. Recent increases in the prime
rate have had a favorable impact on interest and fees earned on loans during
1994.
Average interest-bearing liabilities rose 3.3% for the first nine months
of 1994 with the rate paid declining by only 3 basis points when compared to
the same time period in 1993. As a result, interest expense generated by
interest-bearing liabilities increased by $1.9 million when compared to the
first nine months of 1993. An increase in both the average balance and rate
paid on federal funds purchased and securities sold under repurchase agreements
more than offset a decline in the average balances of interest-bearing deposits
combined with an increased rate paid.
The table below illustrates the changes in net interest margin as a
percentage of average earning assets for the first nine months of 1994 and
1993:
Nine months ended
-----------------
9/30/94 9/30/93 Change
------- ------- ------
Yield on interest-earning assets-FTE 7.23% 7.60% (.37)%
Rate on interest-bearing liabilities 2.74% 2.83% (.09)%
---- ---- -----
Net interest margin-FTE 4.49% 4.77% (.28)%
==== ==== =====
The fully taxable equivalent (FTE) yield on tax exempt income has been computed
based on a 35% federal marginal tax rate for both 1994 and 1993. For the first
nine months of 1994, the Corporation experienced compression in its net
interest margin due to the rates paid on interest-bearing liabilities declining
slower than the decline of yields on earning assets. The Corporation will
continue to take the necessary precautions in order to protect itself against a
rapidly changing interest rate environment.
PROVISION FOR LOAN LOSSES
Management's prudent approach to improving credit quality has contributed
significantly to the increase in earnings experienced during the first nine
months of 1994. Earnings for the nine months ended September 30, 1994 were
positively impacted by the $13.7 million decline in the Corporation's provision
for loan losses when compared to the same time period in 1993.
NONINTEREST INCOME
The Corporation stresses the importance of growth in
15
noninterest income as one of its key long-term strategies. Noninterest income
for the first nine months of 1994, excluding security gains, increased $1.1
million or 3.4% when compared to the same time period in 1993. When comparing
the third quarter of 1994 to the same time period in 1993, noninterest income
decreased $260 thousand or 2.2%. This decline is directly attributed to the
reduction in gains on sales of mortgage loans.
Trust service income increased by 9.2% when compared to the first nine
months of 1993 as Trustmark continued to be one of the largest bank providers
of asset management services in Mississippi. Year-to-date service charges have
remained at essentially the same level as 1993 as the Corporation continued to
experience marginal deposit growth. During the first nine months of 1994,
other account charges, fees and commissions became the largest component of
noninterest income. The two major contributors to the 16.0% increase in this
category were fees generated from residential mortgage servicing and ATM usage.
Management's commitment to the continued growth of the mortgage servicing
portfolio was seen by the 41.2% increase in fees collected from servicing
mortgages during the first nine months of 1994. The Corporation's commitment to
customer service is reflected in the growth of off-premise ATM's experienced
during 1994. As a result, fees resulting from ATM usage have grown
significantly during 1994. Security gains for both 1994 and 1993 were
immaterial.
NONINTEREST EXPENSE
Another long-term strategy of the Corporation is to continue to provide
quality service to its customers within the context of economic discipline.
The utilization of the newest technological advances in the financial industry
has allowed the Corporation to provide enhanced customer service while
improving its efficiency. This has allowed the Corporation's percentage of
overhead expenses to average assets to remain substantially below that of its
peer group. Noninterest expense for the nine months ended September 30, 1994
increased $3.8 million or 3.7% when compared to the same time period in 1993.
When comparing only the third quarter of 1994 to 1993, noninterest expenses
decreased by $193 thousand or .54%. This decline is especially noteworthy
considering that expenses from both the Columbus and Tupelo branches, which
were acquired during the UniSouth acquisition, have been included for the full
three and nine month periods of 1994 while expenses for the three and nine
month periods of 1993 were included only from the acquisition date of July
31st.
Salaries and employee benefits continue to comprise the largest portion of
other expenses and have increased 4.0% during the first nine months of 1994.
As mentioned above, this increase can be primarily attributed to the additional
salary expense incurred during 1994 from the UniSouth acquisition. The number
of full-time equivalent employees totaled 2,071 at September 30, 1994, 2,072 at
December 31, 1993 and 2,075 at September 30, 1993. Personnel expense for the
Corporation remains well below that of its peer group. Renovations to
facilities purchased and leased in the UniSouth acquisition as well as the
general maintenance of existing facilities and the replacement of equipment
have
16
contributed to the $1.1 million increase in occupancy and equipment expenses
during the first nine months of 1994. Services and fees expense increased by
10.0% during the same time period due to increased expenses for communications
and advertising. Decreased write-downs were the major contributor to the 83.8%
decrease in other real estate expenses during the first nine months of 1994.
The Corporation's volume of other real estate compares very favorably to that
of its peer group. FDIC insurance expense remained at essentially the same
level as that of the prior year. The amortization of intangible assets has
decreased 20.5% when comparing the first nine months of 1994 to the same time
period last year. Increased prepayments of mortgages serviced resulted in the
accelerated amortization of mortgage servicing rights during 1993 which has
more than offset the amortization of intangible assets associated with the
UniSouth acquisition that began during the third quarter of 1993. In addition,
the amortization of intangible assets associated with the purchase of the
Canton Exchange Bank in 1983 was completed during the fourth quarter of 1993.
Other expenses increased 4.3% during the first nine months of 1994 primarily
due to increased expenses related to the purchase and sale of loans in the
mortgage servicing portfolio, credit cards and loan collection.
INCOME TAXES
For the nine months ended September 30, 1994, the Corporation's effective
tax rate was 34% compared to 26% for the same time period in 1993. This
increase in effective tax rate is substantially due to three factors. First,
the Corporation adopted SFAS No. 109, "Accounting for Income Taxes," during
the first quarter of 1993. The adoption of this pronouncement changed the
Corporation's method of accounting for income taxes from a deferred method to
an asset and liability method. This change in accounting method caused a
one-time reduction in income tax expense in the amount of $1.5 million, which
reduced the Corporation's effective tax rate for the nine months ended
September 30,1993 by 3%. Second, the Revenue Reconciliation Act of 1993
increased the statutory tax rate by 1% in August of 1993. A result of this
change was an increase in the value of the Corporation's deferred tax asset
causing another one-time reduction in income tax expense. This change reduced
the Corporation's effective tax rate by 1.2% for the nine months ended
September 30, 1993. Finally, for the period ended September 30, 1994,
tax-exempt interest income declined both in real terms and as a percentage of
net income when compared to the nine months ended September 30, 1993.
OTHER REGULATORY MATTERS
In June 1993, the issuance of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," addressed how creditors should establish allowances for
credit losses on individual loans determined to be impaired. This standard
offers a definition of impairment and how the amount of impairment is measured.
SFAS No. 114 applies to financial statements for fiscal years beginning after
December 15, 1994. The effect of the implementation of this statement is not
expected to be material.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments for the quarter ended September 30, 1994.
ITEM 2. CHANGES IN SECURITIES
A) None
B) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
A) None
B) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A) None
B) None
C) None
D) None
ITEM 5. OTHER INFORMATION
Effective October 7, 1994, First National Financial Corporation (FNFC) of
Vicksburg, Mississippi, the parent company of First National Bank of Vicksburg,
merged with Trustmark Corporation (Corporation) in a business combination
accounted for as a pooling-of-interests. The stockholders of FNFC received
approximately 3.6 million shares of the Corporation's common stock and
approximately $1.1 million in cash in connection with the merger. At September
30, 1994, FNFC had total consolidated assets of approximately $278 million and
total consolidated deposits of approximately $243 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
(27) Financial Data Schedule
Form 8-K Current Report was filed on October 21, 1994, relative to Item 5
reported above.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
TRUSTMARK CORPORATION
(Registrant)
DATE: November 10, 1994 /s/ FRANK R. DAY
Frank R. Day, Chairman of the
Board, President and Chief
Executive Officer
DATE: November 10, 1994 /s/ DAVID R. CARTER
David R. Carter, Secretary-
Treasurer