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, 1995
------------------
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, 1995:
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, 1995 and December 31, 1994
Consolidated Statements of Income
Three and Nine Months Ended
September 30, 1995 and 1994
Consolidated Statements of
Cash Flows - Nine Months
Ended September 30, 1995 and 1994
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)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1995 1994*
--------------- --------------
ASSETS
Cash and due from banks (noninterest-bearing) $ 277,633 $ 280,114
Federal funds sold and securities purchased
under reverse repurchase agreements 57,750 105,731
Trading account securities 452 1,150
Securities available for sale 438,932 439,691
Securities held to maturity (fair value: $1,396,414-1995;
$1,345,614-1994) 1,398,063 1,422,660
Loans 2,583,870 2,365,683
Less: Unearned income 10,629 18,118
Allowance for loan losses 61,450 65,014
------------- ------------
Net loans 2,511,791 2,282,551
Premises and equipment, net 61,547 64,078
Accrued interest receivable 35,301 37,200
Intangible assets 37,668 38,074
Other assets 85,997 92,116
------------- ------------
TOTAL ASSETS $ 4,905,134 $ 4,763,365
============= ============
LIABILITIES
Deposits:
Noninterest-bearing $ 721,999 $ 732,635
Interest-bearing 2,760,790 2,716,594
------------- ------------
Total deposits 3,482,789 3,449,229
Federal funds purchased 96,727 160,140
Securities sold under repurchase agreements 809,298 690,898
Accrued expenses and other liabilities 51,490 42,088
------------- ------------
TOTAL LIABILITIES 4,440,304 4,342,355
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized, 100,000,000 shares
Issued and outstanding: 34,910,683 shares 14,546 14,546
Surplus 244,578 244,578
Retained earnings 203,322 169,857
Net unrealized gain (loss) on securities available for sale, net of tax 2,384 (7,971)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 464,830 421,010
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,905,134 $ 4,763,365
============= ============
* 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,
-------------------------- -----------------------------
1995 1994 1995 1994
-------- ---------- ------------ ----------
INTEREST INCOME
Interest and fees on loans $ 58,561 $ 48,343 $ 166,911 $ 139,237
Interest on securities:
Taxable interest income 27,500 28,278 82,895 84,233
Interest income exempt from federal
income taxes 1,439 1,654 4,488 5,136
Interest on federal funds sold and securities purchased
under reverse repurchase agreements 1,319 1,283 5,108 5,048
------------- ------------- ------------- -------------
TOTAL INTEREST INCOME 88,819 79,558 259,402 233,654
INTEREST EXPENSE
Interest on deposits 28,810 22,959 83,564 66,898
Interest on federal funds purchased and securities sold
under repurchase agreements 12,652 8,744 36,702 23,243
------------- ------------- ------------- -------------
TOTAL INTEREST EXPENSE 41,462 31,703 120,266 90,141
------------- ------------- ------------- -------------
NET INTEREST INCOME 47,357 47,855 139,136 143,513
------------- ------------- ------------- -------------
Provision for loan losses 1,183 694 955 1,429
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 46,174 47,161 138,181 142,084
OTHER INCOME
Trust service income 2,303 2,140 6,891 6,652
Service charges on deposit accounts 5,425 4,777 15,698 13,712
Other account charges, fees and commissions 6,115 5,047 17,859 14,090
Securities gains 75 135 195 174
Other 762 325 3,001 1,407
------------- ------------- ------------- -------------
TOTAL OTHER INCOME 14,680 12,424 43,644 36,035
OTHER EXPENSES
Salaries 15,377 15,332 45,772 45,901
Employee benefits 2,727 2,616 8,427 8,658
Net occupancy - premises 2,435 2,211 6,918 6,257
Equipment expense 3,333 3,273 10,280 9,866
Services and fees 4,750 4,802 13,942 13,888
Other real estate expenses 104 179 288 511
FDIC insurance assessment 21 1,859 3,818 5,761
Amortization of intangible assets 1,915 1,742 5,455 5,136
Other 5,643 6,167 18,849 18,072
------------- ------------- ------------ -------------
TOTAL OTHER EXPENSES 36,305 38,181 113,749 114,050
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 24,549 21,404 68,076 64,069
Income taxes 8,423 7,464 23,351 21,613
------------- ------------- ------------- -------------
NET INCOME $ 16,126 $ 13,940 $ 44,725 $ 42,456
============= ============= ============= =============
NET INCOME PER SHARE $ 0.46 $ 0.40 $ 1.28 $ 1.22
============= ============= ============= =============
DIVIDENDS PER SHARE $ 0.1075 $ 0.1000 $ 0.3225 $ 0.3000
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 34,910,683 34,773,169 34,910,683 34,773,169
============= ============= ============= =============
See notes to consolidated financial statements
5
TRUSTMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1995 1994
--------- --------
OPERATING ACTIVITIES
Net income $ 44,725 $ 42,456
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 955 1,429
Provision for depreciation and amortization 13,231 12,533
(Gains)/losses and writedowns on other real estate (60) 156
Net (accretion)/amortization of securities (3,414) 126
Securities gains (195) (174)
Other (530) 1,150
Decrease (increase)in accrued interest receivable 1,899 (1,437)
Increase in intangible assets (5,049) (3,863)
Increase in deferred income taxes (1,624) (891)
Decrease (increase) in other assets 1,139 (12,181)
Increase (decrease) in other liabilities 9,402 (1,227)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 60,479 38,077
------------ ------------
INVESTING ACTIVITIES
Proceeds from calls and maturities of securities available for sale 273,483 201,724
Proceeds from calls and maturities of securities held to maturity 58,176 264,527
Proceeds from sales of securities available for sale 92,570 255,200
Purchases of securities available for sale (245,794) (253,068)
Purchases of securities held to maturity (132,701) (446,192)
Net decrease in federal funds sold and securities
purchased under reverse repurchase agreements 47,981 14,908
Net increase in loans (229,691) (73,034)
Purchases of premises and equipment (4,398) (7,416)
Proceeds from sales of premises and equipment 127 131
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (140,247) (43,220)
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 33,560 (16,687)
Net increase in federal funds purchased
and securities sold under repurchase agreements 54,987 76,781
Cash dividends paid (11,260) (10,184)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 77,287 49,910
------------ ------------
(Decrease) increase in cash and cash equivalents (2,481) 44,767
Cash and cash equivalents at beginning of year 280,114 252,906
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 277,633 $ 297,673
============ ============
See notes to consolidated financial statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) In the opinion of Management, the accompanying consolidated financial
statements contain all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly Trustmark Corporation's balance sheets
as of September 30, 1995 and December 31, 1994, the statements of income for
the three and nine month periods ended September 30, 1995 and 1994 and the
statements of cash flows for the nine month periods ended September 30, 1995
and 1994.
(2) During the first nine months of 1995, the Corporation paid approximately
$22,050,000 in income taxes and $116,379,000 in interest on deposit liabilities
and other borrowings. This compares to $22,298,000 for income taxes and
$91,586,000 for interest on deposits and other borrowings for the first nine
months of 1994.
(3) For the nine months ended September 30, 1995 and 1994, noncash transfers
from loans to foreclosed properties were $1,200,000 and $1,224,000,
respectively.
(4) On January 1, 1995 the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114 "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures." The statement addresses how
creditors should establish allowances for credit losses on individual loans
determined to be impaired. The effect of this implementation on the
consolidated financial statements has been immaterial.
(5) In January 1995, a judgment was rendered in a Mississippi trial court
against the Corporation's subsidiary, Trustmark National Bank, in a case
related to the placement of collateral protection insurance ("CPI") by the Bank
on a particular loan. The judgment awarded $500 thousand in actual damages
(against the Bank and the insurance agent, jointly and severally) and $38
million in punitive damages (against the Bank only). The Bank filed motions
for entry of judgment in its favor, or for a new trial, or to reduce the
verdicts. The judge took the motions under advisement in April 1995. On
August 4, 1995, the court reduced the punitive damage award from $38 million to
$5 million. The judge left the actual damage award intact. Notice of appeal
has been filed by the Bank appealing this case to the Mississippi Supreme
Court. Notice of cross-appeal has been filed by the plaintiffs.
There are nine other suits in state courts and nine suits in federal
courts. On September 18, 1995, one of the federal court suits was certified as
a class action, with the class broadly defined to include all persons who
financed an automobile through the Bank and whose loan accounts were charged
for CPI premiums; one of the CPI insurers, the CPI underwriter and the
insurance agent are also defendants to the class action.
The cases are being vigorously contested. Investigation is continuing.
Defense of the litigation will be costly. The outcome of the litigation is
uncertain. Similar, but not identical, cases in other states have had a
variety of results, including settlements. Trustmark's program was consistent
with those of numerous other banks. Trustmark's program was terminated in
1994. At least five other banks in Mississippi have recently been served with
CPI-related class action complaints.
The Corporation is defendant in various other legal actions arising in the
normal course of business. Management and legal counsel are of the opinion
that the outcome of these other matters will not have a material adverse effect
on the Corporation's financial condition or results of operations.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements found elsewhere in this report.
BUSINESS COMBINATIONS
On October 7, 1994, the Corporation completed a merger with First National
Financial Corporation (FNFC) of Vicksburg, Mississippi and its wholly-owned
subsidiary, First National Bank of Vicksburg (FNBV). The business combination
was accounted for as a pooling of interests; therefore, all financial data of
the Corporation as previously reported has been restated.
EARNINGS SUMMARY
Trustmark Corporation reported net income of $16.1 million or $.46 per
share, for the third quarter of 1995, compared to $13.9 million or $.40 for the
third quarter of 1994. Net income for the nine months ended September 30, 1995
was $44.7 million or $1.28 per share, compared to $42.5 million or $1.22 per
share, for the same time period in 1994. Both third quarter and year-to-date
results were impacted by increases in noninterest income, refunds of FDIC
assessments and a continued emphasis on expense control.
Two key measures of profitability in the banking industry are return on
average assets (ROA) and return on average equity (ROE). During the third
quarter of 1995, ROA measured 1.31% and ROE 14.00% compared to a ROA of 1.16%
and a ROE of 13.33% for the same time period in 1994. For the nine months ended
September 30, 1995, ROA was 1.23% and ROE was 13.41% compared to a ROA of 1.18%
and a ROE of 14.03% for the same time period in 1994.
ASSET/LIABILITY MANAGEMENT AND LIQUIDITY
A key objective of asset/liability management is to manage the
Corporation's assets and liabilities to optimize and maintain the spread
between interest earned and interest paid while ensuring an adequate liquidity
position. The Asset/Liability Committee monitors and adjusts the Corporation's
exposure to interest rates, within specific policy guidelines, based on its
view of current and expected market conditions. The primary tool utilized by
this committee is an asset/liability modeling system which is used to evaluate
exposure to interest rate risk and to project earnings and balance sheet
growth. The Asset/Liability Committees of both senior bank officials and the
Board of Directors meet monthly to evaluate Trustmark's interest rate risk
position.
Another tool used to monitor the Corporation's overall interest rate
sensitivity is a gap analysis. The table below represents the Corporation's 90
day and one year gap position as of September 30, 1995 ($ in thousands):
8
Interest Sensitive Within
90 days One Year
----------- -----------
Total rate sensitive assets $ 1,201,488 $ 1,839,469
Total rate sensitive liabilities 1,542,530 2,399,833
----------- -----------
Net gap $ (341,042) $ (560,364)
=========== ===========
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. With
the general decline in deposit rates during the third quarter, the
Corporation's negative net gap position has grown slightly when compared to
June 30, 1995.
The Asset/Liability Committee establishes guidelines which monitor the
current liquidity position and also ensure adequate funding capacity. The
Corporation's goal is to maintain an adequate liquidity position to compensate
for expected and unexpected balance sheet fluctuations and to provide funds for
growth. This is achieved by maintaining a stable base of core deposits,
accessibility to local, regional and national funding sources, readily
marketable assets and diversity in customers, products and market areas. The
ability to maintain liquidity is also enhanced by consistent earnings power and
adequate capital.
EARNING ASSETS
Improved loan demand continues to be the driving force behind the growth
of earning assets during the first nine months of 1995. At September 30, 1995,
earning assets were $4.468 billion (91.1% of total assets) compared to $4.317
billion (90.6% of total assets) at the end of 1994.
Total loans increased by $225.7 million or 9.61% during the first nine
months of 1995. The most substantial growth in the loan portfolio was seen in
real estate loans, which increased by $148.7 million. Recently declining
interest rates on mortgage loans combined with additional mortgage production
offices and the Corporation's ability to provide quality service to
construction borrowers have all contributed to this growth. The Corporation
has also continued its commitment to the growth of its mortgage servicing
portfolio. The Corporation intends to package and sell substantially all
qualified one-to-four family residential mortgage loans that the Corporation
has originated or purchased while retaining the right to service these
mortgages. At September 30, 1995, the Corporation's volume of residential
mortgage loan servicing was approximately $2.359 billion compared to $2.088
billion at the end of 1994.
Commercial and consumer loans have grown by $51.5 million during the first
nine months of 1995 in response to the state's improving economic atmosphere.
The most significant changes were in the Wholesale and Service industries.
The Corporation's conservative lending policies have produced
9
consistently good asset quality. A measure of asset quality in the financial
institutions industry is the level of nonperforming assets. Nonperforming
assets include nonperforming loans, consisting of nonaccrual and restructured
loans, and other real estate. See the table below for more details ($ in
thousands):
9/30/95 12/31/94
------- -------
Loans accounted for on a nonaccrual basis $ 12,150 $ 12,817
Other real estate 2,557 3,723
Loans past due 90 days or more & still accruing 1,673 2,252
-------- --------
Total nonperforming assets&loans past due 90+ days $ 16,380 $ 18,792
======== ========
As the table above illustrates, overall nonperforming assets and loans
past due 90 days or more remain well- controlled. As a result, the
Corporation's level of nonperforming assets and past due loans continue to
compare favorably to peer levels. Management is not aware of any additional
credits, other than those identified above, where serious doubts as to the
repayment of principal and interest existed at September 30, 1995.
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 and unfunded
lines 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 additional guidance provided by regulatory authorities.
This analysis is presented to the Credit Policy Committee with subsequent
review and approval by the Board of Directors.
The current level of the allowance for loan losses approximates 2.39% of
total loans outstanding and provides the Corporation with an 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, yet conservative approach in the evaluation of the allowance
for loan losses.
Net charge-offs totaled $1.183 million during the third quarter of 1995
resulting in an annualized net charge-off ratio of .19%. For the nine months
ended September 30, 1995, net charge-offs were $4.519 million, which yielded an
annualized net charge-off ratio of .25%. This compares to net charge-offs of
$1.443 million or an annualized net charge-off ratio of .09% for the first nine
months of 1994. This increase in net charge-offs is primarily due to a one-
time charge-off of approximately $2.3 million from a specific line of business.
The securities portfolio is utilized to provide a quality investment
alternative for available funds and to provide a stable source of interest
income. At September 30, 1995, total securities were $1.837 billion, a
decrease of $25.4 million or 1.36% from the end of 1994. This slight decrease
in the securities portfolio is
10
partially attributable to the Corporation's decision to maintain its investment
portfolio at approximately its current level in order to allow any excess
liquidity to provide funds for loan growth. Given that the current treasury
yield curve is relatively flat, the Corporation will remain cautious in
planning its future strategy for securities.
At September 30, 1995, the amortized cost and fair value of securities
classified as available for sale were $435.1 million and $438.9 million,
respectively. This resulted in an unrecognized gain, net of tax, of
approximately $2.384 million as a separate component of stockholders' equity.
During the third quarter of 1995, the size of the Corporation's
short-term portfolio declined as the Corporation reduced its investment in U.
S. Government agency securities as it sought to provide liquidity for loan
growth. During the first nine months of 1995, the Corporation has realized $207
thousand more in earnings from the short-term portfolio than would have been
earned from a similar investment in the overnight funds market.
For the nine months ended September 30, 1995, realized gains were $1.351
million on securities available for sale while realized losses totaled $1.281
million, resulting in net securities gains of $70 thousand. Gross unrealized
gains approximated $6.005 million while gross unrealized losses approximated
$2.147 million on these securities.
There were no sales of securities held to maturity during the first nine
months of 1995. Gross gains of $125 thousand were realized on securities
called prior to their maturity. Gross unrealized gains approximated $14.054
million and gross unrealized losses approximated $15.703 million on securities
classified as held to maturity at September 30, 1995.
Federal funds sold and securities purchased under reverse repurchase
agreements decreased by $48.0 million when compared to the end of 1994. Market
conditions and liquidity needs are the driving forces behind the utilization of
federal funds sold and securities purchased under reverse repurchase agreements
as short-term investment products.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits are the primary source of funding for the Corporation's earning
assets. Trustmark offers a variety of products designed to attract and retain
customers with the primary focus on core deposits.
Total deposits at September 30, 1995 increased by $33.6 million when
compared to December 31, 1994 with the majority of this growth centered in
certificates of deposit. During the remainder of 1995, the Corporation is
committed to increasing its core deposit base while reducing its dependence on
short-term borrowings.
Federal funds purchased decreased $63.4 million when compared to December
31, 1994. This can be traced to a decrease in funds available for purchase
from correspondent banks. Securities sold under repurchase agreements grew by
$118.4 million during the first nine months of 1995. This increase can be
primarily attributed to increased funds invested by governmental entities.
11
CONTINGENCIES
In January 1995, a judgment was rendered in a Mississippi trial court
against the Corporation's subsidiary, Trustmark National Bank, in a case
related to the placement of collateral protection insurance ("CPI") by the Bank
on a particular loan. The judgment awarded $500 thousand in actual damages
(against the Bank and the insurance agent, jointly and severally) and $38
million in punitive damages (against the Bank only). The Bank filed motions
for entry of judgment in its favor, or for a new trial, or to reduce the
verdicts. The judge took the motions under advisement in April 1995. On
August 4, 1995, the court reduced the punitive damage award from $38 million to
$5 million. The judge left the actual damage award intact. Notice of appeal
has been filed by the Bank appealing this case to the Mississippi Supreme
Court. Notice of cross-appeal has been filed by the plaintiffs.
There are nine other suits in state courts and nine suits in federal
courts. On September 18, 1995, one of the federal court suits was certified as
a class action, with the class broadly defined to include all persons who
financed an automobile through the Bank and whose loan accounts were charged
for CPI premiums; one of the CPI insurers, the CPI underwriter and the
insurance agent are also defendants to the class action.
The cases are being vigorously contested. Investigation is continuing.
Defense of the litigation will be costly. The outcome of the litigation is
uncertain. Similar, but not identical, cases in other states have had a
variety of results, including settlements. Trustmark's program was consistent
with those of numerous other banks. Trustmark's program was terminated in
1994. At least five other banks in Mississippi have recently been served with
CPI-related class action complaints.
The Corporation is defendant in various other legal actions arising in the
normal course of business. Management and legal counsel are of the opinion
that the outcome of these other matters will not have a material adverse effect
on the Corporation's financial condition or results of operations.
STOCKHOLDERS' EQUITY
The Corporation has always placed a great emphasis on maintaining a strong
capital base. It is the Corporation's goal to maintain its position as a "well
capitalized" financial institution by expanding its capital base through
continued profitability, business combinations and possibly the sale of stock.
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, 1995 ($ in
thousands):
Tier 1 Capital $ 451,432
Tier 2 Capital 35,987
------------
Total Qualifying Capital $ 487,419
============
Total Risk Weighted Assets $ 2,853,945
============
Tier 1/Risk Weighted Assets 15.82%
Tier 2/Risk Weighted Assets 1.26%
============
Total Qualifying Capital/Risk Weighted Assets 17.08%
============
Leverage Ratio 9.24%
============
12
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, 1995, the Corporation had stockholders' equity of $464.8
million, which contained a net unrealized gain on securities available for
sale, net of taxes, of $2.384 million. This compares to total stockholders'
equity at December 31, 1994 of $421.0 million, which contained a net unrealized
loss on securities available for sale, net of taxes of $7.971 million.
Based on its dividend payout ratio of 25.0%, the Corporation retained
75.0% of its earnings during the first nine months of 1995, generating an
internal capital growth rate of 10.06%. Dividends for the third quarter of 1995
remained at $.1075 per share, resulting in an annual dividend rate of $.43 per
share. Book value for the Corporation's common stock was $13.31 at September
30, 1995 compared to the closing market price of $18.50.
NET INTEREST INCOME
During the first nine months of 1995, the Corporation's level of net
interest income dropped by 3.05% or $4.4 million when compared to the same time
period in 1994. For the third quarter, net interest income declined 1.04% or
$498 thousand when compared to the third quarter of 1994. These declines can
be attributed to the Corporation's cost of funds increasing at a somewhat
faster pace than its yield on earning assets. However, due to the significant
amount of loan growth experienced during 1995, the decline in net interest
income when compared to 1994 has been diminishing.
When compared to 1994, average earning assets increased 1.03% during the
first nine months of 1995. During the same time period, the yield on average
earning assets increased by 69 basis points. This combination resulted in
interest income generated by earning assets increasing $25.7 million or 11.0%
when comparing the first nine months of 1995 and 1994. The primary contributor
to this gain was interest and fees on loans, which increased 19.9%. This
resulted from a 10.3% increase in average loan volume and a higher interest
rate environment when comparing the first nine months of 1995 to 1994.
Average interest-bearing liabilities increased by only .5% when comparing
the first nine months of 1995 to the same time period in 1994. However, during
the same time period, the rate paid increased by 89 basis points. As a result,
during the first nine months of 1995 interest expense generated by
interest-bearing liabilities increased by $30.1 million or 33.4% when compared
to the first nine months of 1994.
The table below illustrates the changes in net interest margin as a
percentage of average earning assets for the periods shown:
13
Nine months ended September 30,
------------------------------
1995 1994 Change
------ ------ ------
Yield on interest-earning assets-FTE 7.95% 7.26% .69%
Rate on interest-bearing liabilities 3.64% 2.75% .89%
---- ---- ----
Net interest margin-FTE 4.31% 4.51% (.20%)
==== ==== ===
The fully taxable equivalent (FTE) yield on tax-exempt income has been computed
based on a 35% federal marginal tax rate for all periods shown. The
Corporation will continue to take the necessary precautions in order to
minimize exposure to changes in interest rates.
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses is the adjustment to expense
necessary to maintain the allowance for loan losses at an adequate level. As a
result of Management's assessment of the adequacy of the allowance, the
Corporation recorded a provision of $1.183 million during the third quarter of
1995. During the third quarter of 1994, the Corporation's provision for loan
losses was $694 thousand. For the nine months ended September 30, 1995, the
Corporation recorded a provision for loan losses of $955 thousand compared to
$1.429 million for the first nine months of 1994.
NONINTEREST INCOME
The Corporation stresses the importance of growth in noninterest income as
one of its key long-term strategies. Noninterest income for the first nine
months of 1995, excluding securities gains, increased $7.6 million or 21.2%
when compared to the same time period in 1994. For the third quarter of 1995,
noninterest income, excluding securities gains, increased $2.3 million or 18.9%
when compared to the same time period in 1994.
Other account charges, fees and commissions continue to provide the
largest component of noninterest income. For the first nine months of 1995,
the major contributors to the 26.7% increase in this category were fees
generated from residential mortgage servicing, ATM usage and a variety of other
fee producing products and services.
Year-to-date service charges have grown by 14.5% when comparing the first
nine months of 1995 to 1994. This increase can be attributed to Management's
reevaluation of its service charge pricing, procedures and products.
The increase in other income can be attributed to significant increases in
gains on the sale of mortgage loans in the secondary market.
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
Corporation's commitment to lowering its cost position is demonstrated by its
efficiency ratios, which
14
continue to compare favorably with its peer group. Noninterest expense for the
first nine months of 1995 decreased $301 thousand or .26% when compared to the
first nine months of 1994. For the third quarter of 1995, noninterest expense
decreased $1.88 million or 4.9% when compared to the same time period in 1994.
These decreases can be attributed to the $1.92 million refund of FDIC insurance
assessments recognized during the third quarter of 1995.
Salaries and employee benefits continue to comprise the largest portion of
other expenses through September 30, 1995; however, these expenses have
decreased by $360 thousand, or .66%, when compared to the same time period in
1994. The number of full-time equivalent employees totaled 2,201 at September
30, 1995 and 2,219 at September 30, 1994. This decrease demonstrates the
Corporation's success in controlling the size of its workforce through
increased automation of its operations while continuing to grow its asset base.
Personnel expense for the Corporation remains well below that of its peer
group.
Renovations to facilities purchased and leased in business combinations as
well as the general maintenance of existing facilities have contributed to the
$661 thousand or 10.6% increase in net occupancy expenses when comparing the
first nine months of 1995 to 1994. Equipment expenses experienced a modest
increase of $414 thousand when comparing the first nine months of 1995 to 1994,
primarily from increased depreciation expenses related to new and existing
equipment utilized in business combinations.
Other expenses increased $777 thousand or 4.3% when comparing the first
nine months of 1995 to 1994. This can be traced to larger operational costs
recorded during the first nine months of 1995 than in the same time period in
1994.
INCOME TAXES
For the nine months ended September 30, 1995, the Corporation's effective
tax rate was 34.3% compared to 33.7% for the first nine months of 1994, an
increase of .6%. This increase is due primarily to a decrease in the amount of
tax- exempt interest net of interest expense to carry tax-free obligations.
This net tax-exempt interest was lower for the first nine months of 1995 both
in real terms and as a percentage of interest income than during the nine
months ended September 30, 1994.
During 1995, an income tax examination of the Corporation for the years
1989, 1990 and 1991 was concluded. The effects, which are not material, are
included in the Corporation's consolidated financial statements.
OTHER REGULATORY MATTERS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan -Income Recognition and Disclosures." SFAS No. 114
generally will require all creditors to account for impaired loans, except
those that are accounted for at fair value or at the lower of cost or fair
value, at the present value of the expected future cash flows discounted at the
loan's effective interest rate or, if collateral
15
dependent, at the fair value of the underlying collateral. The Corporation
adopted this standard on January 1, 1995 and the effects on financial condition
and results of operations have been immaterial.
In March of 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of."
This statement establishes standards concerning accounting for "impaired"
property, plant and equipment, identifiable intangibles and related goodwill.
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995.
The Corporation is currently evaluating the impact that adoption of this
statement will have on its financial condition and results of operations.
The FASB has also issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights and Excess Servicing Receivables and for Securitization of Mortgage
Loans." The new statement amends Statement No. 65, "Accounting for Certain
Mortgage Banking Activities" and primarily eliminates the distinction between
purchased mortgage servicing rights and mortgage servicing rights on loans
originated by the financial institution. SFAS No. 122 is effective for fiscal
years beginning after December 15, 1995. The Corporation is currently
evaluating the impact that adoption of this statement will have on its
financial condition and results of operations.
In October of 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and is
effective for fiscal years beginning after December 15, 1995. Since the
Corporation currently does not have any stock-based employee compensation
plans, the adoption of this statement will have no effect on the Corporation's
financial condition or results of operations.
In August of 1995, the FDIC announced a decrease in the lowest deposit
insurance rate for deposits insured through the Bank Insurance Fund (BIF) from
$.23 per $100 of deposits to $.04. This will result in a decrease in the
Corporation's fourth quarter FDIC insurance assessment of approximately $1.4
million.
Various legislative proposals regarding the future of the Savings
Insurance Fund (SAIF) have been reported recently. Several of these proposals
include a one-time special assessment for SAIF deposits. The Corporation has
approximately $366 million of deposits insured by SAIF as the result of its
assisted purchase of Unifirst Bank for Savings (1990) and First Jackson Savings
Bank (1991) in a transaction defined as "Oakar" by the FDIC. At the present
time, Congress is still debating the specific features of this legislation.
Consequently, the Corporation does not know when and if any such proposal may
be adopted or the ultimate effect on its insurance assessment resulting from
deposits insured by the SAIF.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments for the quarter ended September 30, 1995
other than those disclosed in the Notes to Consolidated Financial Statements
and Management's Discussion and Analysis of this Form 10-Q, as well as the June
30, 1995 Form 10-Q.
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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
(27) Financial Data Schedule
17
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, 1995 /s/ FRANK R. DAY
----------------- -----------------------------
Frank R. Day, Chairman of the
Board, President and Chief
Executive Officer
DATE: November 10, 1995 /s/ HARRY M. WALKER
----------------- -----------------------------
Harry M. Walker, Secretary
DATE: November 10, 1995 /s/ GERARD R. HOST
----------------- -----------------------------
Gerard R. Host, Treasurer
18
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule