FORM 10-Q UNITED STATES 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, 2001 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, 2001. Title Outstanding Common stock, no par value 66,652,040
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Trustmark Corporation and Subsidiaries Consolidated Balance Sheets ($ IN THOUSANDS) <TABLE> <CAPTION> (Unaudited) Mar. 31, Dec. 31, 2001 2000 ---------- ----------- ASSETS <S> <C> <C> Cash and due from banks (noninterest-bearing) $306,830 $298,651 Federal funds sold and securities purchased under reverse repurchase agreements 1,249 47,849 Trading account securities 100 990 Securities available for sale (at fair value) 1,249,688 1,119,643 Securities held to maturity (fair value: $982,238 - 2001; $1,021,444 - 2000) 956,805 1,005,455 Loans 4,053,146 4,143,933 Less allowance for loan losses 65,710 65,850 ---------- ----------- Net loans 3,987,436 4,078,083 Premises and equipment 80,463 80,692 Intangible assets 68,691 66,381 Other assets 172,546 189,244 ---------- ----------- TOTAL ASSETS $6,823,808 $6,886,988 ========== =========== LIABILITIES Deposits: Noninterest-bearing $924,512 $952,696 Interest-bearing 3,182,104 3,105,722 ---------- ----------- Total deposits 4,106,616 4,058,418 Federal funds purchased 351,299 435,262 Securities sold under repurchase agreements 790,464 819,751 Short-term borrowings 415,811 632,964 Long-term FHLB advances 450,000 250,000 Other liabilities 66,154 60,952 ---------- ----------- TOTAL LIABILITIES 6,180,344 6,257,347 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, no par value: Authorized: 250,000,000 shares Issued and outstanding: 64,344,522 shares - 2001; 64,755,022 shares - 2000 13,405 13,491 Capital surplus 85,943 94,229 Retained earnings 529,296 512,107 Accumulated other comprehensive income, net of tax 14,820 9,814 ---------- ----------- TOTAL SHAREHOLDERS' EQUITY 643,464 629,641 ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,823,808 $6,886,988 ========== =========== </TABLE> See notes to consolidated financial statements.
TRUSTMARK CORPORATION AND SUBSIDIARIES Consolidated Statements of Income ($ in thousands except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Mar. 31, ------------------ 2001 2000 ------- ------- INTEREST INCOME <S> <C> <C> Interest and fees on loans $85,007 $82,742 Interest on securities: Taxable interest income 34,354 33,105 Interest income exempt from federal income taxes 2,081 1,824 Interest on federal funds sold and securities purchased under reverse repurchase agreements 377 375 ------- ------- TOTAL INTEREST INCOME 121,819 118,046 INTEREST EXPENSE Interest on deposits 34,338 28,083 Interest on federal funds purchased and securities sold under repurchase agreements 15,375 18,852 Other interest expense 13,662 11,200 ------- ------- TOTAL INTEREST EXPENSE 63,375 58,135 ------- ------- NET INTEREST INCOME 58,444 59,911 Provision for loan losses 2,400 2,118 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 56,044 57,793 NONINTEREST INCOME Service charges on deposit accounts 10,423 9,882 Other account charges, fees and commissions 8,940 9,212 Mortgage servicing fees 4,093 3,674 Trust service income 3,527 3,468 Securities gains - 4,641 Other income 5,350 1,174 ------- ------- TOTAL NONINTEREST INCOME 32,333 32,051 NONINTEREST EXPENSES Salaries and employee benefits 26,189 25,446 Net occupancy - premises 2,596 2,580 Equipment expenses 3,791 3,730 Services and fees 6,755 6,714 Amortization of intangible assets 2,277 2,252 Other expenses 6,881 6,704 ------- ------- TOTAL NONINTEREST EXPENSES 48,489 47,426 ------- ------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 39,888 42,418 Income taxes 14,004 14,278 ------- ------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 25,884 28,140 Cumulative effect of a change in accounting principle, net of tax - (2,464) ------- ------- NET INCOME $25,884 $25,676 ======= ======= EARNINGS PER SHARE Basic and diluted earnings per share before cumulative effect of a change in accounting principle $0.40 $0.40 Cumulative effect of a change in accounting principle, net of tax - (0.03) ------- ------- EARNINGS PER SHARE - BASIC AND DILUTED $0.40 $0.37 ======= ======= </TABLE> See notes to consolidated financial statements.
TRUSTMARK CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity ($ in thousands except per share data) (Unaudited) 2001 2000 -------- -------- BALANCE, JANUARY 1 $629,641 $655,756 Comprehensive income: Net income per consolidated statements of income 25,884 25,676 Net change in unrealized gains on securities available for sale, net of tax 5,096 (6,356) Net change in accumulated net losses on cash flow hedges, net of tax (90) - -------- -------- Comprehensive income 30,890 19,320 Cash dividends paid (8,695) (8,671) Repurchase and retirement of common stock (8,372) (22,524) -------- -------- BALANCE, MARCH 31 $643,464 $643,881 ======== ======== See notes to consolidated financial statements.
TRUSTMARK CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows ($ in thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, ---------------------- 2001 2000 -------- -------- OPERATING ACTIVITIES <S> <C> <C> Net income $25,884 $25,676 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,400 2,118 Depreciation and amortization 5,218 5,359 Net accretion of securities (96) (322) Securities gains - (4,641) Gains on sales of loans (4,381) (172) Cumulative effect of a change in accounting principle - 3,820 Net decrease in loans held for sale 163,417 1,642 Proceeds from sales of trading securities 890 130,575 Net increase in intangible assets (4,587) (1,794) Net decrease in deferred income taxes 3,430 3,151 Net decrease (increase) in other assets 9,262 (13,510) Net increase in other liabilities 5,348 8,966 Other operating activities, net (4) 713 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 206,781 161,581 INVESTING ACTIVITIES Proceeds from calls and maturities of securities held to maturity 49,121 50,878 Proceeds from calls and maturities of securities available for sale 102,724 32,852 Proceeds from sales of securities available for sale 8 6,332 Purchases of securities held to maturity - (26,027) Purchases of securities available for sale (225,191) (157,630) Net decrease (increase) in federal funds sold and securities purchased under reverse repurchase agreements 46,600 (259) Net increase in loans (70,789) (51,889) Purchases of premises and equipment (2,220) (3,098) Proceeds from sales of premises and equipment 111 8 Proceeds from sales of other real estate 306 690 -------- -------- NET CASH USED BY INVESTING ACTIVITIES (99,330) (148,143) FINANCING ACTIVITIES Net increase (decrease) in deposits 48,198 (42,288) Net decrease in federal funds purchased and securities sold under repurchase agreements (113,250) (57,599) Net (decrease) increase in other borrowings (217,153) 100,613 Proceeds from long-term FHLB advances 200,000 - Cash dividends (8,695) (8,671) Common stock transactions, net (8,372) (22,524) -------- -------- NET CASH USED BY FINANCING ACTIVITIES (99,272) (30,469) -------- -------- Increase (decrease) in cash and cash equivalents 8,179 (17,031) Cash and cash equivalents at beginning of year 298,651 279,957 -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $306,830 $262,926 ======== ======== </TABLE> See notes to consolidated financial statements.
TRUSTMARK CORPORATION & SUBSIDIARIES 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) 2000 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. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. NOTE 2 - BUSINESS COMBINATIONS On April 6, 2001, Trustmark completed its merger with Barret Bancorp, Inc. (Barret) in Barretville, Tennessee. Barret, which had assets of $503 million, was the holding company for the former Peoples Bank in Barretville and Somerville Bank and Trust in Somerville, Tennessee. This transaction was accounted for as a purchase business combination. NOTE 3 - LOANS The following table summarizes the activity in the allowance for loan losses for the three month periods ended March 31, ($ in thousands): 2001 2000 ------- ------- Balance at beginning of year $65,850 $65,850 Provision charged to expense 2,400 2,118 Loans charged off (4,438) (3,771) Recoveries 1,898 1,653 ------- ------- Balance at end of period $65,710 $65,850 ======= ======= At March 31, 2001 and 2000, the carrying amounts of nonaccrual loans were $19.0 million and $17.7 million, respectively. Included in these nonaccrual loans at March 31, 2001 and 2000, are loans that are considered to be impaired and totaled $15.3 million and $13.7 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 2001 and 2000 were $14.6 million and $13.2 million, respectively. No material amounts of interest income were recognized on impaired loans or nonaccrual loans for the first quarter of 2001 or 2000. 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 - EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income by the weighted average shares of common stock outstanding. Diluted EPS is computed by dividing net income by the weighted average shares of common stock outstanding, adjusted for the effect of stock options outstanding during the period. The following table reflects weighted average shares used to calculate Basic and Diluted EPS for the periods presented: Three Months Ended March 31, ------------------------ 2001 2000 ---------- ---------- Weighted Average Shares Outstanding Basic 64,425,662 69,756,672 Diluted 64,515,627 69,785,096 NOTE 6 - STATEMENTS OF CASH FLOWS Trustmark paid income taxes approximating $213 thousand and $234 thousand during the three months ended March 31, 2001 and 2000, respectively. Interest paid on deposit liabilities and other borrowings approximated $65.1 million in the first quarter of 2001 and $57.3 million in the first quarter of 2000. For the three months ended March 31, 2001 and 2000, noncash transfers from loans to foreclosed properties were $395 thousand and $758 thousand, respectively. NOTE 7 - RECENT PRONOUNCEMENTS In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities." SFAS No. 140 provides accounting and reporting standadards for transfers and servicing of financial assets and extinguishments of liabilities and is effective for events occurring after March 31, 2001. Management does not anticipate the effect of this pronouncement will have a material impact on Trustmark's consolidated financial statements. NOTE 8 - SEGMENT INFORMATION Trustmark has three reportable segments: Retail Banking, Commercial Banking and Financial Services. Retail Banking delivers a full range of financial products and services to individuals and small businesses through Trustmark's extensive branch network. Commercial Banking provides various financial products and services to corporate and middle market clients. Included among these products and services are specialized services for commercial and residential real estate development lending, indirect auto financing and other specialized lending services. Financial Services includes trust and fiduciary services, discount brokerage services, insurance services, as well as credit card and mortgage services. Also included in this segment is a selection of investment management services including Trustmark's proprietary mutual fund family. Treasury & Other consists of asset/liability management activities that include the investment portfolio and the related gains (losses) on sales of securities. Treasury & Other also includes expenses such as corporate overhead and amortization of intangible assets.
The following table discloses financial information by segment for the quarters ended March 31, ($ in thousands): <TABLE> <CAPTION> Retail Commercial Financial Treasury Banking Banking Services & Other Total ---------- ---------- ---------- ---------- ---------- 2001 - ---- <S> <C> <C> <C> <C> <C> Net interest income from external customers $2,493 $32,661 $10,392 $12,898 $58,444 Internal funding 28,899 (22,675) (2,824) (3,400) - ---------- ---------- ---------- ---------- ---------- Net interest income 31,392 9,986 7,568 9,498 58,444 Provision for loan losses 1,128 769 643 (140) 2,400 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 30,264 9,217 6,925 9,638 56,044 Noninterest income 12,483 132 18,150 1,568 32,333 Noninterest expenses 29,145 3,746 13,062 2,536 48,489 ---------- ---------- ---------- ---------- ---------- Income before taxes 13,602 5,603 12,013 8,670 39,888 Income taxes 4,693 1,935 4,182 3,194 14,004 ---------- ---------- ---------- ---------- ---------- Segment net income $8,909 $3,668 $7,831 $5,476 $25,884 ========== ========== ========== ========== ========== Selected Financial Information Average assets $2,056,616 $1,567,453 $838,903 $2,388,548 $6,851,520 Depreciation and amortization $1,057 $51 $1,709 $2,401 $5,218 </TABLE> <TABLE> <CAPTION> Retail Commercial Financial Treasury 2000 Banking Banking Services & Other Total - ---- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> Net interest income from external customers $8,521 $30,429 $11,471 $9,490 $59,911 Internal funding 22,968 (21,388) (4,861) 3,281 - ---------- ---------- ---------- ---------- ---------- Net interest income 31,489 9,041 6,610 12,771 59,911 Provision for loan losses 1,154 497 467 - 2,118 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 30,335 8,544 6,143 12,771 57,793 Noninterest income 11,721 157 13,947 6,226 32,051 Noninterest expenses 28,775 3,827 11,907 2,917 47,426 ---------- ---------- ---------- ---------- ---------- Income before income taxes and cumulative effect of a change in accounting principle 13,281 4,874 8,183 16,080 42,418 Income taxes 4,585 1,682 2,879 5,132 14,278 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of a change in accounting principle 8,696 3,192 5,304 10,948 28,140 Cumulative effect of a change in accounting principle - - - (2,464) (2,464) ---------- ---------- ---------- ---------- ---------- Segment net income $8,696 $3,192 $5,304 $8,484 $25,676 ========== ========== ========== ========== ========== Selected Financial Information Average assets $2,159,986 $1,469,323 $859,016 $2,286,754 $6,775,079 Depreciation and amortization $1,042 $54 $1,381 $2,882 $5,359 </TABLE>
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) financial condition and results of operations. 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. 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; 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 significantly from those anticipated, estimated, projected or expected. FINANCIAL HIGHLIGHTS For the first quarter of 2001, Trustmark's basic and diluted earnings per share were $0.40, compared with $0.37 for the first quarter of 2000, an increase of 8.1%. Net income totaled $25.9 million in the first quarter of 2001, compared with $25.7 million for the same period in 2000. Trustmark's performance for the quarter ended March 31, 2001, resulted in a return on average assets of 1.53%, a return on average equity of 16.79% and an efficiency ratio of 54.32%. These compared with 2000 ratios of 1.52% for return on average assets, 15.84% for return on average equity and 53.06% for the efficiency ratio. At March 31, 2001, Trustmark reported total loans of $4.1 billion, total assets of $6.8 billion, total deposits of $4.1 billion and shareholders' equity of $643.5 billion. At March 31, 2000, Trustmark reported total loans of $4.1 billion, total assets of $6.7 billion, total deposits of $3.9 billion and shareholders' equity of $644 million. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income (NII) is the principal component of Trustmark's income stream and represents the difference or spread between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest-bearing liabilities can materially impact net interest income. The net interest margin (NIM) is computed by dividing fully taxable equivalent NII by average interest-earning assets and measures how effectively Trustmark utilizes its interest-earning assets in relationship to the interest cost of funding them. The fully taxable equivalent (FTE) yield on tax-exempt income has been computed based on a 35% federal marginal tax rate for the periods shown. The following table summarizes Trustmark's NIM for the periods shown: Quarter Ended March 31, --------------- 2001 2000 ------ ----- Yield on interest-earning assets-FTE 7.97% 7.76% Rate on interest-bearing liabilities 4.07% 3.76% ------ ----- Net interest margin-FTE 3.90% 4.00% ====== ===== For the quarter ended March 31, 2001, NII decreased $1.5 million, or 2.4%, compared with the same period in 2000. Average interest-earning assets for the first three months of 2001 were $6.322 billion, compared to $6.227 billion for the first three months of 2000, an increase of $95 million or 1.5%. The average interest-earning asset growth is attributable to a 1.0% increase in average loans and a 4.0% increase in average securities, when comparing the first three months of 2001 to the same period in 2000. This combination resulted in growth in interest income of $3.8 million, or 3.2%, when comparing the first three months of 2001 to the same period in 2000. The growth in interest income, however, was offset by an increase in funding costs from interest-bearing liabilities. While average interest-bearing deposits increased 6.7% when
comparing the first three months of 2001 with the same period in 2000, average short-term borrowings and FHLB advances decreased 5.0%. The increase in the base of core deposits allowed Trustmark to reduce reliance on higher priced short-term borrowings. This combination resulted in an increase in interest expense totaling $5.2 million, or 9.0% when comparing the first quarter of 2001 to the same time period in 2000. The capital management plan also contributed to the decrease in NII as Trustmark utilized available funds to repurchase common stock. Trustmark continues to be heavily involved in this program during 2001, as demonstrated by the repurchase of $8.4 million in common stock. PROVISION FOR LOAN LOSSES Trustmark's provision for loan losses totaled $2.4 million during the first three months of 2001, compared to $2.1 million in the same period in 2000. The provision to average loans was 0.24% for the first quarter of 2001 compared with 0.21% for the same period in 2000. The provision for loan losses reflects Management's assessment of the adequacy of the allowance for loan losses to absorb inherent charge-offs in the loan portfolio. The provision for each period is dependent upon many factors including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, Management's assessment of loan portfolio quality, the value of collateral and general economic factors. Trustmark's provision for loan losses to average loans continues to remain favorable because of asset quality and compares favorably with its peer banks. NONINTEREST INCOME Noninterest income consists of revenues generated from a broad range of banking, insurance and investment products and services. For the first three months of 2001, noninterest income increased by $282 thousand, or 0.9%. Excluding the securities gains which occurred during the first quarter of 2000 as a result of the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", noninterest income increased $4.9 million, or 18.0%, when comparing the first quarter of 2001 to the same period in 2000. Service charges for deposit products and services continue to be the single largest component of noninterest income. Income from service charges on deposit accounts increased $541 thousand, or 5.5% during the first quarter of 2001, when compared to the first quarter of 2000. Revised fee structures for certain deposit services, the overall growth in fee-based deposit accounts, transaction volume and an intensified effort to collect fees resulted in the increase. The second largest component of noninterest income is other account charges, fees and commissions. In the first three months of 2001, a decrease in these areas totaled $272 thousand, or 3.0%, when compared to the same period in 2000, primarily from a reduction in insurance commissions. Credit card fees increased 11.8% in the first three months of 2001, compared to the same period in 2000 and reflect an increase in interchange income, merchants' discounts and volume of accounts resulting from management's efforts to increase income from these services. Mortgage servicing fees grew $419 thousand or 11.4% in the first quarter of 2001, when compared to the same period in 2000. Reductions in interest rates have resulted in an increase in volume of mortgages serviced. Trustmark serviced $3.9 billion in mortgage loans at March 31, 2001. Trust service income increased slightly in the first quarter of 2001, compared to the same period in 2000. Current market conditions have contributed to a decline in corporate trust fees and advisory fees during the first three months of 2001, compared to the same period in 2000. At March 31, 2001, Trustmark, which continues to be one of the largest providers of asset management services in Mississippi, held assets under administration of $6.5 billion. Other income totaled $5.4 million for the first quarter of 2001, compared to $1.2 million during the same period in 2000. The primary component of this increase is a $3.9 million gain resulting from the sale of $192 million in mortgage loans with significant prepayment risk. During the first quarter of 2001, no gains on security transactions were recognized. During the first quarter of 2000, securities gains totaled $4.6 million, which were realized from sales of AFS equity securities and were used to offset the effect of adopting SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." NONINTEREST EXPENSES Total noninterest expenses increased $1.1 million, or 2.2%, in the first quarter of 2001, compared to the same period in 2000. The control of noninterest expenses is a management priority. The primary measure of the effectiveness of noninterest expense control is the efficiency ratio, which is calculated by dividing total noninterest expenses by tax-equivalent net interest income plus
noninterest income. The efficiency ratio measures the percentage of revenues that are absorbed by costs of production. For the first quarter of 2001, Trustmark's efficiency ratio, excluding nonrecurring items, was 54.32%, compared to 53.06% for the same period in 2000. Salaries and employee benefits were $26.2 million in the first quarter of 2001, compared to $25.4 million in the same period in 2000. The increase, which is the largest in the noninterest expense category, represents normal annual merit increases offset by a reduction in full time equivalent employees of 26. All other categories in noninterest expenses remained well controlled as evidenced by only slight increases during the first quarter of 2001, when compared to the same period in 2000. Management will continue to closely monitor the level of noninterest expenses as part of its strategic plan effort to improve the profitability of Trustmark. INCOME TAXES For the quarter ended March 31, 2001, Trustmark's combined effective tax rate was 35.1% compared with 33.7% for the same period in 2000. The increase in Trustmark's effective tax rate for 2001 is due primarily to the receipt of non-taxable life insurance proceeds in the first quarter of 2000. SHAREHOLDERS' EQUITY In order to enhance shareholder value, Trustmark initiated a capital management plan during 1998. This plan included a number of initiatives designed to improve earnings per share and return on equity, two of the most significant factors impacting shareholder value. Two of these initiatives were the implementation of a common stock repurchase program and the evaluation of Trustmark's dividend payout ratio. Shareholders' equity increased to $643.5 million at March 31, 2001 from $629.6 million at December 31, 2000. As a result of these initiatives, Trustmark's return on average equity has increased to 16.79% at March 31, 2001 from 15.58% at December 31, 2000. The utilization of this capital management plan has allowed Trustmark to increase shareholder value, while maintaining sufficient regulatory capital levels. COMMON STOCK REPURCHASE PROGRAM In November 1998, Trustmark implemented the first phase of its capital management plan by authorizing the repurchase of up to 7.5%, or 5.46 million shares of common stock. This program was completed in the third quarter of 2000, with purchases totaling $112.4 million. During the third quarter of 2000, an additional plan was authorized by Trustmark's Board of Directors to repurchase an additional 5.0%, or approximately 3.4 million shares of common stock. At March 31, 2001, Trustmark had repurchased $9.9 million in common stock under the latest plan, $8.4 million which were repurchased during the first quarter of 2001. The new plan continues to be subject to market conditions and management discretion. Since implementation of these plans, Trustmark has purchased approximately 9.3 million shares of common stock totaling over $181 million. DIVIDENDS An increased dividend payout ratio is another means by which Trustmark has enhanced shareholder value. Trustmark's dividend payout ratio was 33.8% for the quarters ended March 31, 2001 and 2000. Dividends for the first quarter of 2001 were $0.135 per share, an increase of 8.0% when compared with dividends of $0.125 per share the same period in 2000. REGULATORY CAPITAL Trustmark and Trustmark National Bank (Bank) are subject to minimum capital requirements, which are administered by various Federal regulatory agencies. These capital requirements, as defined by Federal guidelines, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements of both Trustmark and the Bank. Management believes, as of March 31, 2001, that Trustmark and the Bank meet all capital adequacy requirements to which they are subject. At March 31, 2001, the most recent notification from the Office of the Comptroller of the Currency (OCC) categorized the Bank as well capitalized. To be categorized in this manner, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios (defined in applicable regulations) as set forth in the table below. There are no significant conditions or events that have occurred since the OCC's notification that Management believes have affected the Bank's present classification.
Actual and minimum regulatory capital amounts and ratios at March 31, 2001, for Trustmark and the Bank are as follows ($ in thousands): <TABLE> <CAPTION> Actual Minimum Regulatory Regulatory Capital Capital Required ------------------ ------------------ Amount Ratio Amount Ratio -------- ------ -------- ------ Total Capital (to Risk Weighted Assets) <S> <C> <C> <C> <C> Trustmark Corporation $658,677 15.86% $332,193 8.00% Trustmark National Bank 653,130 15.73% 332,065 8.00% Tier 1 Capital (to Risk Weighted Assets) Trustmark Corporation $606,162 14.60% $166,096 4.00% Trustmark National Bank 601,074 14.48% 166,032 4.00% Tier 1 Capital (to Average Assets) Trustmark Corporation $606,162 8.88% $204,871 3.00% Trustmark National Bank 601,074 8.80% 204,828 3.00% </TABLE> EARNING ASSETS Earning assets are comprised of securities, loans, federal funds sold, securities purchased under resale agreements and trading account assets, which are the primary revenue streams for Trustmark. At March 31, 2001, earning assets were $6.261 billion, or 91.75% of total assets, compared with $6.318 billion, or 91.74% of total assets at December 31, 2000, a decrease of $56.9 million, or 0.9%. This decrease is the direct result of the previously discussed strategy Trustmark executed during the first quarter of 2001 to sell $192 million in mortgage loans with significant prepayment risk. SECURITIES The securities portfolio is utilized to provide Trustmark with a quality investment alternative, a stable source of interest income, as well as, collateral for pledges on public deposits and securities sold under agreements to repurchase. At March 31, 2001, Trustmark's securities portfolio totaled $2.206 billion, compared to $2.125 billion at December 31, 2000, an increase of $81.4 million, or 3.8%. The increase is the result of Trustmark reinvesting the proceeds from the mortgage loan sale, discussed previously, in AFS securities in order to reposition the balance sheet. AFS securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income, a separate component of shareholders' equity. At March 31, 2001, AFS securities totaled $1.250 billion, which represented 56.6% of the securities portfolio, compared to $1.120 million or 52.7% at December 31, 2000. HTM securities are carried at amortized cost and represent those securities that Trustmark both positively intends and has the ability to hold to maturity. At March 31, 2001, HTM securities totaled $957 million and represented 43.4% of the total portfolio, compared with $1.005 billion or 47.3% at December 31, 2000. Management continues to stress asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of over 85% of the portfolio in U. S. Treasury and U. S. Government agency obligations. The REMIC and CMO issues held in the securities portfolio are entirely U. S. Government agency issues. In order to avoid excessive yield volatility from unexpected prepayments, Trustmark's normal practice is to purchase investment securities at or near par value to reduce the risk of premium write-offs. LOANS Loans, the largest group of earning assets, totaled 64.7% of earning assets at March 31, 2001, compared with 65.6% at December 31, 2000. At March 31, 2001, loans totaled $4.053 billion compared to $4.144 billion at year-end 2001, a decrease of $90.8 million, or 2.2%. As previously discussed, during the first quarter of 2001, Trustmark executed a strategy to sell $192 million in mortgage loans with significant prepayment risk. Excluding this sale, loans would have increased $101.2 million or 2.4%. Loan growth has slowed, but remains broad-based, led by business banking and mortgage refinance volume. Trustmark's lending policies have produced consistently strong asset quality. One measure of asset quality in the financial services industry is the
level of nonperforming assets. Trustmark's nonperforming assets at March 31, 2001 and December 31, 2000, are shown in the following table ($ in thousands): Mar. 31, Dec. 31, Nonperforming Assets 2001 2000 -------------------- -------- -------- Nonaccrual and restructured loans $ 18,951 $ 15,958 Other real estate (ORE) 2,355 2,280 -------- -------- Total nonperforming assets $ 21,306 $18,238 ======== ======== Accruing loans past due 90 days or more $2,445 $2,494 ======== ======== Nonperforming assets/total loans and ORE 0.53% 0.44% ======== ======== While the volume of nonperforming assets at March 31, 2001, reflects an increase from year-end 2000, as indicated in the preceding table, the level of nonperforming assets continues to compare favorably to those of peer banks. 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. At March 31, 2001, the allowance for loan losses was $65.7 million, representing 1.62% of total loans outstanding, compared to $65.9 million and 1.59% at December 31, 2000. The allowance for loan losses is maintained at a level that Management and the Board of Directors believe is adequate to absorb estimated probable losses within the loan portfolio, including losses associated with off-balance sheet credit instruments such as letters of credit and unfunded lines of credit. A formal analysis is prepared monthly to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan losses. Specifically, the analysis considers any identified impairment, as well as historical loss experience in relation to 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. Net charge-offs were $2.5 million or 0.25% of average loans at March 31, 2001, compared with $2.1 million or 0.21% of average loans at March 31, 2000. Trustmark's level of net charge-offs to average loans continues to compare favorably to those of peer banks. OTHER EARNING ASSETS Federal funds sold and securities purchased under reverse repurchase agreements were $1.2 million at March 31, 2001, a decrease of $46.6 million when compared with year-end 2000. 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 $4.107 billion at March 31, 2001 and averaged $4.081 billion for the first quarter of 2001. This compares with quarter-end and quarterly average deposits for December 31, 2000 of $4.058 billion and $3.961 billion, respectively. Interest-bearing deposits increased 3.4% from December 31, 2000 to March 31, 2001. During this period, interest-bearing demand deposits increased 14.7% and large certificates of deposits rose 5.4%. Non-interest bearing deposits grew 1.8% during the same period. Deposit mix remains favorable with non-interest deposits representing 22% of total deposits. Trustmark continues to search for reasonably priced funding alternatives by evaluating new deposit products. Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, FHLB borrowings and the treasury tax and loan note option account. Short-term borrowings totaled $1.558 billion at March 31, 2001, a decrease of $330.4 million, compared with $1.888 billion at December 31, 2000. This difference is primarily related to the utilization of a long-term borrowings category, which totaled $450 million at March 31, 2001 and consisted entirely of FHLB advances. Significant funding remains available through FHLB borrowings. 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 core banking activities. Interest rate risk is the risk to net interest income represented by the impact of higher or lower interest rates. Management continually develops and applies cost-effective strategies to manage these risks. The Asset/Liability Committee sets the
day-to-day operating guidelines, 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 preserve the value created by the core banking business. This is accomplished through the development and implementation of lending, funding, pricing, and hedging strategies designed to maximize net interest income performance under varying interest rate environments subject to specific liquidity and interest rate risk guidelines. The primary tool utilized by the Asset/Liability Committee is a modeling system that provides information used to evaluate exposure to interest rate risk, 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/LIBOR spread widens and tightens to the high and low spread determined by using 2 standard deviations. o Prepayment risk scenarios where projected prepayment speeds in up-and-down 200 basis point rate scenarios are compared to current projected prepayment speeds. A static gap analysis is a tool used mainly for interest rate risk measurement, which highlights significant short-term repricing volume mismatches. Management's assumptions related to the prepayment of certain loans and securities as well as the maturity for rate sensitive assets and liabilities are utilized for sensitivity static gap analysis. At March 31, 2001, the balance sheet was liability-sensitive to interest rate movements with $902 million more liabilities than assets scheduled to reprice within three months and $921 million scheduled to reprice within one year. At March 31, 2001, Trustmark's static gap analysis indicates that net interest income would benefit from additional decreases in market interest rates. Trustmark uses derivatives to hedge interest rate exposures by mitigating the interest rate risk of mortgage loans held for sale and mortgage loans in process. Trustmark regularly enters into derivative financial instruments in the form of forward contracts, as part of its normal asset/liability management strategies. Forward contracts, a type of derivative financial instrument, are agreements to purchase or sell securities or other money market instruments at a future specified date at a specified price or yield. Trustmark's obligations under forward contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. During the second half of 2000, Trustmark began a strategy to utilize caps and floors, which will be implemented over time. The intent of utilizing these financial instruments is to reduce the risk associated with the effects of significant movements in interest rates. Caps and floors, which have not been designated as hedging instruments, are options that are linked to a notional principal amount and an underlying indexed interest rate. Exposure to loss on these options will increase or decrease as interest rates fluctuate. LIQUIDITY Trustmark's goal is to maintain an adequate liquidity position to satisfy the cash flow requirements of depositors and borrowers while meeting the cash flow needs which Trustmark requires 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. BUSINESS COMBINATIONS On April 6, 2001, Trustmark completed its merger with Barret Bancorp, Inc. (Barret) in Barretville, Tennessee. Barret, which had assets of $503 million, was the holding company for the former Peoples Bank in Barretville and Somerville Bank and Trust in Somerville, Tennessee. This transaction was accounted for as a purchase business combination.
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There were no material developments for the quarter ended March 31, 2001, 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. There were no reports on Form 8-K filed during the first quarter of 2001
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 (Principal Executive Officer Financial Officer) DATE: May 11, 2001 DATE: May 11, 2001