UNITED STATES FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 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 July 31, 2000. Title Outstanding Common stock, no par value 68,598,293
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Trustmark Corporation and Subsidiaries Consolidated Balance Sheets ($ in thousands) <TABLE> <CAPTION> (Unaudited) June 30, December 31, 2000 1999 ----------- ----------- Assets <S> <C> <C> Cash and due from banks (noninterest-bearing) $ 291,782 $ 279,957 Federal funds sold and securities purchased under reverse repurchase agreements 60,109 29,599 Trading account securities 648 Securities available for sale (at fair value) 1,092,884 783,220 Securities held to maturity (fair value: $992,124 - 2000; $1,374,631 - 1999) 1,007,902 1,390,981 Loans 4,046,366 4,014,935 Less allowance for loan losses 65,850 65,850 ----------- ----------- Net loans 3,980,516 3,949,085 Premises and equipment 81,116 80,575 Intangible assets 64,841 65,063 Other assets 177,211 164,924 ----------- ----------- Total Assets $ 6,757,009 $ 6,743,404 =========== =========== Liabilities Deposits: Noninterest-bearing $ 910,045 $ 860,650 Interest-bearing 3,050,500 3,064,146 ----------- ----------- Total deposits 3,960,545 3,924,796 Federal funds purchased 357,018 287,163 Securities sold under repurchase agreements 847,850 1,090,257 Short-term borrowings 878,734 733,024 Other liabilities 58,418 52,408 ----------- ----------- Total Liabilities 6,102,565 6,087,648 Commitments and Contingencies Shareholders' Equity Common stock, no par value: Authorized: 250,000,000 shares Issued and outstanding: 68,803,793 shares - 2000; 70,423,993 shares - 1999 14,334 14,672 Surplus 164,764 193,721 Retained earnings 480,365 444,999 Accumulated other comprehensive (loss) income, net of tax (5,019) 2,364 ----------- ----------- Total Shareholders' Equity 654,444 655,756 ----------- ----------- Total Liabilities and Shareholders' Equity $ 6,757,009 $ 6,743,404 =========== =========== </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 Six Months Ended June 30, June 30, ---------------------- --------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Interest Income <S> <C> <C> <C> <C> Interest and fees on loans $ 85,443 $ 76,764 $ 168,185 $ 152,799 Interest on securities: Taxable interest income 33,375 29,629 66,480 57,849 Interest income exempt from federal income taxes 1,875 1,614 3,699 3,236 Interest on federal funds sold and securities purchased under reverse repurchase agreements 550 2,133 925 5,718 --------- --------- --------- --------- Total Interest Income 121,243 110,140 239,289 219,602 Interest Expense Interest on deposits 30,256 26,601 58,339 54,243 Interest on federal funds purchased and securities sold under repurchase agreements 17,435 16,658 36,287 32,642 Other interest expense 13,802 5,729 25,002 10,572 --------- --------- --------- --------- Total Interest Expense 61,493 48,988 119,628 97,457 --------- --------- --------- --------- Net Interest Income 59,750 61,152 119,661 122,145 Provision for loan losses 3,198 2,503 5,316 4,469 --------- --------- --------- --------- Net Interest Income After Provision for Loan Losses 56,552 58,649 114,345 117,676 Noninterest Income Service charges on deposit accounts 10,473 9,680 20,355 18,550 Other account charges, fees and commissions 9,174 8,741 18,386 15,168 Mortgage servicing fees 3,664 3,547 7,338 7,047 Trust service income 3,825 3,486 7,293 7,105 Securities gains 3,921 8,562 Other income 2,963 1,106 4,137 2,414 --------- --------- --------- --------- Total Noninterest Income 34,020 26,560 66,071 50,284 Noninterest expense Salaries and employee benefits 24,987 25,177 50,433 49,283 Net occupancy - premises 2,578 2,540 5,158 5,009 Equipment expense 3,886 3,664 7,616 6,979 Services and fees 6,594 6,333 13,308 12,735 Amortization of intangible assets 2,247 2,706 4,499 5,250 Other expense 8,650 6,744 15,354 13,217 --------- --------- --------- --------- Total Noninterest Expense 48,942 47,164 96,368 92,473 --------- --------- --------- --------- Income Before Income Taxes and Cumulative Effect of a Change in Accounting Principle 41,630 38,045 84,048 75,487 Income taxes 14,624 13,122 28,902 26,438 --------- --------- --------- --------- Income Before Cumulative Effect of a Change in Accounting Principle 27,006 24,923 55,146 49,049 Cumulative effect of a change in accounting principle, net of tax (2,464) --------- --------- --------- --------- Net Income $ 27,006 $ 24,923 $ 52,682 $ 49,049 ========= ========= ========= ========= Earnings Per Share Basic and diluted earnings per share before cumulative effect of a change in accounting principle $ 0.39 $ 0.34 $ 0.79 $ 0.68 Cumulative effect of a change in accounting principle, net of tax (0.03) --------- --------- --------- --------- Earnings per share - basic and diluted $ 0.39 $ 0.34 $ 0.76 $ 0.68 ========= ========= ========= ========= </TABLE> See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity ($ in thousands) (Unaudited) 2000 1999 --------- --------- Balance, January 1, $ 655,756 $ 651,876 Comprehensive income: Net income per consolidated statements of income 52,682 49,049 Net change in unrealized losses on securities available for sale, net of tax (7,383) (10,592) --------- --------- Comprehensive income 45,299 38,457 Cash dividends paid (17,316) (15,171) Common stock issued in business combination 18,919 Common stock issued - long-term incentive plan (161) Repurchase and retirement of common stock (29,295) (26,700) --------- --------- Balance, June 30, $ 654,444 $ 667,220 ========= ========= See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries Consolidated Statements of Cash Flows ($ in thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, ------------------------ 2000 1999 --------- --------- Operating Activities <S> <C> <C> Net income $ 52,682 $ 49,049 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,316 4,469 Depreciation and amortization 10,720 10,363 Net (accretion) amortization of securities (844) 413 Securities gains (8,562) Cumulative effect of change in accounting principle 3,820 Net increase in intangible assets (4,295) (7,148) Net decrease (increase) in deferred income taxes 2,967 (283) Net increase in other assets (13,435) (6,584) Net increase in other liabilities 6,010 2,285 Other operating activities, net (1,756) (1,882) --------- --------- Net cash provided by operating activities 52,623 50,682 Investing Activities Proceeds from calls and maturities of securities available for sale 75,157 90,637 Proceeds from calls and maturities of securities held to maturity 103,025 226,876 Proceeds from sales of securities available for sale 15,209 Proceeds from sales of trading securities 130,575 1,047 Purchases of securities available for sale (158,603) (90,484) Purchases of securities held to maturity (98,974) (391,191) Net (increase) decrease in federal funds sold and securities purchased under reverse repurchase agreements (30,510) 87,794 Net increase in loans (34,557) (120,773) Purchases of premises and equipment (6,321) (11,674) Proceeds from sales of premises and equipment 11 4 Proceeds from sales of other real estate 1,894 1,118 Cash received in business combination 6,358 --------- --------- Net cash used by investing activities (3,094) (200,288) Financing Activities Net increase (decrease) in deposits 35,749 (101,093) Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements (172,552) 78,164 Net increase in short-term borrowings 145,710 209,534 Cash dividends (17,316) (15,171) Common stock transactions, net (29,295) (26,861) --------- --------- Net cash (used) provided by financing activities (37,704) 144,573 --------- --------- Increase (decrease) in cash and cash equivalents 11,825 (5,033) Cash and cash equivalents at beginning of period 279,957 312,527 --------- --------- Cash and cash equivalents at end of period $ 291,782 $ 307,494 ========= ========= </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) 1999 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 year presentation. NOTE 2 - BUSINESS COMBINATIONS On April 9, 1999, Trustmark completed its acquisition of the Dan Bottrell Agency, Inc. (Bottrell), an independent insurance agency located in Jackson, Mississippi, with approximately $9 million in total assets. This transaction was accounted for as a purchase business combination. The results of operations, which are not material, have been included in the financial statements from the merger date. NOTE 3 - LOANS The following table summarizes the activity in the allowance for loan losses for the six month periods ended June 30, ($ in thousands): 2000 1999 -------- -------- Balance at beginning of year $ 65,850 $ 66,150 Provision charged to expense 5,316 4,469 Loans charged off (8,534) (7,516) Recoveries 3,218 2,747 -------- -------- Balance at end of period $ 65,850 $ 65,850 ======== ======== At June 30, 2000 and 1999, the carrying amounts of nonaccrual loans were $16.2 million and $14.4 million, respectively. Included in these nonaccrual loans at June 30, 2000 and 1999, are loans that are considered to be impaired and totaled $11.9 million and $10.6 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 second quarter of 2000 and 1999 were $12.1 million and $10.9 million, respectively. No material amounts of interest income were recognized on impaired loans or nonaccrual loans for the second quarter of 2000 or 1999.
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: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Weighted Average Shares Outstanding <S> <C> <C> <C> <C> Basic 68,946,481 72,523,716 69,351,577 72,335,129 Diluted 68,997,233 72,568,376 69,390,216 72,378,095 </TABLE> NOTE 6 - STATEMENTS OF CASH FLOWS Trustmark paid income taxes of $19.3 million and $29.5 million during the six months ended June 30, 2000 and 1999, respectively. Interest paid on deposit liabilities and other borrowings totaled $118.3 million in the first six months of 2000 and $96.4 million in the same period in 1999. For the six months ended June 30, 2000 and 1999, noncash transfers into foreclosed properties were $3.3 million and $1.5 million, respectively. NOTE 7 - RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. During 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133-an amendment of FASB Statement No. 133," which concluded that it was appropriate to defer the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
Trustmark uses derivatives designated as cash flow hedges 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. 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 into mortgage-backed securities. Realized gains and losses on forward contracts and the sale of mortgage loans in the secondary market are recorded upon the settlement of the related forward contract and included in other income. During the first six months of 2000, no recognized net gains or losses related to cash flow hedges were deemed to be material. On January 1, 2000, Trustmark adopted SFAS No. 133. As allowed by SFAS No. 133, at the date of initial application of this statement, Trustmark transferred held to maturity securities with an amortized cost of $237.5 million and a market value of $237.8 million into the available for sale category. In addition, Trustmark transferred held to maturity securities with an amortized cost of $135.1 million and a market value of $131.2 million into the trading category. The effect of adopting SFAS No. 133 is shown as a cumulative effect of a change in accounting principle and reduced net income by $2.5 million (net of taxes) during the first quarter of 2000. In order to offset the effect of adopting SFAS No. 133, Trustmark sold available for sale equity securities which resulted in realized gains in the first quarter of $4.6 million or an after tax gain of $2.9 million. These separate transactions allowed Trustmark to reposition the investment portfolio as well as provide additional liquidity for investment opportunities in a potentially higher yielding market environment while having an insignificant impact on consolidated net income for the first six months of 2000. 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 operational unit expenses along with other related corporate overhead. The following tables disclose financial information by segment for the periods ended June 30, 2000 and 1999.
Trustmark Corporation Segment Information (000's in thousands) <TABLE> <CAPTION> Retail Commercial Financial Treasury Banking Banking Services & Other Total ----------- ----------- ----------- ----------- ----------- For the three months ended June 30, 2000 - -------------------------------------------------- <S> <C> <C> <C> <C> <C> Net interest income from external customers $ 7,911 $ 31,777 $ 11,620 $ 8,442 $ 59,750 Internal funding 22,979 (22,604) (4,385) 4,010 0 ----------- ----------- ----------- ----------- ----------- Net interest income 30,890 9,173 7,235 12,452 59,750 Provision for loan losses 2,369 266 563 0 3,198 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 28,521 8,907 6,672 12,452 56,552 Noninterest income 12,761 159 15,723 5,377 34,020 Noninterest expense 27,558 3,818 11,937 5,629 48,942 ----------- ----------- ----------- ----------- ----------- Income before income taxes 13,724 5,248 10,458 12,200 41,630 Income taxes 4,738 1,813 3,648 4,425 14,624 ----------- ----------- ----------- ----------- ----------- Segment net income $ 8,986 $ 3,435 $ 6,810 $ 7,775 $ 27,006 =========== =========== =========== =========== =========== Selected Financial Information Average assets $ 2,129,390 $ 1,504,023 $ 870,132 $ 2,241,928 $ 6,745,473 Depreciation and amortization $ 1,058 $ 52 $ 1,423 $ 2,828 $ 5,361 For the three months ended June 30, 1999 - -------------------------------------------------- Net interest income from external customers $ 7,807 $ 25,810 $ 4,430 $ 23,105 $ 61,152 Internal funding 23,988 (16,778) 3,482 (10,692) 0 ----------- ----------- ----------- ----------- ----------- Net interest income 31,795 9,032 7,912 12,413 61,152 Provision for loan losses 1,248 380 409 466 2,503 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 30,547 8,652 7,503 11,947 58,649 Noninterest income 11,636 157 13,441 1,326 26,560 Noninterest expense 27,969 3,639 12,014 3,542 47,164 ----------- ----------- ----------- ----------- ----------- Income before income taxes 14,214 5,170 8,930 9,731 38,045 Income taxes 4,907 1,784 3,331 3,100 13,122 ----------- ----------- ----------- ----------- ----------- Segment net income $ 9,307 $ 3,386 $ 5,599 $ 6,631 $ 24,923 =========== =========== =========== =========== =========== Selected Financial Information Average assets $ 2,048,125 $ 1,348,045 $ 815,940 $ 2,329,447 $ 6,541,557 Depreciation and amortization $ 945 $ 60 $ 1,789 $ 2,544 $ 5,338
Trustmark Corporation Segment Information (000's in thousands) Retail Commercial Financial Treasury Banking Banking Services & Other Total ----------- ----------- ----------- ----------- ----------- For the six months ended June 30, 2000 - -------------------------------------------------- Net interest income from external customers $ 16,432 $ 62,206 $ 23,091 $ 17,932 $ 119,661 Internal funding 45,947 (43,992) (9,246) 7,291 0 ----------- ----------- ----------- ----------- ----------- Net interest income 62,379 18,214 13,845 25,223 119,661 Provision for loan losses 3,523 763 1,030 0 5,316 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 58,856 17,451 12,815 25,223 114,345 Noninterest income 24,482 316 29,670 11,603 66,071 Noninterest expense 56,333 7,645 23,844 8,546 96,368 ----------- ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of a change in accounting principle 27,005 10,122 18,641 28,280 84,048 Income taxes 9,323 3,495 6,527 9,557 28,902 ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of a change in accounting principle 17,682 6,627 12,114 18,723 55,146 Cumulative effect of a change in accounting principle 0 0 0 (2,464) (2,464) ----------- ----------- ----------- ----------- ----------- Segment net income $ 17,682 $ 6,627 $ 12,114 $ 16,259 $ 52,682 =========== =========== =========== =========== =========== Selected Financial Information Average assets $ 2,144,688 $ 1,486,673 $ 864,574 $ 2,264,341 $ 6,760,276 Depreciation and amortization $ 2,100 $ 106 $ 2,804 $ 5,710 $ 10,720 For the six months ended June 30, 1999 - -------------------------------------------------- Net interest income from external customers $ 14,591 $ 51,245 $ 8,119 $ 48,190 $ 122,145 Internal funding 49,156 (33,164) 7,523 (23,515) 0 ----------- ----------- ----------- ----------- ----------- Net interest income 63,747 18,081 15,642 24,675 122,145 Provision for loan losses 2,461 692 850 466 4,469 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 61,286 17,389 14,792 24,209 117,676 Noninterest income 22,383 307 25,468 2,126 50,284 Noninterest expense 55,958 7,152 22,726 6,637 92,473 ----------- ----------- ----------- ----------- ----------- Income before income taxes 27,711 10,544 17,534 19,698 75,487 Income taxes 9,567 3,638 6,328 6,905 26,438 ----------- ----------- ----------- ----------- ----------- Segment net income $ 18,144 $ 6,906 $ 11,206 $ 12,793 $ 49,049 =========== =========== =========== =========== =========== Selected Financial Information Average assets $ 2,036,363 $ 1,329,394 $ 804,888 $ 2,339,467 $ 6,510,112 Depreciation and amortization $ 1,878 $ 119 $ 3,493 $ 4,873 $ 10,363 </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) results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and the supplemental financial data included elsewhere in this report. The Private Securities Litigation Reform Act evidences Congress' determination that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by Management. Specifically, Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements with respect to the adequacy of the allowance for loan losses; the effect of legal proceedings on Trustmark's financial condition, results of operations and liquidity; 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 SUMMARY For the second quarter of 2000, Trustmark's net income totaled $27.0 million, compared with $24.9 million for the second quarter of 1999. Basic and diluted earnings per share were $0.39 for the second quarter of 2000, compared with $0.34 for the second quarter of 1999, an increase of 14.7%. For the three months ended June 30, 2000, Trustmark recorded a return on average assets of 1.61%, a return on average equity of 16.37% and a core efficiency ratio of 52.97%. For the second quarter of 1999, Trustmark recorded a return on average assets of 1.53%, a return on average equity of 15.08% and a core efficiency ratio of 52.67% For the six months ended June 30, 2000, Trustmark's net income totaled $52.7 million compared with $49.0 million for the comparable period in 1999. Basic and diluted earnings per share were $0.76 for the first six months of 2000, compared to $0.68 for the first six months of 1999, an increase of 11.8%. Trustmark's performance for the six months ended June 30, 2000, resulted in a return on average assets of 1.57%, a return on average equity of 16.10% and a core efficiency ratio of 52.28%. For the six months ended June 30, 1999, Trustmark recorded a return on average assets of 1.52%, a return on average equity of 15.22% and a core efficiency ratio of 52.50%. At June 30, 2000, Trustmark reported total loans of $4.046 billion, total assets of $6.757 billion, total deposits of $3.961 billion and shareholders' equity of $654.4 million. BUSINESS COMBINATIONS Trustmark seeks to increase shareholder value and diversify products and services through selective acquisitions of other financial services companies, including banks, insurance agencies and asset management companies.
On April 9, 1999, Trustmark completed its acquisition of the Dan Bottrell Agency, Inc. (Bottrell), an independent insurance agency located in Jackson, Mississippi, with approximately $9 million in total assets. This transaction was accounted for as a purchase business combination. The results of operations, which are not material, have been included in the financial statements from the merger date. 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. 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 business units. Trustmark utilizes an investment portfolio as well as off-balance sheet instruments to manage the interest rate risk naturally created through its business activities. The primary tool utilized by the Asset/Liability Committee is a modeling system that 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/prime spread widens and tightens 50 and 100 basis points. o Prepayment risk scenarios where projected prepayment speeds in up-and-down 200 basis point rate scenarios are compared to current projected prepayment speeds. Static gap analysis is a relatively straightforward tool for interest rate risk measurement used mainly in highlighting significant short-term repricing volume mismatches. Utilized in the table below are Management's assumptions relating to prepayments of certain loans and securities as well as the maturity for rate sensitive assets and liabilities. The following table presents Trustmark's rate sensitivity static gap analysis at June 30, 2000 ($ in thousands): Interest Sensitive Within -------------------------- 90 days One Year ----------- ----------- Total rate sensitive assets $ 1,668,170 $ 2,664,086 Total rate sensitive liabilities 2,678,870 3,906,174 ----------- ----------- Net gap ($1,010,700) ($1,242,088) =========== ===========
The analysis indicates a negative gap position over the next three and twelve-month periods which indicates that Trustmark would benefit somewhat from a decrease in market interest rates. Although rates have increased, Management believes there is adequate flexibility to alter the overall rate sensitivity structure as necessary to minimize exposure to these changes. Liquidity Trustmark's goal is to maintain an adequate liquidity position to compensate for balance sheet fluctuations and to provide funds for growth. The Asset/Liability Committee establishes guidelines by which the current liquidity position is monitored to ensure adequate funding capacity. This is accomplished through the active management of both the asset and liability sides of the balance sheet and by maintaining accessibility to local, regional and national funding sources. The ability to maintain consistent earnings and adequate capital also enhances Trustmark's liquidity. EARNING ASSETS Earning assets are composed of loans, securities, federal funds sold, securities purchased under resale agreements and trading account assets, which are the primary revenue streams for Trustmark. At June 30, 2000, earning assets were $6.208 billion, or 91.87% of total assets, compared with $6.219 billion, or 92.22% of total assets at December 31, 1999. Loans Loans are Trustmark's largest group of earning assets and represented 65.2% of earning assets at June 30, 2000, compared with 64.6% at December 31, 1999. At June 30, 2000, loans totaled $4.046 billion compared to $4.015 billion at year-end 1999, an increase of $31.4 million, or 1.0%. During the second quarter of 2000, Trustmark sold $77 million in student loans. This sale was undertaken in order to take advantage of favorable market conditions for the sale of loans with below market interest rates and to provide liquidity to reposition the portfolio in a higher interest rate environment. Excluding the sale of student loans, loan growth would be $108.5 million, or 2.7%, when comparing June 30, 2000 with year-end 1999. Additional growth during the first two quarters was due to the introduction of Trustmark's Business Advantage, a tailored package of financial and discounted business services, with a target market of firms with annual sales up to $3 million. Other loan growth continues to be well diversified. Trustmark's lending policies have consistently produced strong quality assets. One measure of asset quality in the financial services industry is the level of nonperforming assets. Trustmark's nonperforming assets at June 30, 2000 and December 31, 1999 are shown in the following table ($ in thousands): June 30, Dec. 31, 2000 1999 ------- ------- Nonaccrual and restructured loans $16,180 $16,671 Other real estate (ORE) 3,559 1,987 ------- ------- Total nonperforming assets $19,739 $18,658 ======= ======= Accruing loans past due 90 days or more $ 2,610 $ 2,043 ======= ======= Nonperforming assets/total loans and ORE 0.49% 0.46% ======= =======
While the volume of nonperforming assets at June 30, 2000, reflects a slight increase from December 31, 1999, as indicated in the preceding table, it remains at a manageable level and continues to compare favorably to those of peer banks. During the second quarter of 2000, other real estate increased primarily from the addition of closed bank premises that resulted from branch configuration analysis. Management is not aware of any additional credits, other than those identified above, where serious doubts as to the repayment of principal and interest exist. The allowance for loan losses is maintained at a level that Management and the Board of Directors believe is adequate to absorb probable losses within the loan portfolio, plus losses associated with off-balance sheet credit instruments such as letters of credit and unfunded lines of credit. A formal analysis is prepared quarterly to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan losses. Specifically, the analysis is based on factors such as historical loss experience 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. The allowance for loan losses was $65.9 million at June 30, 2000 and December 31, 1999, representing 1.63% and 1.64%, respectively, of total loans outstanding. Net charge-offs were $5.3 million, or 0.26% of average loans, for the six months ended June 30, 2000, compared with $4.8 million, or 0.26% of average loans, for the same period in 1999. Trustmark's level of net charge-offs to average loans continues to compare favorably to those of peer banks. Securities The securities portfolio is utilized to provide a quality investment alternative for available funds, a stable source of interest income and collateral on pledges for public deposits and securities sold under agreements to repurchase. At June 30, 2000, Trustmark's securities portfolio totaled $2.101 billion, a decrease of $73.4 million or 3.4% from December 31, 1999. This decrease can be directly attributed to the adoption of SFAS No. 133 and subsequent transfer of $135 million in held to maturity securities to the trading account. As a percentage of earning assets, the decrease in the securities portfolio from 35.0% at December 31, 1999 to 33.8% at June 30, 2000, also reflects this transfer. As seen in Note 7 of Notes to Consolidated Financial Statements, on January 1, 2000, Trustmark adopted SFAS No. 133. As allowed by SFAS No. 133, at the date of initial application of this statement, Trustmark transferred held to maturity securities with an amortized cost of $237.5 million and a market value of $237.8 million into the available for sale category. In addition, Trustmark transferred held to maturity securities with an amortized cost of $135.1 million and a market value of $131.2 million into the trading category. The effect of adopting SFAS No. 133 is shown as a cumulative effect of a change in accounting principle and reduced net income by $2.5 million (net of taxes) during the first quarter of 2000. In order to offset the effect of adopting SFAS No. 133, Trustmark sold available for sale equity securities which resulted in realized gains in the first quarter of $4.6 million or an after tax gain of $2.9 million. These separate transactions allowed Trustmark to reposition the investment portfolio as well as provide additional liquidity for investment opportunities in a potentially higher yielding market environment while having an insignificant impact on consolidated net income for the first six months of 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 84% 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. Held to maturity (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 June 30, 2000, HTM securities totaled $1.008 billion and represented 48.0% of the total portfolio, compared to a total of $1.391 billion representing 64.0% of the total portfolio at the end of 1999. Available for sale (AFS) securities are reported at their estimated fair value with unrealized gains or losses recognized, net of tax, in accumulated other comprehensive income, a separate component of shareholders' equity. At June 30, 2000, securities available for sale totaled $1.093 billion, which represented 52.0% of the securities portfolio, an increase from 36.0% at year-end 1999. The valuation adjustment to decrease fair value at June 30, 2000 was $8.1 million, compared to a valuation adjustment to increase fair value at December 31, 1999 of $3.8 million. During the second quarter of 2000, Trustmark took advantage of favorable market conditions in order to continue the sale of AFS equity securities. This strategy allowed Trustmark to improve profitability as well as provide liquidity as needed. Other Earning Assets Federal funds sold and securities purchased under reverse repurchase agreements were $60.1 million at June 30, 2000, an increase of $30.5 million when compared with year-end 1999. 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 it serves. Total deposits were $3.961 billion at June 30, 2000, compared to $3.925 billion at December 31, 1999. Time deposits at December 31, 1999 contained a $100 million public CD that matured in January 2000. By excluding this time deposit from the year-end balance, growth in deposits would be approximately $136 million for the first six months of 2000. As a component of total deposits, noninterest-bearing deposits increased to 23.0% at June 30, 2000, compared with 21.9% at year-end 1999. For the same time period, interest-bearing demand deposits decreased slightly to 17.6% from 17.7% of total deposits, savings deposits decreased to 15.6% from 16.2% and time deposits decreased slightly to 43.8% at June 30, 2000, from 44.2% at year-end 1999. The growth in the deposit portfolio has allowed Trustmark to reduce its reliance on short-term borrowings when compared to the end of 1999. Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, Federal Home Loan Bank (FHLB) borrowings and the treasury tax and loan note option account. Short-term borrowings totaled $2.084 billion at June 30, 2000, a decrease of $26 million compared to $2.110 billion at December 31, 1999. Trustmark continues to search for reasonably priced funding alternatives by evaluating new deposit products and an additional brokered CD program. Significant funding remains available through FHLB borrowings.
CONTINGENCIES Trustmark and its subsidiaries are parties to lawsuits and other claims that arise in the ordinary course of business; some of the lawsuits assert claims related to the lending, collection, servicing, investment, trust and other business activities; and some of the lawsuits allege substantial claims for damages. The cases are being vigorously contested. In the regular course of business, Management evaluates estimated losses or costs related to litigation, and provision is made for anticipated losses whenever Management believes that such losses are probable and can be reasonably estimated. At the present time, Management believes, based on the advice of legal counsel, that the final resolution of pending legal proceedings will not have a material impact on Trustmark's consolidated financial position or results of operations. SHAREHOLDERS' EQUITY At June 30, 2000, Trustmark had shareholders' equity of $654.4 million, compared with $655.8 million at year-end 1999, a decrease of $1.3 million. The decline is directly related to the common stock repurchase program, which is described below. The shareholders' equity to assets ratio was 9.69% at June 30, 2000, compared with 9.72% at December 31, 1999. Trustmark's book value was $9.51 at June 30, 2000, compared to $9.31 at December 31, 1999. Regulatory Capital Trustmark and Trustmark National Bank (the Bank) are subject to minimum capital requirements, which are administered by various Federal regulatory agencies. These capital requirements, as defined by Federal guidelines, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of both Trustmark and the Bank. Management believes, as of June 30, 2000, that Trustmark and the Bank meet all capital adequacy requirements to which they are subject. At June 30, 2000, the most recent notification from the Office of the Comptroller of the Currency (OCC) categorized the Bank as well-capitalized. To be categorized in this manner, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios (defined in the applicable regulations) as set forth in the table below. There are no significant conditions or events that have occurred since the OCC's notification that Management believes have affected the Bank's present classification. Actual and minimum regulatory capital amounts and ratios at June 30, 2000, for Trustmark and the Bank are as follows ($ 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 $687,043 16.61% $330,975 8.00% Trustmark National Bank $680,587 16.46% $330,847 8.00% Tier 1 Capital (to Risk Weighted Assets) Trustmark Corporation $634,797 15.34% $165,488 4.00% Trustmark National Bank $628,717 15.20% $165,424 4.00% Tier 1 Capital (to Average Assets) Trustmark Corporation $634,797 9.45% $201.624 3.00% Trustmark National Bank $628,717 9.36% $201,538 3.00% </TABLE>
Common Stock Repurchase Program In November 1998, Trustmark implemented a capital management plan, which authorized the repurchase of up to 7.5%, or 5.46 million shares of common stock. Since implementation of the plan, Trustmark has purchased approximately 4.84 million shares of common stock in the open market, including 360 thousand in the second quarter of 2000. This program has allowed Trustmark to increase the return on equity to shareholders, while maintaining sufficient capital levels and related ratios to satisfy regulatory requirements. On July 11, 2000, Trustmark's Board of Directors authorized the repurchase of up to an additional 5.0%, or approximately 3.4 million shares, of common stock, with implementation to begin upon the conclusion of the original program. The new program, which continues to be subject to market conditions and management discretion, will be implemented through open market purchases or privately negotiated transactions. Dividends Cash dividends paid during the first six months of 2000 totaled $17.3 million, an increase of $2.1 million or 14.1%, from $15.2 million paid during the same period in 1999. The payout ratio of cash dividends paid to net income was 32.89% in the first half of 2000 and 30.88% for the same period in 1999. Dividends per share were $0.25 per share for the first six months of 2000, 19.0% higher than the $0.21 per share paid in the same period of 1999. RESULTS OF OPERATIONS Net Interest Income Net interest income (NII) is interest income generated by interest-earning assets reduced by the interest expense of funding those assets and is Trustmark's principal source of income. Consequently, changes in the mix and volume of interest-earning assets and interest-bearing liabilities, and their related yields and interest rates, can impact earnings. 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 illustrates the net interest margin as a percentage of average interest-earning assets for the periods shown: Six Months Ended June 30, ------------- 2000 1999 ----- ----- Yield on interest-earning assets-FTE 7.85% 7.54% Rate on interest-bearing liabilities 3.86% 3.29% ----- ----- Net interest margin-FTE 3.99% 4.25% ===== =====
For the six months ended June 30, 2000, NII decreased $2.5 million, or 2.0%, when compared with the same period in 1999. Average interest-earning assets for the first six months of 2000 were $6.234 billion, compared to $5.973 billion for the first six months of 1999, an increase of $261 million or 4.4%. The average interest-earning asset growth is attributable to an 8.2% increase in average loans and a 7.5% increase in average securities, when comparing the first half of 2000 to the same period in 1999. This combination resulted in growth in interest income of $19.7 million, or 9.0%, when comparing the first half of 2000 to the same period in 1999. The growth in interest income was offset by an increase in funding costs that resulted from a change in the mix of interest-bearing liabilities. While average interest-bearing deposits decreased slightly when comparing the first six months of 2000 with the same period in 1999, average short-term borrowings increased 14.6%. This growth, combined with a rising interest rate environment, resulted in an increase in interest expense for the first six months of 2000 of $22.2 million, or 22.7%, when compared to the same time period in 1999. Provision for Loan Losses The provision for loan losses reflects Management's assessment of the adequacy of the allowance for loan losses to absorb inherent write-offs in the loan portfolio. Factors considered in the assessment include growth and composition of the loan portfolio, historical credit loss experience, current and anticipated economic conditions and changes in borrowers' financial positions. During the first six months of 2000, Trustmark's provision totaled $5.3 million, compared to $4.5 million for the same period in 1999. This increase is the result of an $800 thousand direct charge-off related to a specific credit, which occurred during the second quarter of 2000. The provision to average loans was 0.26% for the first six months of 2000, compared to 0.24% for the same period in 1999. Trustmark's ratio of the provision for loan losses to average loans continues to compare favorably with those of peer banks. Noninterest Income Trustmark stresses the importance of growth in noninterest income as one of its key long-term strategies. This was accomplished during the first six months of 2000, as noninterest income, excluding securities gains/losses, increased $7.2 million, or 14.4%, when compared with the first six months of 1999. The Bottrell business combination completed during 1999 contributed $2.3 million to the increase in noninterest income for 2000. Excluding the Bottrell business combination, noninterest income growth would be 9.8% for the six months ended June 30, 2000. Other growth in noninterest income can be attributed to fees earned from deposit products and services. Service charges for deposit products and services has been the single largest component of noninterest income and totaled $20.4 million in the first six months of 2000, compared to $18.6 million for the same period in 1999. This 9.7% increase in service charges has been the result of Trustmark's expansion of customer relationships, combined with new product offerings. The second largest component of noninterest income has been other account charges, fees and commissions, totaling $18.4 million in the first six months of 2000, compared to $15.2 million during the same period in 1999. This 21.2% increase is due to Trustmark's expansion of its insurance line of business by acquiring Bottrell in 1999 and expanding the sales of annuity products. This combination of new products and services contributed $2.5 million to the growth of other account charges, fees and commissions during the first six months of 2000.
Other income totaled $4.1 million for the first six months of 2000, compared to $2.4 million for the same period in 1999. Contributing to the change in other income was $1.3 million in nontaxable benefits received on a key man life insurance policy and $2.1 million gain from the sale of student loans which offset a market write-down of $669 thousand on trading account securities and a reduction in gain on sale of mortgage loans of $1.6 million. The decrease in gain on sale of loans can be attributed to a higher interest rate environment, which impaired the sale of mortgage loans. Both mortgage servicing fees and trust service income showed modest increases during the first six months of 2000. Securities gains totaled $8.5 million for the first six months of 2000. During the first quarter of 2000, securities gains of $4.6 million, which were realized from sales of AFS equity securities, were used to offset the effect of adopting SFAS No. 133. During the second quarter of 2000, securities gains totaled $3.9 million as Trustmark continued the sale of AFS equity securities in order to provide additional revenues as well as liquidity where needed. During the first six months of 2000, there were no sales of securities held to maturity. Noninterest Expense Total noninterest expense increased $3.9 million, or 4.2%, in the first six months of 2000, when compared to the same period in 1999. Total noninterest expense were $96.4 million in the first six months of 2000, compared with $92.5 million during the same period in 1999. The Bottrell business combination completed during 1999 contributed $1.7 million to this increase in noninterest expense for the first six months of 2000. The efficiency ratio, which is total noninterest expense as a percentage of tax equivalent net interest income plus noninterest income, is a primary measure of the effectiveness of noninterest expense control. During 2000, Trustmark continues to exceed its corporate goal of an efficiency ratio of 55% or less with an efficiency ratio of 52.28%. This compared with an efficiency ratio of 52.50% for the first six months of 1999. Salaries and employee benefits, which represent the largest category of noninterest expense, were $50.4 million in the first six months of 2000, an increase of $1.2 million, or 2.3%, when compared to the first six months of 1999. The Bottrell acquisition contributed $1.1 million to this increase in salaries and employee benefits during 2000. At June 30, 2000, Trustmark had 2,258 full-time equivalent employees, compared to 2,302 at June 30, 1999. Other expenses were $15.4 million in the first six months of 2000, an increase of $2.1 million, or 16.2%, when compared to the first six months of 1999. Litigation settlements of $1.6 million, which were completed during the second quarter of 2000, were a primary portion of the increase in other expenses during 2000. These claims have reached final resolution and pose no future threat to results of operations. Also contributing to the increase in other expenses was a charge of $461 thousand related to reengineering costs associated with the new Strategic Sourcing initiative. This initiative, which Trustmark began during the second quarter of 2000, will reduce supply costs and improve efficiency. All other expense categories remained well controlled for the first six months of 2000, as evidenced by an increase of $608 thousand, or 2.0%, when compared to the same time period in 1999. Management will continue to closely monitor the level of noninterest expense as part of its strategic plan to improve the profitability of Trustmark.
Income Taxes For the six months ended June 30, 2000, Trustmark's combined effective tax rate was 34.4%, compared with 35.0% for the first six months of 1999. The reduction in Trustmark's effective tax rate is due primarily to the receipt of nontaxable benefits received on a key man life insurance policy in the first quarter of 2000. RECENT PRONOUNCEMENTS - DERIVATIVES In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. During 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133-an amendment of FASB Statement No. 133," which deferred the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Because Trustmark adopted SFAS No. 133 on January 1, 2000, the deferral of the effective date had no effect on the Corporation.
Part II. OTHER INFORMATION Item 1. Legal Proceedings There were no material developments for the quarter ended June 30, 2000, other than those disclosed in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of this Form 10-Q. Item 6. Exhibits and Reports on Form 8-K 1. The following exhibits are included herein: (27) Financial Data Schedule 2. There were no reports on Form 8-K filed during the second quarter of 2000.
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: August 11, 2000 DATE: August 11, 2000
EXHIBIT INDEX Exhibit Number Description - -------------- ----------------------- 27 Financial Data Schedule