NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES
OF
CONSOLIDATION
The
consolidated financial statements in this quarterly report on Form 10-Q include
the accounts of Trustmark Corporation (Trustmark) and all other entities in
which Trustmark has a controlling financial interest. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the consolidated financial statements, and notes thereto, included in
Trustmark’s 2007 annual report on Form 10-K. Operating results for
the interim periods disclosed herein are not necessarily indicative of the
results that may be expected for a full year or any future
period. Certain reclassifications have been made to prior period
amounts to conform to the current period presentation.
Management
is required to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. 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.
NOTE
2 – LOANS AND ALLOWANCE FOR LOAN LOSSES
For the
periods presented, loans consisted of the following ($ in
thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
Construction,
land development and other land loans
|
|
$
|
1,062,319
|
|
|
$
|
1,194,940
|
|
Secured
by 1-4 family residential properties
|
|
|
1,561,024
|
|
|
|
1,694,757
|
|
Secured
by nonfarm, nonresidential properties
|
|
|
1,345,624
|
|
|
|
1,325,379
|
|
Other
real estate secured
|
|
|
175,877
|
|
|
|
167,610
|
|
Commercial
and industrial loans
|
|
|
1,328,035
|
|
|
|
1,283,014
|
|
Consumer
loans
|
|
|
947,113
|
|
|
|
1,087,337
|
|
Other
loans
|
|
|
320,738
|
|
|
|
287,755
|
|
Loans
|
|
|
6,740,730
|
|
|
|
7,040,792
|
|
Less
allowance for loan losses
|
|
|
90,888
|
|
|
|
79,851
|
|
Net
loans
|
|
$
|
6,649,842
|
|
|
$
|
6,960,941
|
|
The
following table summarizes the activity in the allowance for loan losses for the
periods presented ($ in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$
|
86,576
|
|
|
$
|
70,948
|
|
|
$
|
79,851
|
|
|
$
|
72,098
|
|
Loans
charged-off
|
|
|
(12,732
|
)
|
|
|
(6,417
|
)
|
|
|
(56,728
|
)
|
|
|
(14,886
|
)
|
Recoveries
|
|
|
2,571
|
|
|
|
2,838
|
|
|
|
8,037
|
|
|
|
8,373
|
|
Net
charge-offs
|
|
|
(10,161
|
)
|
|
|
(3,579
|
)
|
|
|
(48,691
|
)
|
|
|
(6,513
|
)
|
Provision
for loan losses
|
|
|
14,473
|
|
|
|
4,999
|
|
|
|
59,728
|
|
|
|
6,783
|
|
Balance
at end of period
|
|
$
|
90,888
|
|
|
$
|
72,368
|
|
|
$
|
90,888
|
|
|
$
|
72,368
|
|
The
allowance for loan losses is maintained at a level believed adequate by
Management, based on estimated probable losses within the existing loan
portfolio. Trustmark’s allowance for loan loss methodology is based
on guidance provided in SEC Staff Accounting Bulletin (SAB) No. 102, “Selected
Loan Loss Allowance Methodology and Documentation Issues,” as well as other
regulatory guidance. Accordingly, Trustmark’s methodology is based on
historical loss experience by type of loan and internal risk ratings,
homogeneous risk pools and specific loss allocations, with adjustments
considering environmental factors such as current economic events, industry and
geographical conditions and portfolio performance indicators. The
provision for loan losses reflects loan quality trends, including the levels of
and trends related to nonaccrual loans, past due loans, potential problem loans
and net charge-offs or recoveries, among other factors, in compliance with the
Interagency Policy Statement on the Allowance for Loan and Lease Losses
published by the governmental regulating agencies for financial services
companies. This evaluation is inherently subjective, as it requires
material estimates, including the amounts and timings of future cash flows
expected to be received and valuation adjustments on impaired loans that may be
susceptible to significant changes. Management believes that the allowance for
loan losses adequately provides for probable losses in its loan portfolio at
September 30, 2008.
At
September 30, 2008 and December 31, 2007, the carrying amounts of nonaccrual
loans, which are considered for impairment in accordance with SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan,” were $105.3 million and
$65.2 million, respectively. When a loan is deemed to be impaired,
the full difference between the carrying amount of the loan and the most likely
estimate of the assets net realizable value is charged-off and, as such, the
impaired loan has no specific allowance for loan loss reserves. At
September 30, 2008 and December 31, 2007, specifically evaluated impaired loans
totaled $42.7 million and $6.5 million, respectively. For the first
nine months of 2008, specific charge-offs related to impaired loans totaled
$28.9 million while the provisions charged to net income totaled $18.5
million. For the first nine months of 2007, both charge-offs related
to specifically evaluated impaired loans and provisions charged to net income
were zero.
At
September 30, 2008 and December 31, 2007, nonaccrual loans, not specifically
impaired and written down to net realizable value, totaled $62.6 million and
$58.7 million, respectively. In addition, these nonaccrual loans had
allocated allowance for loan losses of $11.8 million and $12.5 million at the
end of the respective periods. No material interest income was
recognized in the income statement on impaired or nonaccrual loans during the
nine months ended September 30, 2008 and 2007.
NOTE
3 – MORTGAGE BANKING
The fair
value of mortgage servicing rights (MSR) is determined using discounted cash
flow techniques which are periodically benchmarked against third-party opinions
of value. Estimates of fair value involve several assumptions, including the key
valuation assumptions about market expectations of future prepayment rates,
interest rates and discount rates. Prepayment rates are projected using an
industry standard prepayment model. The model considers other key factors, such
as a wide range of standard industry assumptions tied to specific portfolio
characteristics such as remittance cycles, escrow payment requirements,
geographic factors, foreclosure loss exposure, VA no-bid exposure, delinquency
rates and cost of servicing, including base cost and cost to service delinquent
mortgages. Prevailing market conditions at the time of analysis are factored
into the accumulation of assumptions and determination of servicing
value.
Trustmark
utilizes derivative instruments, specifically exchange-traded Treasury note
futures and option contracts, to offset changes in the fair value of MSR
attributable to changes in interest rates. Changes in the fair value of these
derivative instruments are recorded in mortgage banking income and are offset by
the changes in the fair value of MSR, as shown in the accompanying
table. MSR fair values represent the effect of present value decay
and the effect of changes in interest rates. Ineffectiveness of
hedging MSR fair value is measured by comparing total hedge position to the fair
value of the MSR asset attributable to market changes. Changes in
yields created fluctuating values in both MSR and the hedge during the third
quarter of 2008. Lower mortgage rates experienced during the third
quarter resulted in a decrease of $903 thousand in the MSR value due to market
changes which contrasts the second quarter of 2008 when the MSR value increased
by $13.1 million due to rising mortgage rates. Conversely, the hedge
value increased by $1.7 million during the third quarter of 2008 due to falling
yields on ten-year Treasury notes, compared to a second quarter decrease of
$10.5 million. The result was $777 thousand of positive net
ineffectiveness during the third quarter compared to $2.6 million during the
second quarter.
The
activity in mortgage servicing rights is detailed in the table below ($ in
thousands):
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of period
|
|
$
|
67,192
|
|
|
$
|
69,272
|
|
Origination
of servicing assets
|
|
|
18,759
|
|
|
|
14,284
|
|
Disposals
|
|
|
(2,524
|
)
|
|
|
(1,707
|
)
|
Change
in fair value:
|
|
|
|
|
|
|
|
|
Due
to market changes
|
|
|
2,008
|
|
|
|
(1,323
|
)
|
Due
to runoff
|
|
|
(6,885
|
)
|
|
|
(7,279
|
)
|
Due
to other
|
|
|
-
|
|
|
|
6
|
|
Balance
at end of period
|
|
$
|
78,550
|
|
|
$
|
73,253
|
|
NOTE
4 - DEPOSITS
At
September 30, 2008 and December 31, 2007, deposits consisted of the following ($
in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Noninterest-bearing
demand deposits
|
|
$
|
1,526,374
|
|
|
$
|
1,477,171
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
|
1,165,278
|
|
|
|
1,210,817
|
|
Savings
|
|
|
1,754,533
|
|
|
|
1,577,198
|
|
Time
|
|
|
2,491,493
|
|
|
|
2,604,086
|
|
Total
interest-bearing deposits
|
|
|
5,411,304
|
|
|
|
5,392,101
|
|
Total
deposits
|
|
$
|
6,937,678
|
|
|
$
|
6,869,272
|
|
NOTE
5 – STOCK AND INCENTIVE COMPENSATION PLANS
Trustmark
accounts for stock and incentive compensation following the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based
Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based
Compensation.” This statement establishes fair value as the
measurement objective in accounting for stock awards and requires the
application of a fair value based measurement method in accounting for
compensation cost, which is recognized over the requisite service
period. Trustmark implemented the provisions of this statement using
the modified prospective approach, which applies to new awards, as well as, any
previously granted awards outstanding on January 1,
2006. Compensation cost for the portion of awards for which the
requisite service had not been rendered as of the date of adoption, is being
recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes previously under SFAS No.
123.
Stock
Option Grants
During
the first nine months of 2008, there were no grants of stock option
awards. Stock option-based compensation expense totaled $681 thousand
and $949 thousand for the first nine months of 2008 and 2007,
respectively. Stock option-based compensation expense totaled $179
thousand and $338 thousand for the three months ended September 30, 2008 and
2007, respectively.
Restricted
Stock Grants
Performance
Awards
During
the first nine months of 2008, Trustmark awarded 76,464 shares of performance
based restricted stock to 28 key members of Trustmark’s executive management
team and board of directors. These performance awards vest based on
performance goals of return on average tangible equity (ROATE) and total
shareholder return (TSR) compared to a defined peer group. The awards
are restricted until December 31, 2010 and are valued in accordance with SFAS
No. 123R. The TSR portion of the award is valued utilizing a
Monte Carlo simulation to estimate fair value of the awards at the grant date,
while the ROATE portion is valued utilizing fair value of Trustmark’s stock at
the grant date based on the estimated number of shares expected to
vest.
The
performance based restricted stock issued in May 2005, vested on December 31,
2007. The stock related to this grant was issued to the participants free of
restriction during the first quarter of 2008. As a result of achieving 132% of
the performance goals during the performance period, 21,060 excess shares were
awarded and will vest at either the date of Trustmark’s Annual meeting of
Shareholders in 2010 or May 31, 2010, whichever comes first.
Time-Vested
Awards
Trustmark’s
time-vested awards are granted as an incentive in both employee recruitment and
retention and are issued to Trustmark’s directors, the executive management team
and non-executive management associates. During the first nine months of 2008,
Trustmark awarded 100,368 shares of time-vested restricted stock to key members
of Trustmark’s management team and board of directors. These
time-vested awards are restricted for thirty-six months from the award
dates. The weighted average share price of the shares awarded during
the first nine months of 2008 was $20.99.
During
the first nine months of 2008 and 2007, Trustmark recorded compensation expense
for restricted stock awards of $2.5 million and $1.5 million,
respectively. During the three-month period ended September 30, 2008
and 2007, Trustmark recorded compensation expense for restricted stock awards of
$884 thousand and $497 thousand, respectively.
NOTE
6 – BENEFIT PLANS
Pension
Plan
Trustmark
maintains a noncontributory defined benefit pension plan (Trustmark Capital
Accumulation Plan), which covers substantially all associates employed prior to
January 1, 2007. The plan provides retirement benefits that are based on the
length of credited service and final average compensation as defined in the plan
and vests upon five years of service.
In
December 2006, Trustmark adopted the provisions of SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans" and
elected to move its measurement date for the plan to December 31 from October
31. The following table presents information regarding the net
periodic benefit cost for the periods ended September 30, 2008 and 2007 ($ in
thousands):
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
325
|
|
|
$
|
327
|
|
|
$
|
1,234
|
|
|
$
|
980
|
|
Interest
cost
|
|
|
1,234
|
|
|
|
1,174
|
|
|
|
3,702
|
|
|
|
3,523
|
|
Expected
return on plan assets
|
|
|
(1,399
|
)
|
|
|
(1,323
|
)
|
|
|
(4,195
|
)
|
|
|
(3,968
|
)
|
Amortization
of prior service cost
|
|
|
(127
|
)
|
|
|
(127
|
)
|
|
|
(382
|
)
|
|
|
(382
|
)
|
Recognized
net actuarial loss
|
|
|
552
|
|
|
|
564
|
|
|
|
1,394
|
|
|
|
1,691
|
|
Net
periodic benefit cost
|
|
$
|
585
|
|
|
$
|
615
|
|
|
$
|
1,753
|
|
|
$
|
1,844
|
|
The
acceptable range of contributions to the plan is determined each year by the
plan's actuary. Trustmark's policy is to fund amounts allowable for
federal income tax purposes. The actual amount of the contribution
will be determined based on the plan's funded status and return on plan assets
as of the measurement date, which was December 31, 2007 for amounts related to
2008. In 2008, Trustmark’s minimum required contribution is expected
to be zero.
Supplemental
Retirement Plan
Trustmark
maintains a non-qualified supplemental retirement plan covering directors that
elect to defer fees, key executive officers and senior officers. The
plan provides for defined death benefits and/or retirement benefits based on a
participant's covered salary. Trustmark has acquired life insurance
contracts on the participants covered under the plan, which may be used to fund
future payments under the plan. The measurement date for the plan is
December 31.
The
following table presents information regarding the plan's net periodic benefit
cost for periods ended September 30, 2008 and 2007 ($ in
thousands):
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
241
|
|
|
$
|
330
|
|
|
$
|
850
|
|
|
$
|
978
|
|
Interest
cost
|
|
|
523
|
|
|
|
454
|
|
|
|
1,568
|
|
|
|
1,362
|
|
Amortization
of prior service cost
|
|
|
42
|
|
|
|
35
|
|
|
|
111
|
|
|
|
105
|
|
Recognized
net actuarial loss
|
|
|
90
|
|
|
|
23
|
|
|
|
185
|
|
|
|
70
|
|
Net
periodic benefit cost
|
|
$
|
896
|
|
|
$
|
842
|
|
|
$
|
2,714
|
|
|
$
|
2,515
|
|
NOTE
7 – CONTINGENCIES
Letters
of Credit
Standby
and commercial letters of credit are conditional commitments issued by Trustmark
to insure the performance of a customer to a third party. Trustmark
issues financial and performance standby letters of credit in the normal course
of business in order to fulfill the financing needs of its
customers. A financial standby letter of credit irrevocably obligates
Trustmark to pay a third-party beneficiary when a customer fails to repay an
outstanding loan or debt instrument. A performance standby letter of
credit irrevocably obligates Trustmark to pay a third-party beneficiary when a
customer fails to perform some contractual, nonfinancial
obligation. When issuing letters of credit, Trustmark uses
essentially the same policies regarding credit risk and collateral which are
followed in the lending process. At September 30, 2008 and 2007,
Trustmark’s maximum exposure to credit loss in the event of nonperformance by
the other party for standby and commercial letters of credit was $182.8 million
and $171.9 million, respectively. These amounts consist primarily of
commitments with maturities of less than three years, which have an immaterial
carrying value. Trustmark holds collateral to support standby letters
of credit when deemed necessary. As of September 30, 2008, the fair
value of collateral held was $44.8 million.
Legal
Proceedings
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 and Management’s evaluation, that the final resolution
of pending legal proceedings will not have a material impact on Trustmark’s
consolidated financial position or results of operations; however, Management is
unable to estimate a range of potential loss on these matters because of the
nature of the legal environment in states where Trustmark conducts
business.
NOTE
8 – 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 potentially dilutive stock grants
outstanding during the period. The following table reflects
weighted-average shares used to calculate basic and diluted EPS for the periods
presented (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic
shares
|
|
|
57,299
|
|
|
|
57,267
|
|
|
|
57,293
|
|
|
|
57,856
|
|
Dilutive
shares
|
|
|
39
|
|
|
|
260
|
|
|
|
33
|
|
|
|
287
|
|
Diluted
shares
|
|
|
57,338
|
|
|
|
57,527
|
|
|
|
57,326
|
|
|
|
58,143
|
|
NOTE
9 - STATEMENTS OF CASH FLOWS
Trustmark paid $40.9 million in income
taxes during the first nine months of 2008, compared to $34.7 million paid
during the first nine months of 2007. Interest paid on deposit
liabilities and other borrowings approximated $141.6 million in the first nine
months of 2008 and $185.4 million in the first nine months of
2007. For the nine months ended September 30, 2008 and 2007, noncash
transfers from loans to foreclosed properties were $30.2 million and $5.6
million, respectively.
NOTE
10 – SEGMENT INFORMATION
Trustmark’s
management reporting structure includes four segments: general banking, wealth
management, insurance and administration. General banking is
responsible for all traditional banking products and services, including loans
and deposits. Wealth management provides customized solutions for
affluent customers by integrating financial services with traditional banking
products and services such as private banking, money management, full-service
brokerage, financial planning, personal and institutional trust, and retirement
services, as well as life insurance and risk management services provided by
TRMK Risk Management, Inc., a wholly-owned subsidiary of Trustmark National Bank
(TNB). Insurance includes two wholly-owned subsidiaries of
TNB: The Bottrell Insurance Agency and Fisher-Brown,
Incorporated. Through Bottrell and Fisher-Brown, Trustmark provides a
full range of retail insurance products, including commercial risk management
products, bonding, group benefits and personal lines
coverages. Administration includes all other activities that are not
directly attributable to one of the major lines of
business. Administration consists of internal operations such as
Human Resources, Executive Administration, Treasury and Corporate
Finance.
The
accounting policies of each reportable segment are the same as those of
Trustmark except for its internal allocations. Noninterest expenses for
back-office operations support are allocated to segments based on estimated uses
of those services. Trustmark measures the net interest income of its business
segments with a process that assigns cost of funds or earnings credit on a
matched-term basis. This process, called "funds transfer pricing",
charges an appropriate cost of funds to assets held by a business unit, or
credits the business unit for potential earnings for carrying
liabilities. The net of these charges and credits flows through to
the Administration Division, which contains the management team responsible for
determining the bank's funding and interest rate risk
strategies. During the first nine months of 2008, net interest
income increased in the Administration Division primarily from two factors;
first, as a result of a steeper yield curve, the earnings credit to segments on
deposits declined by a greater amount than the cost of funds charged to segments
on loans and secondly, additional interest income was recognized from growth in
the securities portfolio which is held in the Administration
Division.
The
following tables disclose financial information by reportable segment for the
periods ended September 30, 2008 and 2007.
Trustmark
Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Information
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
General
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
|
Management
|
|
|
Insurance
|
|
|
Administration
|
|
|
|
|
For
the three months ended
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Total
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
62,452
|
|
|
$
|
970
|
|
|
$
|
96
|
|
|
$
|
15,878
|
|
|
$
|
79,396
|
|
Provision
for loan losses
|
|
|
14,479
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
14,473
|
|
Noninterest
income
|
|
|
25,868
|
|
|
|
7,202
|
|
|
|
9,221
|
|
|
|
(341
|
)
|
|
|
41,950
|
|
Noninterest
expense
|
|
|
52,737
|
|
|
|
5,232
|
|
|
|
6,336
|
|
|
|
8,429
|
|
|
|
72,734
|
|
Income
before income taxes
|
|
|
21,104
|
|
|
|
2,946
|
|
|
|
2,981
|
|
|
|
7,108
|
|
|
|
34,139
|
|
Income
taxes
|
|
|
7,281
|
|
|
|
1,051
|
|
|
|
1,113
|
|
|
|
1,340
|
|
|
|
10,785
|
|
Segment
net income
|
|
$
|
13,823
|
|
|
$
|
1,895
|
|
|
$
|
1,868
|
|
|
$
|
5,768
|
|
|
$
|
23,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets
|
|
$
|
7,398,285
|
|
|
$
|
99,497
|
|
|
$
|
25,077
|
|
|
$
|
1,549,275
|
|
|
$
|
9,072,134
|
|
Depreciation
and amortization
|
|
$
|
5,232
|
|
|
$
|
83
|
|
|
$
|
114
|
|
|
$
|
1,254
|
|
|
$
|
6,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
70,157
|
|
|
$
|
1,028
|
|
|
$
|
-
|
|
|
$
|
3,901
|
|
|
$
|
75,086
|
|
Provision
for loan losses
|
|
|
4,803
|
|
|
|
23
|
|
|
|
-
|
|
|
|
173
|
|
|
|
4,999
|
|
Noninterest
income
|
|
|
25,761
|
|
|
|
6,721
|
|
|
|
9,019
|
|
|
|
68
|
|
|
|
41,569
|
|
Noninterest
expense
|
|
|
47,972
|
|
|
|
4,774
|
|
|
|
6,481
|
|
|
|
9,261
|
|
|
|
68,488
|
|
Income
(loss) before income taxes
|
|
|
43,143
|
|
|
|
2,952
|
|
|
|
2,538
|
|
|
|
(5,465
|
)
|
|
|
43,168
|
|
Income
taxes
|
|
|
14,882
|
|
|
|
1,043
|
|
|
|
984
|
|
|
|
(2,822
|
)
|
|
|
14,087
|
|
Segment
net income (loss)
|
|
$
|
28,261
|
|
|
$
|
1,909
|
|
|
$
|
1,554
|
|
|
$
|
(2,643
|
)
|
|
$
|
29,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets
|
|
$
|
7,424,380
|
|
|
$
|
93,119
|
|
|
$
|
28,111
|
|
|
$
|
1,291,838
|
|
|
$
|
8,837,448
|
|
Depreciation
and amortization
|
|
$
|
5,767
|
|
|
$
|
87
|
|
|
$
|
107
|
|
|
$
|
1,395
|
|
|
$
|
7,356
|
|
Trustmark
Corporation
|
|
|
|
|
Segment
Information
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
General
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
|
Management
|
|
|
Insurance
|
|
|
Administration
|
|
|
|
|
For
the nine months ended
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Total
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
189,835
|
|
|
$
|
3,025
|
|
|
$
|
144
|
|
|
$
|
38,759
|
|
|
$
|
231,763
|
|
Provision
for loan losses
|
|
|
59,555
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
191
|
|
|
|
59,728
|
|
Noninterest
income
|
|
|
85,743
|
|
|
|
21,800
|
|
|
|
25,827
|
|
|
|
5,562
|
|
|
|
138,932
|
|
Noninterest
expense
|
|
|
152,935
|
|
|
|
15,825
|
|
|
|
18,231
|
|
|
|
25,183
|
|
|
|
212,174
|
|
Income
before income taxes
|
|
|
63,088
|
|
|
|
9,018
|
|
|
|
7,740
|
|
|
|
18,947
|
|
|
|
98,793
|
|
Income
taxes
|
|
|
21,761
|
|
|
|
3,200
|
|
|
|
2,940
|
|
|
|
3,807
|
|
|
|
31,708
|
|
Segment
net income
|
|
$
|
41,327
|
|
|
$
|
5,818
|
|
|
$
|
4,800
|
|
|
$
|
15,140
|
|
|
$
|
67,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets
|
|
$
|
7,523,002
|
|
|
$
|
97,032
|
|
|
$
|
20,796
|
|
|
$
|
1,392,181
|
|
|
$
|
9,033,011
|
|
Depreciation
and amortization
|
|
$
|
15,992
|
|
|
$
|
249
|
|
|
$
|
319
|
|
|
$
|
3,799
|
|
|
$
|
20,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
$
|
208,018
|
|
|
$
|
3,004
|
|
|
$
|
(2
|
)
|
|
$
|
9,840
|
|
|
$
|
220,860
|
|
Provision
for loan losses
|
|
|
6,970
|
|
|
|
3
|
|
|
|
-
|
|
|
|
(190
|
)
|
|
|
6,783
|
|
Noninterest
income
|
|
|
73,615
|
|
|
|
19,246
|
|
|
|
27,744
|
|
|
|
(415
|
)
|
|
|
120,190
|
|
Noninterest
expense
|
|
|
148,028
|
|
|
|
14,762
|
|
|
|
18,579
|
|
|
|
25,358
|
|
|
|
206,727
|
|
Income
(loss) before income taxes
|
|
|
126,635
|
|
|
|
7,485
|
|
|
|
9,163
|
|
|
|
(15,743
|
)
|
|
|
127,540
|
|
Income
taxes
|
|
|
43,705
|
|
|
|
2,652
|
|
|
|
3,552
|
|
|
|
(7,135
|
)
|
|
|
42,774
|
|
Segment
net income (loss)
|
|
$
|
82,930
|
|
|
$
|
4,833
|
|
|
$
|
5,611
|
|
|
$
|
(8,608
|
)
|
|
$
|
84,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets
|
|
$
|
7,296,015
|
|
|
$
|
89,394
|
|
|
$
|
22,326
|
|
|
$
|
1,411,645
|
|
|
$
|
8,819,380
|
|
Depreciation
and amortization
|
|
$
|
16,208
|
|
|
$
|
298
|
|
|
$
|
307
|
|
|
$
|
4,219
|
|
|
$
|
21,032
|
|
NOTE
11 – FAIR VALUE
On
January 1, 2008, Trustmark adopted SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 established a framework for measuring fair value in generally accepted
accounting principles and expanded disclosures about fair value
measurements. In accordance with Financial Accounting Standards Board
Staff Position (FSP) No. 157-2, “Effective Date of Financial Accounting
Standards Board (FASB) Statement No. 157,” Trustmark will defer application of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities until January
1, 2009. The application of SFAS No. 157 in situations where the
market for a financial asset is not active was clarified by the issuance of FSP
No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active,” in October 2008. FSP No. 157-3 became
effective for Trustmark’s interim financial statements as of September 30, 2008
and did not significantly impact the methods by which Trustmark determines the
fair value of its financial assets.
Trustmark
measures a portion of its assets and liabilities on a fair value basis. Fair
value is used for certain assets and liabilities in which fair value is the
primary basis of accounting. Examples of these include derivative instruments,
available for sale securities, loans held for sale and MSR. Fair value is
defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date. Depending on the nature of the asset or liability, Trustmark
uses various valuation techniques and assumptions when estimating fair value,
which are in accordance with SFAS No. 157.
In
accordance with SFAS No. 157, Trustmark groups its assets and liabilities
carried at fair value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of assumptions used to determine
fair value. These levels are:
Level 1 –
Valuation is based upon quoted prices for identical instruments traded in active
markets.
Level 2 –
Valuation is based upon quoted prices for similar instruments in active markets
or quoted prices for identical or similar instruments in markets that are not
active.
Level 3 –
Valuation is based on significant valuation assumptions that are not readily
observable in the market.
When
determining the fair value measurements for assets and liabilities required or
permitted to be recorded at and/or marked to fair value, Trustmark considers the
principal or most advantageous market in which it would transact and considers
assumptions that market participants would use when pricing the asset or
liability. When possible, Trustmark looks to active and observable markets to
price identical assets or liabilities. When identical assets and liabilities are
not traded in active markets, Trustmark looks to observable market data of
similar assets and liabilities. Nevertheless, certain assets and liabilities are
not actively traded in observable markets and Trustmark must use alternative
valuation techniques to derive a fair value measurement.
The
methodologies Trustmark uses in determining the fair values are based primarily
on the use of independent, market-based data to reflect a value that would be
reasonably expected upon exchange of the position in an orderly transaction
between market participants at the measurement date. The large
majority of assets that are stated at fair value are of a nature that can be
valued using prices or inputs that are readily observable through a variety of
independent data providers. The providers selected by Trustmark for
fair valuation data are widely recognized and accepted vendors whose evaluations
support the pricing functions of financial institutions, investment and mutual
funds, and portfolio managers. Trustmark has documented and evaluated
the pricing methodologies used by the vendors and has maintained internal
processes that regularly test valuations for anomalies.
Mortgage
loan commitments are valued based on the securities prices of similar
collateral, term, rate and delivery for which the loan is eligible to deliver in
place of the particular security. Trustmark acquires a broad array of
mortgage security prices that are supplied by a market data vendor, which in
turn accumulates prices from a broad list of securities
dealers. Prices are processed through a mortgage pipeline management
system that accumulates and segregates all loan commitment and forward-sale
transactions according to the similarity of various characteristics (maturity,
term, rate, and collateral). Prices are matched to those positions
that are deemed to be an eligible substitute or offset (i.e. “deliverable”) for
a corresponding security observed in the market place.
Trustmark
uses an independent valuation firm to estimate fair value of MSR through the use
of prevailing market participant assumptions and market participant valuation
processes. This valuation is periodically tested and validated
against other third-party firm valuations.
At this
time, Trustmark presents no fair values that are derived through internal
modeling. Should positions requiring fair valuation arise that are
not relevant to existing methodologies, Trustmark will make every reasonable
effort to obtain market participant assumptions, or independent
evaluation.
The
following table presents financial assets and liabilities measured at fair value
on a recurring basis as of September 30, 2008 ($ in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities
available for sale
|
|
$
|
907,629
|
|
|
$
|
7,518
|
|
|
$
|
900,111
|
|
|
$
|
-
|
|
Loans
held for sale
|
|
|
154,162
|
|
|
|
-
|
|
|
|
154,162
|
|
|
|
-
|
|
Mortgage
servicing rights
|
|
|
78,550
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,550
|
|
Other
assets - derivatives
|
|
|
(1,330
|
)
|
|
|
(1,449
|
)
|
|
|
249
|
|
|
|
(130
|
)
|
Other
liabilities - derivatives
|
|
|
8,235
|
|
|
|
8,235
|
|
|
|
-
|
|
|
|
-
|
|
The
changes in Level 3 assets measured at fair value on a recurring basis as of
September 30, 2008 are summarized as follows ($ in thousands):
|
|
Other Assets - Derivatives
|
|
|
MSR
|
|
Balance,
beginning of period
|
|
$
|
198
|
|
|
$
|
67,192
|
|
Total
net gains (losses) included in net income
|
|
|
2,290
|
|
|
|
(4,877
|
)
|
Purchases,
sales, issuances and settlements, net
|
|
|
(2,618
|
)
|
|
|
16,235
|
|
Net
transfers into/out of Level 3
|
|
|
-
|
|
|
|
-
|
|
Balance,
end of period
|
|
$
|
(130
|
)
|
|
$
|
78,550
|
|
|
|
|
|
|
|
|
|
|
The
amount of total gains for the period included in
earnings that are
attributable to the change in unrealized
gains or losses still held at September 30,
2008
|
|
$
|
605
|
|
|
$
|
2,008
|
|
Trustmark
may be required, from time to time, to measure certain assets at fair value on a
nonrecurring basis in accordance with U.S. generally accepted accounting
principles. Assets at September 30, 2008 which have been measured at fair value
on a nonrecurring basis include impaired loans. Loans for which it is
probable Trustmark will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement
are considered impaired. Once a loan is identified as individually impaired,
Management measures impairment in accordance with SFAS No. 114, “Accounting by
Creditors for Impairment of a Loan.” Specific allowances for impaired
loans are based on comparisons of the recorded carrying values of the loans to
the present value of the estimated cash flows of these loans at each loan’s
original effective interest rate, the fair value of the collateral or the
observable market prices of the loans. At September 30, 2008, Trustmark had
outstanding balances of $42.7 million in impaired loans that were specifically
identified for evaluation in accordance with SFAS No. 114 and were written down
to net realizable value based on the fair value of the collateral or other
unobservable input. These impaired loans are classified as Level 3 in
the fair value hierarchy.
Certain
nonfinancial assets and nonfinancial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step
of a goodwill impairment test, as well as intangible assets. As
stated above, SFAS No. 157 will be applicable to these fair value measurements
beginning January 1, 2009.
NOTE
12 – RECENT PRONOUNCEMENTS
Accounting
Standards Adopted in 2008
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 allows
entities the option to measure eligible financial instruments at fair value as
of specified dates. Such election, which may be applied on an
instrument-by-instrument basis, is typically irrevocable once elected. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007, and early
application is allowed under certain circumstances. Management elected not to
apply the fair value option to any of its assets or liabilities at January 1,
2008.
In June
2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No.
06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards.” EITF 06-11 states that an entity should recognize a realized
tax benefit associated with dividends on nonvested equity shares, nonvested
equity share units and outstanding equity share options charged to retained
earnings as an increase in additional paid in capital. EITF 06-11
should be applied prospectively to income tax benefits of dividends on
equity-classified share-based payment awards that are declared in fiscal years
beginning after December 15, 2007. The adoption of EITF 06-11 did not
have a material impact on Trustmark’s balance sheets or results of
operations.
In
November 2007, the SEC issued SAB No. 109 (SAB 109), “Written Loan
Commitments Recorded at Fair Value Through Earnings.”
SAB 109 rescinds SAB
105’s prohibition on inclusion of expected net future cash flows related to loan
servicing activities in the fair value measurement of a written loan commitment.
SAB 109 also applies to any loan commitments for which fair value accounting is
elected under SFAS No. 159. SAB 109 is effective prospectively for derivative
loan commitments issued or modified in fiscal quarters beginning after
December 15, 2007. The adoption of SAB 109 did not have a
material impact on Trustmark’s balance sheets or results of
operations.
New
Accounting Standards
For
additional information on new accounting standards issued but not effective
until after September 30, 2008, please refer to Recent Pronouncements included
in Management’s Discussion and Analysis.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
The
following provides a narrative discussion and analysis of 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.
FORWARD–LOOKING
STATEMENTS
Certain
statements contained in this document are not statements of historical fact and
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, statements relating to anticipated
future operating and financial performance measures, including net interest
margin, credit quality, business initiatives, growth opportunities and growth
rates, and relating to the anticipated investment by the U.S. Treasury in
Trustmark as part of its Capital Purchase Program, among other things and
encompass any estimate, prediction, expectation, projection, opinion,
anticipation, outlook or statement of belief included therein as well as the
management assumptions underlying these forward-looking statements. 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.
These
risks could cause actual results to differ materially from current expectations
of Management and include, but are not limited to, changes in the level of
nonperforming assets and charge-offs, local, state and national economic and
market conditions, including the extent and duration of current volatility in
the credit and financial markets, material changes in market interest rates, the
costs and effects of litigation and of unexpected or adverse outcomes in such
litigation, competition in loan and deposit pricing, as well as the entry of new
competitors into our markets through de novo expansion and acquisitions, changes
in existing regulations or the adoption of new regulations, natural disasters,
acts of war or terrorism, changes in consumer spending, borrowings and savings
habits, technological changes, changes in the financial performance
or condition of Trustmark’s borrowers, the ability to control expenses, changes
in Trustmark’s compensation and benefit plans, greater than expected costs or
difficulties related to the integration of new products and lines of business
and other risks described in Trustmark’s filings with the Securities and
Exchange Commission.
Although
Management 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. Trustmark undertakes no obligation to update or revise any
of this information, whether as the result of new information, future events or
developments or otherwise.
OVERVIEW
Business
Trustmark
is a multi-bank holding company headquartered in Jackson, Mississippi,
incorporated under the Mississippi Business Corporation Act on August 5,
1968. Trustmark commenced doing business in November
1968. Through its subsidiaries, Trustmark operates as a financial
services organization providing banking and financial solutions through
approximately 150 offices and 2,600 associates predominantly within the states
of Florida, Mississippi, Tennessee and Texas.
Trustmark
National Bank (TNB), Trustmark’s wholly-owned subsidiary, accounts for over 98%
of the assets and revenues of Trustmark. Initially chartered by the
state of Mississippi in 1889, TNB is also headquartered in Jackson,
Mississippi. In addition to banking activities, TNB provides
investment and insurance products and services to its customers through its
wholly-owned subsidiaries, Trustmark Investment Advisors, Inc., The Bottrell
Insurance Agency, Inc. (Bottrell), TRMK Risk Management, Inc., and Fisher-Brown,
Incorporated (Fisher-Brown). TNB also owns all of the stock of Trustmark
Securities, Inc., an inactive subsidiary.
Trustmark
also engages in banking activities through its wholly-owned subsidiary,
Somerville Bank & Trust Company (Somerville), headquartered in Somerville,
Tennessee. Somerville presently has five locations in Somerville,
Hickory Withe and Rossville, Tennessee. Trustmark also owns all of
the stock of F. S. Corporation and First Building Corporation, both inactive
nonbank Mississippi corporations.
In order
to facilitate a private placement of trust preferred securities, Trustmark
formed a Delaware trust affiliate, Trustmark Preferred Capital Trust I
(Trustmark Trust). Also, as a result of the acquisition of Republic
Bancshares of Texas, Inc., Trustmark owns Republic Bancshares Capital Trust I
(Republic Trust), a Delaware trust affiliate. As defined in
applicable accounting standards, both Trustmark Trust and Republic Trust,
wholly-owned subsidiaries of Trustmark, are considered variable interest
entities for which Trustmark is not the primary
beneficiary. Accordingly, the accounts of both trusts are not
included in Trustmark’s consolidated financial statements.
CRITICAL
ACCOUNTING POLICIES
Trustmark’s
consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles and follow general practices within the financial
services industry. Application of these accounting principles
requires Management to make estimates, assumptions and judgments that affect the
amounts reported in the consolidated financial statements and accompanying
notes. These estimates, assumptions and judgments are based on
information available as of the date of the consolidated financial statements;
accordingly, as this information changes, actual financial results could differ
from those estimates.
Certain
policies inherently have a greater reliance on the use of estimates, assumptions
and judgments and, as such, have a greater possibility of producing results that
could be materially different than originally reported. There have
been no significant changes in Trustmark’s critical accounting estimates during
the first nine months of 2008.
FINANCIAL
HIGHLIGHTS
Trustmark’s
net income totaled $23.4 million in the third quarter of 2008, which represented
basic and diluted earnings per share of $0.41. Trustmark’s third
quarter 2008 net income produced returns on average tangible equity and average
assets of 15.16% and 1.02%, respectively. During the first nine
months of 2008, Trustmark’s net income totaled $67.1 million, which represented
basic and diluted earnings per share of $1.17. Trustmark’s
performance during this period resulted in returns on average tangible equity
and average assets of 14.80% and 0.99%, respectively.
Selected
Income Statement Data
($
in thousands, except per share data)
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
9/30/2008
|
|
|
9/30/2007
|
|
|
9/30/2008
|
|
|
9/30/2007
|
|
Net
interest income-fully taxable equivalent
|
|
$
|
81,638
|
|
|
$
|
77,369
|
|
|
$
|
238,573
|
|
|
$
|
228,003
|
|
Taxable
equivalent adjustment
|
|
|
2,242
|
|
|
|
2,283
|
|
|
|
6,810
|
|
|
|
7,143
|
|
Net
interest income
|
|
|
79,396
|
|
|
|
75,086
|
|
|
|
231,763
|
|
|
|
220,860
|
|
Provision
for loan losses
|
|
|
14,473
|
|
|
|
4,999
|
|
|
|
59,728
|
|
|
|
6,783
|
|
Net
interest income after provision for loan losses
|
|
|
64,923
|
|
|
|
70,087
|
|
|
|
172,035
|
|
|
|
214,077
|
|
Noninterest
income
|
|
|
41,950
|
|
|
|
41,569
|
|
|
|
138,932
|
|
|
|
120,190
|
|
Noninterest
expense
|
|
|
72,734
|
|
|
|
68,488
|
|
|
|
212,174
|
|
|
|
206,727
|
|
Income
before income taxes
|
|
|
34,139
|
|
|
|
43,168
|
|
|
|
98,793
|
|
|
|
127,540
|
|
Income
taxes
|
|
|
10,785
|
|
|
|
14,087
|
|
|
|
31,708
|
|
|
|
42,774
|
|
Net
income
|
|
$
|
23,354
|
|
|
$
|
29,081
|
|
|
$
|
67,085
|
|
|
$
|
84,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basis
|
|
$
|
0.41
|
|
|
$
|
0.51
|
|
|
$
|
1.17
|
|
|
$
|
1.47
|
|
Earnings
per common share - diluted
|
|
|
0.41
|
|
|
|
0.51
|
|
|
|
1.17
|
|
|
|
1.46
|
|
Dividends
per common share
|
|
|
0.23
|
|
|
|
0.22
|
|
|
|
0.69
|
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
1.02
|
%
|
|
|
1.31
|
%
|
|
|
0.99
|
%
|
|
|
1.29
|
%
|
Return
on average tangible equity
|
|
|
15.16
|
%
|
|
|
20.41
|
%
|
|
|
14.80
|
%
|
|
|
20.19
|
%
|
Non-GAAP
Disclosures
Management
is presenting, in the accompanying table, adjustments to net income as reported
in accordance with generally accepted accounting principles resulting from
significant items occurring during the periods presented. Management believes
this information will help users compare Trustmark’s current results to those of
prior periods as presented in the table below ($ in thousands):
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
9/30/2008
|
|
|
9/30/2007
|
|
|
9/30/2008
|
|
|
9/30/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income as reported-GAAP
|
|
$
|
23,354
|
|
|
$
|
29,081
|
|
|
$
|
67,085
|
|
|
$
|
84,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
(net of taxes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MasterCard
Class A Common
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,308
|
)
|
|
|
-
|
|
Visa
Litigation Contingency
|
|
|
-
|
|
|
|
-
|
|
|
|
(936
|
)
|
|
|
-
|
|
Hurricane
Katrina
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(665
|
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,244
|
)
|
|
|
(665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income adjusted for specific items (Non-GAAP)
|
|
$
|
23,354
|
|
|
$
|
29,081
|
|
|
$
|
62,841
|
|
|
$
|
84,101
|
|
MasterCard
Class A Common
During
the second quarter of 2008, MasterCard offered Class B shareholders the right to
convert their stock into marketable Class A shares. Trustmark
exercised its right to convert its shares and sold them through a liquidation
program. The conversion and sale resulted in an after-tax gain of
$3.3 million.
Visa
Litigation Contingency
In the
first quarter of 2008, Trustmark recognized an after-tax gain of $936 thousand
resulting from the Visa initial public offering. This gain more than
offsets an after-tax accrual of $494 thousand that Trustmark recorded in the
fourth quarter of 2007 for the Visa litigation contingency relating to the Visa
USA Inc. antitrust lawsuit settlement with American Express and other pending
Visa litigation (reflecting Trustmark’s share as a Visa member).
Hurricane
Katrina
In the
third quarter of 2005, immediately following the aftermath of Hurricane Katrina,
Trustmark estimated possible pre-tax losses resulting from this storm of $11.7
million. Trustmark revised these estimates quarterly and any
subsequent adjustments are reflected in the table above, net of
taxes. At September 30, 2008, the allowance for loan losses included
$364 thousand related to possible Hurricane Katrina losses.
RESULTS
OF OPERATIONS
Net
Interest Income
Net
interest income 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 net interest income 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 accompanying Yield/Rate Analysis Table shows the average
balances for all assets and liabilities of Trustmark and the interest income or
expense associated with earning assets and interest-bearing
liabilities. The yields and rates have been computed based on
interest income and expense adjusted to a fully taxable equivalent (FTE) basis
using a 35% federal marginal tax rate for all periods shown
.
Nonaccruing loans have been
included in the average loan balances, and interest collected prior to these
loans having been placed on nonaccrual has been included in interest
income. Loan fees included in interest income associated with the
average loan balances are immaterial.
Net
interest income-FTE for the three and nine months ended September 30, 2008,
increased $4.3 million and $10.6 million, respectively, when compared with the
same time periods in 2007. Trustmark has expanded its net interest margin in a
falling rate environment during the third quarter of 2008. This was
accomplished through continued deposit pricing discipline, afforded to Trustmark
due to a strong liquidity position and stable deposit base. In addition,
net interest income has now begun to recognize the full impact of the decision
to purchase securities during 2008 given the opportunities afforded by a
positively sloped yield curve. The combination of these factors
resulted in a six basis point increase in NIM to 3.95%, when the first nine
months of 2008 is compared with the same time period in 2007, while the third
quarter NIM of 4.01% was twelve basis points higher than in the third quarter of
2007. For additional discussion, see Market/Interest Rate Risk Management
included later in Management’s Discussion and Analysis.
Average
interest-earning assets for the first nine months of 2008 were $8.074 billion,
compared with $7.845 billion for the same time period in 2007, an increase of
$229.5 million. The increase was primarily due to an increase in average total
loans during the first nine months of 2008, which increased $254.0 million, or
3.7%, relative to the same time period in 2007. The increase in
average total loans was partially offset by a decrease of $22.3 million in fed
funds sold and reverse repos. However, interest rates continued to
fall during the first nine months of 2008 which contributed to a decline in the
yield on loans of 101 basis points when compared to the same time period in
2007. Although average total securities decreased slightly during the
first nine months of 2008, recent purchases have provided significantly higher
yields when compared to previous periods partially due to a slightly longer
duration of the securities portfolio. The overall yield of securities
during 2008 has increased 53 and 32 basis points when compared to the third
quarter of 2007 and the nine months ended September 30, 2007,
respectively. This improvement has helped to offset decreasing loan
yields seen during the periods discussed above. The combination of
these factors resulted in a decline in interest income-FTE of $38.6 million, or
9.4%, when the first nine months of 2008 is compared with the same time period
in 2007. The impact of these factors is also illustrated by the yield
on total earning assets decreasing from 6.99% for the first nine months of 2007,
to 6.14% for the same time period of 2008, a decrease of 85 basis
points.
Average
interest-bearing liabilities for the first nine months of 2008 totaled $6.549
billion compared with $6.326 billion for the same time period in 2007, an
increase of $223.5 million, or 3.5%. However, the mix of these
liabilities has changed when these two periods are
compared. Management’s strategy of disciplined deposit pricing
resulted in a 1.8% increase in interest-bearing deposits during the first nine
months of 2008 while the combination of federal funds purchased, securities sold
under repurchase agreements and borrowings increased by 16.3%. The impact of
utilizing these higher cost interest-bearing liabilities was offset somewhat by
the decrease in the overall yield of 220 basis points on these products when the
first nine months of 2008 is compared with the same time period in
2007. As a result of these factors, total interest expense for the
first nine months of 2008 decreased $49.2 million, or 27.0%, when compared with
the same time period in 2007
.
Yield/Rate
Analysis Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold and securities purchased under reverse repurchase
agreements
|
|
$
|
17,401
|
|
|
$
|
98
|
|
|
|
2.24
|
%
|
|
$
|
30,201
|
|
|
$
|
397
|
|
|
|
5.22
|
%
|
Securities
- taxable
|
|
|
1,006,996
|
|
|
|
12,117
|
|
|
|
4.79
|
%
|
|
|
720,214
|
|
|
|
7,181
|
|
|
|
3.96
|
%
|
Securities
- nontaxable
|
|
|
114,823
|
|
|
|
1,946
|
|
|
|
6.74
|
%
|
|
|
133,585
|
|
|
|
2,422
|
|
|
|
7.19
|
%
|
Loans
(including loans held for sale)
|
|
|
6,927,270
|
|
|
|
105,706
|
|
|
|
6.07
|
%
|
|
|
6,970,434
|
|
|
|
129,394
|
|
|
|
7.36
|
%
|
Other
earning assets (1)
|
|
|
37,323
|
|
|
|
407
|
|
|
|
4.34
|
%
|
|
|
33,341
|
|
|
|
482
|
|
|
|
5.74
|
%
|
Total
interest-earning assets
|
|
|
8,103,813
|
|
|
|
120,274
|
|
|
|
5.90
|
%
|
|
|
7,887,775
|
|
|
|
139,876
|
|
|
|
7.04
|
%
|
Cash
and due from banks
|
|
|
246,515
|
|
|
|
|
|
|
|
|
|
|
|
260,997
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
810,449
|
|
|
|
|
|
|
|
|
|
|
|
759,626
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(88,643
|
)
|
|
|
|
|
|
|
|
|
|
|
(70,950
|
)
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
9,072,134
|
|
|
|
|
|
|
|
|
|
|
$
|
8,837,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$
|
5,637,582
|
|
|
|
32,860
|
|
|
|
2.32
|
%
|
|
$
|
5,451,646
|
|
|
|
50,423
|
|
|
|
3.67
|
%
|
Federal
funds purchased and securities sold under repurchase
agreements
|
|
|
659,312
|
|
|
|
3,123
|
|
|
|
1.88
|
%
|
|
|
491,488
|
|
|
|
5,898
|
|
|
|
4.76
|
%
|
Other
borrowings
|
|
|
276,712
|
|
|
|
2,653
|
|
|
|
3.81
|
%
|
|
|
434,064
|
|
|
|
6,186
|
|
|
|
5.65
|
%
|
Total
interest-bearing liabilities
|
|
|
6,573,606
|
|
|
|
38,636
|
|
|
|
2.34
|
%
|
|
|
6,377,198
|
|
|
|
62,507
|
|
|
|
3.89
|
%
|
Noninterest-bearing
demand deposits
|
|
|
1,415,402
|
|
|
|
|
|
|
|
|
|
|
|
1,423,745
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
136,229
|
|
|
|
|
|
|
|
|
|
|
|
135,469
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
946,897
|
|
|
|
|
|
|
|
|
|
|
|
901,036
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and
Shareholders'
Equity
|
|
$
|
9,072,134
|
|
|
|
|
|
|
|
|
|
|
$
|
8,837,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Margin
|
|
|
|
|
|
|
81,638
|
|
|
|
4.01
|
%
|
|
|
|
|
|
|
77,369
|
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
tax equivalent adjustment
|
|
|
|
|
|
|
2,242
|
|
|
|
|
|
|
|
|
|
|
|
2,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Margin per
Consolidated Statements of
Income
|
|
|
|
|
|
$
|
79,396
|
|
|
|
|
|
|
|
|
|
|
$
|
75,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The prior period has been restated to include the addition of Federal Home
Loan Bank and Federal Reserve Bank stock in other earning
assets.
|
|
Yield/Rate
Analysis Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold and securities purchased under reverse repurchase
agreements
|
|
$
|
23,607
|
|
|
$
|
445
|
|
|
|
2.52
|
%
|
|
$
|
45,868
|
|
|
$
|
1,830
|
|
|
|
5.33
|
%
|
Securities
- taxable
|
|
|
835,800
|
|
|
|
29,053
|
|
|
|
4.64
|
%
|
|
|
816,955
|
|
|
|
25,279
|
|
|
|
4.14
|
%
|
Securities
- nontaxable
|
|
|
115,143
|
|
|
|
5,975
|
|
|
|
6.93
|
%
|
|
|
139,128
|
|
|
|
7,591
|
|
|
|
7.29
|
%
|
Loans
(including loans held for sale)
|
|
|
7,061,176
|
|
|
|
334,370
|
|
|
|
6.33
|
%
|
|
|
6,807,184
|
|
|
|
373,583
|
|
|
|
7.34
|
%
|
Other
earning assets (1)
|
|
|
38,583
|
|
|
|
1,454
|
|
|
|
5.03
|
%
|
|
|
35,706
|
|
|
|
1,615
|
|
|
|
6.05
|
%
|
Total
interest-earning assets
|
|
|
8,074,309
|
|
|
|
371,297
|
|
|
|
6.14
|
%
|
|
|
7,844,841
|
|
|
|
409,898
|
|
|
|
6.99
|
%
|
Cash
and due from banks
|
|
|
253,127
|
|
|
|
|
|
|
|
|
|
|
|
297,154
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
789,792
|
|
|
|
|
|
|
|
|
|
|
|
749,314
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(84,217
|
)
|
|
|
|
|
|
|
|
|
|
|
(71,929
|
)
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
9,033,011
|
|
|
|
|
|
|
|
|
|
|
$
|
8,819,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$
|
5,660,264
|
|
|
|
113,104
|
|
|
|
2.67
|
%
|
|
$
|
5,561,700
|
|
|
|
152,464
|
|
|
|
3.67
|
%
|
Federal
funds purchased and securities sold under repurchase
agreements
|
|
|
565,304
|
|
|
|
9,215
|
|
|
|
2.18
|
%
|
|
|
423,853
|
|
|
|
14,725
|
|
|
|
4.64
|
%
|
Other
borrowings
|
|
|
323,616
|
|
|
|
10,405
|
|
|
|
4.29
|
%
|
|
|
340,173
|
|
|
|
14,706
|
|
|
|
5.78
|
%
|
Total
interest-bearing liabilities
|
|
|
6,549,184
|
|
|
|
132,724
|
|
|
|
2.71
|
%
|
|
|
6,325,726
|
|
|
|
181,895
|
|
|
|
3.84
|
%
|
Noninterest-bearing
demand deposits
|
|
|
1,405,244
|
|
|
|
|
|
|
|
|
|
|
|
1,467,671
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
137,395
|
|
|
|
|
|
|
|
|
|
|
|
127,900
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
941,188
|
|
|
|
|
|
|
|
|
|
|
|
898,083
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and
Shareholders'
Equity
|
|
$
|
9,033,011
|
|
|
|
|
|
|
|
|
|
|
$
|
8,819,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Margin
|
|
|
|
|
|
|
238,573
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
228,003
|
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
tax equivalent adjustment
|
|
|
|
|
|
|
6,810
|
|
|
|
|
|
|
|
|
|
|
|
7,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Margin per
Consolidated Statements of
Income
|
|
|
|
|
|
$
|
231,763
|
|
|
|
|
|
|
|
|
|
|
$
|
220,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The prior period has been restated to include the addition of Federal Home
Loan Bank and Federal Reserve Bank stock in other earning
assets.
|
|
Provision
for Loan Losses
The
provision for loan losses is determined by Management as the amount necessary to
adjust the allowance for loan losses to a level, which, in Management’s best
estimate, is necessary to absorb probable losses within the existing loan
portfolio. The provision for loan losses reflects loan quality
trends, including the levels of and trends related to nonaccrual loans, past due
loans, potential problem loans, criticized loans, net charge-offs or recoveries
and growth in the loan portfolio among other factors. Accordingly,
the amount of the provision reflects both the necessary increases in the
allowance for loan losses related to newly identified criticized loans, as well
as the actions taken related to other loans including, among other things, any
necessary increases or decreases in required allowances for specific loans or
loan pools.
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
PROVISION FOR LOAN LOSSES
|
|
9/30/2008
|
|
|
9/30/2007
|
|
|
9/30/2008
|
|
|
9/30/2007
|
|
Florida
|
|
$
|
3,167
|
|
|
$
|
3,364
|
|
|
$
|
36,869
|
|
|
$
|
3,940
|
|
Mississippi
(1)
|
|
|
8,476
|
|
|
|
(798
|
)
|
|
|
14,950
|
|
|
|
764
|
|
Tennessee
(2)
|
|
|
27
|
|
|
|
1,153
|
|
|
|
3,246
|
|
|
|
781
|
|
Texas
|
|
|
2,803
|
|
|
|
1,280
|
|
|
|
4,663
|
|
|
|
1,298
|
|
Total
provision for loan losses
|
|
$
|
14,473
|
|
|
$
|
4,999
|
|
|
$
|
59,728
|
|
|
$
|
6,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
- Mississippi includes Central and Southern Mississippi
Regions
|
|
(2)
- Tennessee includes Memphis, Tennessee and Northern Mississippi
Regions
|
|
As shown
in the table above, the provision for loan losses for the first nine months of
2008 totaled $59.7 million, or 1.13% of average loans, compared with $6.8
million during the same time period in 2007. For the third quarter of 2008, the
provision for loans losses totaled $14.5 million or 0.83% of average loans,
compared with $5.0 million during the same time period in
2007. Trustmark’s provision for the first nine months of 2008
was impacted by an increase of $59.8 million in nonaccrual loans when compared
to September 30, 2007.
The
increase in the provision for loan losses for the nine months ended September
30, 2008, is primarily attributed to continued credit deterioration in the
construction and land development portfolio for Trustmark’s Florida Panhandle
market as well as net risk-rate downgrades for commercial loans in Trustmark’s
Mississippi market. Nonaccrual loans in the Florida market totaled
$71.1 million at September 30, 2008, an increase of $51.6 million when compared
to September 30, 2007. Trustmark continues to devote significant
resources to managing credit risks resulting from the slowdown in residential
real estate. Trustmark’s Management believes that the Florida
construction and land development portfolio is appropriately risk rated and
adequately reserved based on current conditions. In Trustmark’s
Mississippi market, the provision for loan losses for the first nine months of
2008 totaled $15.0 million compared with $764 thousand for the same time period
in 2007. The provision for 2008 was impacted by increased provisions
for the indirect consumer portfolio as well as specific downgrades for three
commercial loans.
See the
section captioned “Loans and Allowance for Loan Losses” elsewhere in this
discussion for further analysis of the provision for loan losses.
Noninterest
Income
Trustmark’s
noninterest income continues to play an important role in improving net income
and total shareholder value. Total noninterest income before
security gains, net for the first nine months of 2008 increased $18.4 million,
or 15.3%, compared to the same time period in 2007, primarily as a result of a
$15.0 million increase in net revenues from mortgage banking,
net. For the third quarter of 2008, noninterest income before
security gains, net increased $402 thousand, or 1.0% when compared to the third
quarter of 2007. The comparative components of noninterest income for
the three and nine months ended September 30, 2008 and 2007 are shown in the
accompanying table.
The
single largest component of noninterest income continues to be service charges
for deposit products and services, which totaled $39.7 million for the first
nine months of 2008 compared with $40.3 million for the first nine months of
2007, a decrease of $600 thousand, or 1.5%. This decline was due to a
decrease in NSF revenues which was negatively impacted by the issuance of U.S.
Government Economic Stimulus checks as well as a reduction in service charges
due to a shift in the relative mix of deposit products towards lower cost or
free accounts.
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
Service
charges on deposit accounts
|
|
$
|
13,886
|
|
|
$
|
13,849
|
|
|
$
|
37
|
|
|
|
0.3
|
%
|
|
$
|
39,673
|
|
|
$
|
40,271
|
|
|
$
|
(598
|
)
|
|
|
-1.5
|
%
|
Insurance
commissions
|
|
|
9,007
|
|
|
|
8,983
|
|
|
|
24
|
|
|
|
0.3
|
%
|
|
|
25,657
|
|
|
|
27,656
|
|
|
|
(1,999
|
)
|
|
|
-7.2
|
%
|
Wealth
management
|
|
|
6,788
|
|
|
|
6,507
|
|
|
|
281
|
|
|
|
4.3
|
%
|
|
|
21,017
|
|
|
|
18,786
|
|
|
|
2,231
|
|
|
|
11.9
|
%
|
General
banking - other
|
|
|
5,813
|
|
|
|
6,111
|
|
|
|
(298
|
)
|
|
|
-4.9
|
%
|
|
|
17,654
|
|
|
|
18,699
|
|
|
|
(1,045
|
)
|
|
|
-5.6
|
%
|
Mortgage
banking, net
|
|
|
4,323
|
|
|
|
2,503
|
|
|
|
1,820
|
|
|
|
72.7
|
%
|
|
|
22,087
|
|
|
|
7,057
|
|
|
|
15,030
|
|
|
|
n/m
|
|
Other,
net
|
|
|
2,131
|
|
|
|
3,593
|
|
|
|
(1,462
|
)
|
|
|
-40.7
|
%
|
|
|
12,351
|
|
|
|
7,611
|
|
|
|
4,740
|
|
|
|
62.3
|
%
|
Total
Noninterest Income before sec gains, net
|
|
|
41,948
|
|
|
|
41,546
|
|
|
|
402
|
|
|
|
1.0
|
%
|
|
|
138,439
|
|
|
|
120,080
|
|
|
|
18,359
|
|
|
|
15.3
|
%
|
Securities
gains, net
|
|
|
2
|
|
|
|
23
|
|
|
|
(21
|
)
|
|
|
-91.3
|
%
|
|
|
493
|
|
|
|
110
|
|
|
|
383
|
|
|
|
n/m
|
|
Total
Noninterest Income
|
|
$
|
41,950
|
|
|
$
|
41,569
|
|
|
$
|
381
|
|
|
|
0.9
|
%
|
|
$
|
138,932
|
|
|
$
|
120,190
|
|
|
$
|
18,742
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/m
- percentages greater than +/- 100% are considered not
meaningful
|
|
Insurance
commissions were $25.7 million during the first nine months of 2008, a decrease
of $2.0 million, or 7.2%, when compared with the first nine months of
2007. The decline in insurance commissions experienced during the
first nine months of 2008 is primarily attributable to Fisher-Brown, Trustmark’s
wholly-owned insurance subsidiary located in the Florida Panhandle, which has
been impacted by a decline in revenues resulting from a decrease in premium
rates charged by its insurance carriers.
Wealth
management income totaled $21.0 million for the first nine months of 2008,
compared with $18.8 million during the same time period in 2007, an increase of
$2.2 million, or 11.9%. Wealth management consists of income related to
investment management, trust and brokerage services. The growth in
wealth management income during the first nine months of 2008 is largely
attributed to an increase in trust and investment management fee income
resulting from new account growth. In addition, revenues from
brokerage services have increased due to solid and improved production from
Trustmark’s team of investment representatives. At September 30, 2008
and 2007, Trustmark held assets under management and administration of $7.3
billion and $7.4 billion as well as brokerage assets of $1.2 billion and $1.3
billion, respectively.
General
banking-other totaled $17.7 million during the first nine months of 2008,
compared with $18.7 million in the same time period in 2007. General
banking-other income consists primarily of fees on various bank products and
services as well as bankcard fees and safe deposit
box
fees. This decrease is primarily related to a decline in fees earned
on an interest rate driven product.
Net
revenues from mortgage banking were $22.1 million during the first nine months
of 2008, compared with $7.1 million in the first nine months of 2007. As shown
in the accompanying table, net mortgage servicing income has increased $1.1
million, or 10.5% when the first nine months of 2008 is compared with the same
time period in 2007. This increase coincides with growth in the
balance of the mortgage servicing portfolio as well as an increase in mortgage
production. Loans serviced for others totaled $5.0 billion at
September 30, 2008 compared with $4.4 billion at September 30,
2007. Trustmark’s highly regarded mortgage banking reputation has
enabled it to take advantage of competitive disruptions and expand market
share.
The
following table illustrates the components of mortgage banking revenues included
in noninterest income in the accompanying income statements ($ in
thousands):
Mortgage
Banking Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
Mortgage
servicing income, net
|
|
$
|
4,002
|
|
|
$
|
3,503
|
|
|
$
|
499
|
|
|
|
14.2
|
%
|
|
$
|
11,553
|
|
|
$
|
10,459
|
|
|
$
|
1,094
|
|
|
|
10.5
|
%
|
Change
in fair value-MSR from market changes
|
|
|
(903
|
)
|
|
|
(5,268
|
)
|
|
|
4,365
|
|
|
|
-82.9
|
%
|
|
|
2,008
|
|
|
|
(1,323
|
)
|
|
|
3,331
|
|
|
|
n/m
|
|
Change
in fair value of derivatives
|
|
|
1,680
|
|
|
|
5,298
|
|
|
|
(3,618
|
)
|
|
|
-68.3
|
%
|
|
|
8,826
|
|
|
|
521
|
|
|
|
8,305
|
|
|
|
n/m
|
|
Change
in fair value-MSR from run-off
|
|
|
(2,152
|
)
|
|
|
(2,681
|
)
|
|
|
529
|
|
|
|
-19.7
|
%
|
|
|
(6,885
|
)
|
|
|
(7,279
|
)
|
|
|
394
|
|
|
|
-5.4
|
%
|
Gains
on sales of loans
|
|
|
1,875
|
|
|
|
1,224
|
|
|
|
651
|
|
|
|
53.2
|
%
|
|
|
5,495
|
|
|
|
4,065
|
|
|
|
1,430
|
|
|
|
35.2
|
%
|
Other,
net
|
|
|
(179
|
)
|
|
|
427
|
|
|
|
(606
|
)
|
|
|
n/m
|
|
|
|
1,090
|
|
|
|
614
|
|
|
|
476
|
|
|
|
77.5
|
%
|
Mortgage
banking, net
|
|
$
|
4,323
|
|
|
$
|
2,503
|
|
|
$
|
1,820
|
|
|
|
72.7
|
%
|
|
$
|
22,087
|
|
|
$
|
7,057
|
|
|
$
|
15,030
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/m
- percentages greater than +/- 100% are considered not
meaningful
|
|
|
|
|
|
|
|
|
|
Trustmark
utilizes derivative instruments such as Treasury note futures contracts and
exchange-traded option contracts to offset changes in the fair value of mortgage
servicing rights (MSR) attributable to changes in interest rates. Changes in the
fair value of these derivative instruments are recorded in mortgage banking
income and are offset by the changes in the fair value of MSR, as shown in the
accompanying table. MSR fair values represent the effect of present value decay
and the effect of changes in interest rates. Changes in yields
created fluctuating values in both MSR and the hedge during the third quarter of
2008. During the first nine months of 2008, the MSR value increased
$2.0 million primarily due to a 14 basis point increase in mortgage rates. The
hedge improved in value by $8.8 million due to three factors; a five basis point
decline in Treasury market yields, increased income from options due to higher
levels of volatility and additional income due to a steeper yield curve. The
impact of implementing this strategy resulted in a net positive ineffectiveness
of $10.8 million.
Other
income for the first nine months of 2008 was $12.4 million, compared to $7.6
million in the same time period in 2007. During the first quarter of
2008, Trustmark achieved a $1.0 million gain from the redemption of Trustmark’s
shares in Visa upon their initial public offering along with $1.1 million in
insurance benefits resulting from insurance policies used to cover participants
in Trustmark’s supplemental retirement plan. Another portion of the
increase shown during the first nine months of 2008 occurred during the second
quarter and is related to Trustmark’s conversion and sale of MasterCard Class A
common stock. During the second quarter of 2008, MasterCard offered
Class B shareholders the right to convert their stock into marketable Class A
shares. Trustmark exercised its right to convert these shares and
sold them through a liquidation program achieving a gain of $5.4
million. These transactions are offset by decreases of $1.3 million
in income earned from Trustmark’s investment in various limited partnerships and
$1.3 million in revenues earned on a product driven by interest
rates. When the third quarter of 2008 is compared with the same time
period in 2007, other income decreased $1.5 million primarily from a decline in
the gain on sale of student loans as well as a decrease in income earned from
Trustmark’s investment in various limited partnerships.
Securities
gains totaled $493 thousand during the first nine months of 2008 compared with
securities gains of $110 thousand during the same time period in 2007. The
securities gains for 2008 came primarily from an effort to reduce Trustmark’s
holding of corporate bonds.
Noninterest
Expense
Trustmark’s
noninterest expense for the first nine months of 2008 increased $5.4 million, or
2.6%, compared to the same time period in 2007. In the third quarter
of 2008, Trustmark’s noninterest expense totaled $72.7 million, an increase of
$3.1 million relative to the second quarter of 2008 and $4.2 million relative to
the third quarter of 2007. FDIC deposit insurance increased $1.0 million on a
linked quarter basis and $1.2 million on a year over year basis as Trustmark
completed its utilization of credits provided by the FDIC during 2007 in
connection with a new deposit assessment system. Loan and foreclosure
expenses increased $1.2 million on a linked quarter basis and $1.4 million on a
year over year basis. Excluding the increased FDIC insurance, loan
expense and foreclosure expense, noninterest expense during the third quarter
increased $900 thousand compared to the second quarter of 2008 and $1.7 million
compared to the third quarter of 2007.
Management
considers disciplined expense management a key area of focus in the support of
improving shareholder value. Management remains committed to
identifying additional reengineering and efficiency opportunities designed to
enhance shareholder value. The comparative components of noninterest
expense for the three and nine-month periods of 2008 and 2007 are shown in the
accompanying table.
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
Salaries
and employee benefits
|
|
$
|
42,859
|
|
|
$
|
42,257
|
|
|
$
|
602
|
|
|
|
1.4
|
%
|
|
$
|
129,214
|
|
|
$
|
128,276
|
|
|
$
|
938
|
|
|
|
0.7
|
%
|
Services
and fees
|
|
|
9,785
|
|
|
|
9,285
|
|
|
|
500
|
|
|
|
5.4
|
%
|
|
|
28,741
|
|
|
|
27,884
|
|
|
|
857
|
|
|
|
3.1
|
%
|
Net
occupancy - premises
|
|
|
5,153
|
|
|
|
4,753
|
|
|
|
400
|
|
|
|
8.4
|
%
|
|
|
14,804
|
|
|
|
13,801
|
|
|
|
1,003
|
|
|
|
7.3
|
%
|
Equipment
expense
|
|
|
4,231
|
|
|
|
3,922
|
|
|
|
309
|
|
|
|
7.9
|
%
|
|
|
12,449
|
|
|
|
11,874
|
|
|
|
575
|
|
|
|
4.8
|
%
|
Other
expense
|
|
|
10,706
|
|
|
|
8,271
|
|
|
|
2,435
|
|
|
|
29.4
|
%
|
|
|
26,966
|
|
|
|
24,892
|
|
|
|
2,074
|
|
|
|
8.3
|
%
|
Total
Noninterest Expense
|
|
$
|
72,734
|
|
|
$
|
68,488
|
|
|
$
|
4,246
|
|
|
|
6.2
|
%
|
|
$
|
212,174
|
|
|
$
|
206,727
|
|
|
$
|
5,447
|
|
|
|
2.6
|
%
|
Salaries
and employee benefits, the largest category of noninterest expense, were $129.2
million in the first nine months of 2008 and $128.3 million in the same time
period in 2007. During the first nine months of 2008, salary expense
remained relatively flat when compared with the same time period in 2007 and was
positively impacted by Trustmark’s ongoing human capital management initiatives
which resulted in a decrease of 12 FTE employees at September 30, 2008, when
compared with the same time period in 2007. Employee benefits expense
for the nine months ended September 30, 2008 increased by approximately
$855 thousand when compared to the same time period in 2007 and is primarily
attributed to increased costs for employee insurance programs and stock-based
compensation plans.
Changes
in net occupancy and equipment expenses have resulted from Trustmark’s continued
banking center expansion program as well as the initial implementation of
technology enhancements. Expenses in these two categories increased
approximately $1.6 million on a comparative year-to-date basis, with $709
thousand occurring during the third quarter of 2008.
Other
expenses increased $2.1 million, or 8.3%, when comparing the first nine months
of 2008 to the same time period in 2007. The growth in other expenses
was the result of increases in FDIC insurance and real estate foreclosure
expenses, which both increased $1.3 million when compared to the same time
period in 2007.
Income
Taxes
For the
nine months ended September 30, 2008, Trustmark’s combined effective tax rate
was 32.1% compared to 33.5% for the same time period in 2007. The
decrease in Trustmark’s effective tax rate is due to immaterial changes in
permanent items as a percentage of pretax income.
LIQUIDITY
Liquidity
is the ability to meet asset funding requirements and operational cash outflows
in a timely
manner,
in sufficient amount and without excess cost. Consistent cash flows
from operations and adequate capital provide internally generated
liquidity. Furthermore, Management maintains funding capacity from a
variety of external sources to meet daily funding needs, such as those required
to meet deposit withdrawals, loan disbursements and security
settlements. Liquidity strategy also includes the use of wholesale
funding sources to provide for the seasonal fluctuations of deposit and loan
demand and the cyclical fluctuations of the economy that impact the availability
of funds. Management keeps excess funding capacity available to meet
potential demands associated with adverse circumstances.
The asset
side of the balance sheet provides liquidity primarily through maturities and
cash flows from loans and securities, as well as the ability to sell certain
loans and securities while the liability portion of the balance sheet provides
liquidity primarily through noninterest and interest-bearing
deposits. Trustmark utilizes Federal funds purchased, brokered
deposits, FHLB advances and securities sold under agreements to repurchase to
provide additional liquidity. Access to these additional sources
represents Trustmark’s incremental borrowing capacity.
At
September 30, 2008, Trustmark had $389.0 million of upstream Federal funds
purchased, compared to $279.5 million at December 31, 2007. At
September 30, 2008, Trustmark had an estimated additional capacity of $1.031
billion, compared with $1.337 billion at December 31, 2007. Trustmark
also maintains a relationship with the
FHLB, which provided
$275.0 million in short-term advances at September 30, 2008, compared with
$375.0 million in short-term advances at December 31,
2007.
Under the existing borrowing agreement, Trustmark had
sufficient qualifying collateral to increase FHLB advances by $1.335 billion.
Another borrowing source is the Federal Reserve Discount Window (Discount
Window). At September 30, 2008, Trustmark had approximately $575.5
million available in collateral capacity at the Discount Window from pledges of
auto loans and securities, compared with $712.5 million at December 31,
2007. For the periods presented, Trustmark did not draw on any of its
available collateral capacity at the Discount Window.
During
the third quarter of 2008, Trustmark repaid the $7.0 million outstanding on a
$50.0 million revolving line of credit facility and terminated the
agreement. At December 31, 2007, the outstanding balance of this
credit facility was $7.0 million.
During
2006, TNB issued $50.0 million aggregate principal amount of Subordinated Notes
(the Notes) due December 15, 2016. At September 30, 2008, the carrying amount of
the Notes was $49.7 million. The Notes were sold pursuant to the
terms of regulations issued by the Office of the Comptroller of the Currency
(OCC) and in reliance upon an exemption provided by the Securities Act of 1933,
as amended. The Notes are unsecured and subordinate and junior in
right of payment to TNB’s obligations to its depositors, its obligations under
bankers’ acceptances and letters of credit, its obligations to any Federal
Reserve Bank or the FDIC and its obligations to its other creditors, and to any
rights acquired by the FDIC as a result of loans made by the FDIC to
TNB. The Notes, which are not redeemable prior to maturity, qualify
as Tier 2 capital for both TNB and Trustmark. Proceeds from the sale of the
Notes were used for general corporate purposes.
Also
during 2006, Trustmark completed a private placement of $60.0 million of trust
preferred securities through a newly formed Delaware trust affiliate, Trustmark
Preferred Capital Trust I, (the Trust). The trust preferred
securities mature September 30, 2036 and are redeemable at Trustmark’s option
beginning after five years. Under applicable regulatory guidelines,
these trust preferred securities qualify as Tier 1 capital. The
proceeds from the sale of the trust preferred securities were used by the Trust
to purchase $61.856 million in aggregate principal amount of Trustmark’s junior
subordinated debentures. The net proceeds to Trustmark from the sale
of the junior subordinated debentures to the Trust were used to assist in
financing Trustmark’s merger with Republic.
Another
funding mechanism set into place in 2006 was Trustmark’s grant of a Class B
banking license from the Cayman Islands Monetary
Authority. Subsequently, Trustmark established a branch in the Cayman
Islands through an agent bank. The branch was established as a
mechanism to attract dollar denominated foreign deposits (i.e. Eurodollars) as
an additional source of funding. At September 30, 2008, Trustmark had
$41.7 million in Eurodollar deposits outstanding.
The Board
of Directors currently has the authority to issue up to 20 million preferred
shares with no par value. The ability to issue preferred shares in
the future will provide Trustmark with additional financial and management
flexibility for general corporate and acquisition purposes. At
September 30, 2008, no such shares have been issued.
Liquidity
position and strategy are reviewed regularly by the Asset/Liability Committee
and continuously adjusted in relationship to Trustmark’s overall
strategy. Management believes that Trustmark has sufficient liquidity
and capital resources to meet presently known cash flow requirements arising
from ongoing business transactions.
CAPITAL
RESOURCES
At
September 30, 2008, Trustmark’s shareholders’ equity was $949.0 million, an
increase of $29.4 million from its level at December 31, 2007. During
the first nine months of 2008, shareholders’ equity increased primarily as a
result of net income of $67.1 million offset by a $1.9 million increase in
accumulated other comprehensive loss and dividends paid of $39.8
million. Trustmark utilizes a sophisticated capital model in order to
provide Management with a monthly tool for analyzing changes in its strategic
capital ratios. This allows Management to hold sufficient capital to
provide for growth opportunities, protect the balance sheet against sudden
adverse market conditions while maintaining an attractive return on equity to
shareholders.
Regulatory
Capital
Trustmark
and TNB 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 TNB. Trustmark aims to
exceed the well-capitalized guidelines for regulatory capital. As of
September 30, 2008, Trustmark and TNB have exceeded all of the minimum capital
standards for the parent company and its primary banking subsidiary as
established by regulatory requirements. In addition, TNB has met
applicable regulatory guidelines to be considered well-capitalized at September
30, 2008. To be categorized in this manner, TNB must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the accompanying table.
There are no significant
conditions or events that have occurred since September 30, 2008, which
Management believes have affected TNB’s present classification.
In
addition, during 2006, Trustmark enhanced its capital structure with the
issuance of trust preferred securities and Subordinated Notes. For
regulatory capital purposes, the trust preferred securities qualify as Tier 1
capital while the Subordinated Notes qualify as Tier 2 capital. The
addition of these capital instruments provided Trustmark a cost effective manner
in which to manage shareholders’ equity and enhance financial
flexibility.
Regulatory
Capital Table
|
|
|
|
($
in thousands)
|
|
|
|
|
|
September 30, 2008
|
|
|
|
Actual Regulatory Capital
|
|
|
Minimum Regulatory Capital
Required
|
|
|
Minimum Regulatory Provision
to
be Well-Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustmark
Corporation
|
|
$
|
849,145
|
|
|
|
11.80
|
%
|
|
$
|
575,735
|
|
|
|
8.00
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
Trustmark
National Bank
|
|
|
817,100
|
|
|
|
11.50
|
%
|
|
|
568,206
|
|
|
|
8.00
|
%
|
|
$
|
710,258
|
|
|
|
10.00
|
%
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustmark
Corporation
|
|
$
|
709,442
|
|
|
|
9.86
|
%
|
|
$
|
287,867
|
|
|
|
4.00
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
Trustmark
National Bank
|
|
|
682,266
|
|
|
|
9.61
|
%
|
|
|
284,103
|
|
|
|
4.00
|
%
|
|
$
|
426,155
|
|
|
|
6.00
|
%
|
Tier
1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustmark
Corporation
|
|
$
|
709,442
|
|
|
|
8.11
|
%
|
|
$
|
262,447
|
|
|
|
3.00
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
Trustmark
National Bank
|
|
|
682,266
|
|
|
|
7.93
|
%
|
|
|
258,152
|
|
|
|
3.00
|
%
|
|
$
|
430,254
|
|
|
|
5.00
|
%
|
On
November 6, 2008, Trustmark announced that it had received preliminary approval
from the U.S. Treasury Department to participate in its Capital Purchase
Program, a voluntary initiative for U.S. financial institutions designed to
support the economy by increasing financing to businesses and
consumers. Under this program, Trustmark intends to issue $215
million in nonvoting senior preferred stock to the U.S.
Treasury. Trustmark’s senior preferred shares will pay a cumulative
annual dividend rate of 5% for the first five years and will reset to an annual
rate of 9% after year five. These senior preferred shares are
callable by Trustmark at par after three years. Trustmark may call them during
the first three years, but only with the proceeds of newly-issued Tier 1 equity
capital in an amount of at least 25% of the $215 million.
In
conjunction with the purchase of Trustmark’s senior preferred shares, the
Treasury will receive warrants to purchase Trustmark common shares with an
aggregate market price equal to $32.3 million, or 15% of the senior preferred
stock investment. The Trustmark common stock underlying these
warrants will represent less than 3% of Trustmark’s outstanding common shares at
September 30, 2008, at current market prices. The exercise price will
be the market price of Trustmark’s common stock at the time of issuance,
calculated on a 20 trading day trailing average. This approval is subject to the
completion of standard closing conditions and the execution of the closing
documents.
The U.S. Treasury intends that the purchase will occur within 30
days.
Dividends
Dividends
for the nine months ended September 30, 2008, were $0.69 per share, increasing
4.5% when compared with dividends of $0.66 per share for the same time period in
2007. Trustmark’s indicated dividend for 2008 is currently $0.92 per
share, up from $0.88 per share for 2007.
Common
Stock Repurchase Program
At
September 30, 2008, Trustmark had remaining authorization for the repurchase of
up to 1.4 million shares of its common stock. Collectively, the
capital management plans adopted by Trustmark since 1998 have authorized the
repurchase of 24.3 million shares of common stock. Pursuant to these
plans, Trustmark has repurchased approximately 22.7 million shares for $518.1
million. Trustmark did not repurchase any shares during the first
nine months of 2008.
EARNING
ASSETS
Earning
assets serve as the primary revenue streams for Trustmark and are comprised of
securities, loans, federal funds sold and securities purchased under resale
agreements. Average earning assets totaled $8.104 billion, or 89.3% of total
assets, for the third quarter of 2008, $8.221 billion, or 89.6% of total assets,
for the second quarter of 2008 and $7.888 billion, or 89.3% of total assets, for
the third quarter of 2007.
Securities
From 2005
through 2007, Trustmark allowed its investment portfolio to run-off given a flat
yield curve and limited spread opportunity. The cash flow created by this
run-off was reinvested in higher yielding loans resulting in an improved net
interest margin percentage. In the first quarter of 2008, given a
steeper yield curve and improved spread opportunities on investment securities
versus traditional funding sources, Trustmark began purchasing
securities.
When
compared with December 31, 2007, total investment securities increased by $446.5
million during the first nine months of 2008. This increase resulted
primarily from purchases of Agency guaranteed collateralized mortgage obligation
securities offset by maturities and paydowns. In addition, during the
first nine months of 2008, Trustmark sold approximately $158 million in
securities, generating a gain of approximately $493 thousand. This
was a strategy undertaken primarily to reduce lower yielding, shorter-term,
higher risk-weight investment portfolio assets.
Management
uses the securities portfolio as a tool to control exposure to interest rate
risk. Interest rate risk can be adjusted by altering both the
duration of the portfolio and the balance of the portfolio. Trustmark
has maintained a strategy of offsetting potential exposure to higher interest
rates by keeping both the duration and the balances of investment securities at
relatively low levels. The duration of the portfolio was 3.22 years
at September 30, 2008 and 1.77 years at December 31, 2007. Duration during the
first nine months of 2008 was somewhat lengthened as a result of the recent
investment strategy mentioned above.
AFS
securities are carried at their estimated fair value with unrealized gains or
losses recognized, net of taxes, in accumulated other comprehensive loss, a
separate component of shareholders’ equity. At September 30, 2008,
AFS securities totaled $907.6 million, which represented 78.0% of the securities
portfolio, compared to $442.3 million, or 61.7%, at December 31,
2007. At September 30, 2008, accumulated other comprehensive loss was
$3.4 million resulting from net unrealized losses on AFS securities of $5.5
million reduced by $2.1 million of deferred income taxes. This
compares with $0.8 million in accumulated other comprehensive loss at December
31, 2007, which resulted from net unrealized losses on AFS securities of $1.2
million reduced by $0.4 million in deferred income taxes.
At September 30, 2008, AFS
securities consisted of U.S. Treasury securities, obligations of states and
political subdivisions, mortgage related securities and corporate
securities.
Held to
maturity (HTM) securities are carried at amortized cost and represent those
securities that Trustmark both intends and has the ability to hold to
maturity. At September 30, 2008, HTM securities totaled $256.3
million and represented 22.0% of the total portfolio, compared with $275.1
million, or 38.3%, at the end of 2007.
Management
continues to focus on asset quality as one of the strategic goals of the
securities portfolio, which is evidenced by the investment of approximately 87%
of the portfolio in U.S. Treasury, U.S. Government agency-backed obligations and
other AAA rated securities. None of the securities in the portfolio
are considered to be sub-prime. Furthermore, outside of membership in the
Federal Home Loan Bank of Dallas, Trustmark does not hold any equity investment
in government sponsored entities.
Loans
and Allowance for Loan Losses
Loans
(excluding loans held for sale) and the allowance for loan losses are reflected
in the accompanying table ($ in thousands). Loans at September 30,
2008 totaled $6.741 billion compared to $7.041 billion at December 31, 2007, a
decrease of $300.1 million. Average loans declined $222.0 million for
the same comparable period. These declines are directly attributable
to a strategic focus to reduce certain loan classifications, specifically
construction, land development and other land loans, loans secured by 1-4 family
residential properties as well as consumer auto loans. In addition,
these decreases have been impacted by current economic
conditions. The decline in construction, land development and other
land loans can be primarily attributable to Trustmark’s Florida market, which at
September 30, 2008 had loans totaling $301.5 million; a decrease of $84.7
million from December 31, 2007. The consumer loan portfolio decrease
of $140.2 million primarily represents a decrease in the indirect consumer auto
portfolio. The declines in these classifications are expected to
continue until the real estate market stabilizes in Florida and overall economic
conditions improve.
LOANS BY TYPE
|
|
9/30/2008
|
|
|
12/31/2007
|
|
|
$ Change
|
|
|
% Change
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction,
land development and other land loans
|
|
$
|
1,062,319
|
|
|
$
|
1,194,940
|
|
|
$
|
(132,621
|
)
|
|
|
-11.1
|
%
|
Secured
by 1-4 family residential properties
|
|
|
1,561,024
|
|
|
|
1,694,757
|
|
|
|
(133,733
|
)
|
|
|
-7.9
|
%
|
Secured
by nonfarm, nonresidential properties
|
|
|
1,345,624
|
|
|
|
1,325,379
|
|
|
|
20,245
|
|
|
|
1.5
|
%
|
Other
real estate secured
|
|
|
175,877
|
|
|
|
167,610
|
|
|
|
8,267
|
|
|
|
4.9
|
%
|
Commercial
and industrial loans
|
|
|
1,328,035
|
|
|
|
1,283,014
|
|
|
|
45,021
|
|
|
|
3.5
|
%
|
Consumer
loans
|
|
|
947,113
|
|
|
|
1,087,337
|
|
|
|
(140,224
|
)
|
|
|
-12.9
|
%
|
Other
loans
|
|
|
320,738
|
|
|
|
287,755
|
|
|
|
32,983
|
|
|
|
11.5
|
%
|
Loans
|
|
|
6,740,730
|
|
|
|
7,040,792
|
|
|
|
(300,062
|
)
|
|
|
-4.3
|
%
|
Less
Allowance for Loan Losses
|
|
|
90,888
|
|
|
|
79,851
|
|
|
|
11,037
|
|
|
|
13.8
|
%
|
Net
Loans
|
|
$
|
6,649,842
|
|
|
$
|
6,960,941
|
|
|
$
|
(311,099
|
)
|
|
|
-4.5
|
%
|
The loan
composition by region at September 30, 2008 is reflected in the following table
($ in thousands). The table reflects a diversified mix of loans by
region.
|
|
September 30, 2008
|
|
LOAN COMPOSITION BY REGION
|
|
Total
|
|
|
Florida
|
|
|
Mississippi
(Central and Southern Regions)
|
|
|
Tennessee
(
Memphis
,
TN
and
Northern MS Regions)
|
|
|
Texas
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction,
land development and other land loans
|
|
$
|
1,062,319
|
|
|
$
|
301,509
|
|
|
$
|
431,005
|
|
|
$
|
83,454
|
|
|
$
|
246,351
|
|
Secured
by 1-4 family residential properties
|
|
|
1,561,024
|
|
|
|
90,790
|
|
|
|
1,262,966
|
|
|
|
175,296
|
|
|
|
31,972
|
|
Secured
by nonfarm, nonresidential properties
|
|
|
1,345,624
|
|
|
|
176,512
|
|
|
|
740,749
|
|
|
|
211,522
|
|
|
|
216,841
|
|
Other
real estate secured
|
|
|
175,877
|
|
|
|
12,518
|
|
|
|
131,863
|
|
|
|
13,601
|
|
|
|
17,895
|
|
Commercial
and industrial loans
|
|
|
1,328,035
|
|
|
|
18,305
|
|
|
|
947,576
|
|
|
|
65,748
|
|
|
|
296,406
|
|
Consumer
loans
|
|
|
947,113
|
|
|
|
3,008
|
|
|
|
900,113
|
|
|
|
31,450
|
|
|
|
12,542
|
|
Other
loans
|
|
|
320,738
|
|
|
|
14,833
|
|
|
|
280,201
|
|
|
|
17,244
|
|
|
|
8,460
|
|
Loans
|
|
$
|
6,740,730
|
|
|
$
|
617,475
|
|
|
$
|
4,694,473
|
|
|
$
|
598,315
|
|
|
$
|
830,467
|
|
The
allowance for loan losses totaled $90.9 million and $79.9 million at September
30, 2008 and December 31, 2007, respectively. The allowance for loan
losses is established through provisions for estimated loan losses charged
against earnings. The allowance reflects Management’s best estimate
of the probable loan losses related to specifically identified loans, as well
as, probable loan losses in the remaining loan portfolio and requires
considerable judgment. The allowance is based upon Management’s
current judgments and the credit quality of the loan portfolio, including all
internal and external factors that impact loan collectibility. SFAS
No. 5, “Accounting for Contingencies,” and SFAS No. 114, “Accounting by
Creditors for Impairment of a Loan,” limit the amount of the loss allowance to
the estimate of losses that have been incurred at the balance sheet reporting
date. Accordingly, the allowance is based upon past events and
current economic conditions.
Trustmark’s
allowance has been developed using different factors to estimate losses based
upon specific evaluation of identified individual loans considered impaired,
estimated identified losses on various pools of loans and/or groups of risk
rated loans with common risk characteristics and other external and internal
factors of estimated probable losses based on other facts and
circumstances.
Trustmark’s
allowance for probable loan loss methodology is based on guidance provided in
SEC Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology
and Documentation Issues,” as well as on other regulatory
guidance. The level of Trustmark’s allowance reflects Management’s
continuing evaluation of industry concentrations, specific credit risks, loan
loss experience, current loan portfolio growth, present economic, political and
regulatory conditions and unidentified losses inherent in the current loan
portfolio. This evaluation takes into account other qualitative
factors including recent acquisitions, national, regional and local economic
trends and conditions, changes in credit concentration, changes in levels and
trends of delinquencies and nonperforming loans, changes in levels and trends of
net charge-offs, changes in interest rates and collateral, financial and
underwriting exceptions. The allowance for loan losses consists of three
elements: (i) specific valuation allowances determined in accordance with SFAS
No. 114 based on probable losses on specific loans; (ii) historical valuation
allowances determined in accordance with SFAS No. 5 based on historical loan
loss experience for similar loans with similar characteristics and trends; and
(iii) qualitative risk valuation allowances determined in accordance with SFAS
No. 5 based on general economic conditions and other qualitative risk factors,
both internal and external, to Trustmark.
At
September 30, 2008, the allowance for loan losses was $90.9 million, resulting
in allowance coverage of nonperforming loans of 86.3%. When impaired
loans, which have been written down to net realizable value, are excluded from
nonperforming loans, the revised allowance coverage of nonperforming loans is
145.2%. Trustmark’s allocation of its allowance for loan losses
represents 1.76% of commercial loans and 0.64% of consumer and home mortgage
loans, resulting in an allowance to total loans of 1.35% at September 30,
2008.
Nonperforming
assets totaled $137.7 million at September 30, 2008, an increase of $64.2
million relative to December 31, 2007. As seen in the table below,
the change during the first nine months of 2008 was largely attributable to
increases in nonaccrual loans and other real estate originating in Trustmark’s
Florida market. The third quarter increase primarily results from an
increase in other real estate as well as an increase of $10.0 million in
nonaccrual loans due to a single energy-related credit in Trustmark’s Houston,
Texas market. This exposure is well secured, appropriately reserved
and no additional write-downs are anticipated.
The
details of Trustmark’s nonperforming assets are shown in the accompanying table
($ in thousands):
NONPERFORMING ASSETS
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Nonaccrual
loans
|
|
|
|
|
|
|
Florida
|
|
$
|
71,125
|
|
|
$
|
43,787
|
|
Mississippi
(1)
|
|
|
12,727
|
|
|
|
13,723
|
|
Tennessee
(2)
|
|
|
4,012
|
|
|
|
4,431
|
|
Texas
|
|
|
17,418
|
|
|
|
3,232
|
|
Total
nonaccrual loans
|
|
|
105,282
|
|
|
|
65,173
|
|
Other
real estate
|
|
|
|
|
|
|
|
|
Florida
|
|
|
18,265
|
|
|
|
995
|
|
Mississippi
(1)
|
|
|
6,062
|
|
|
|
1,123
|
|
Tennessee
(2)
|
|
|
7,924
|
|
|
|
6,084
|
|
Texas
|
|
|
214
|
|
|
|
146
|
|
Total
other real estate
|
|
|
32,465
|
|
|
|
8,348
|
|
Total
nonperforming assets
|
|
$
|
137,747
|
|
|
$
|
73,521
|
|
|
|
|
|
|
|
|
|
|
LOANS PAST DUE OVER 90 DAYS
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
3,622
|
|
|
$
|
4,853
|
|
Loans
HFS - guaranteed GNMA serviced loans
|
|
|
20,332
|
|
|
|
11,847
|
|
Total
loans past due over 90 days
|
|
$
|
23,954
|
|
|
$
|
16,700
|
|
|
|
|
|
|
|
|
|
|
(1)
- Mississippi includes Central and Southern Mississippi
Regions
|
|
|
|
|
|
(2)
- Tennessee includes Memphis, Tennessee and Northern Mississippi
Regions
|
|
As was
reported previously, Trustmark conducted extensive reviews of the construction
and land development portfolio of its Florida Panhandle market during the second
quarter of 2008. During the third quarter of 2008, Trustmark
continued to devote significant resources to managing credit risks resulting
from the slowdown in residential real estate. As seen in the
accompanying table, approximately $96.5 million in construction and land
development loans have been classified and reserved for at appropriate levels,
including $39.7 million of impaired loans that have been written down to net
realizable value. At September 30, 2008, Management believes that
this portfolio is appropriately risk rated and adequately reserved based upon
current conditions. Trustmark’s Mississippi, Tennessee and Texas loan
portfolios continue to perform relatively well in the current economic
environment.
FLORIDACREDIT
QUALITY
|
|
Total
Loans
|
|
|
Criticized
Loans (1)
|
|
|
Classified
Loans (2)
|
|
|
Nonaccrual
Loans
|
|
|
Impaired
Loans (3)
|
|
Construction
and land development loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lots
|
|
$
|
82,472
|
|
|
$
|
20,834
|
|
|
$
|
16,222
|
|
|
$
|
11,082
|
|
|
$
|
5,396
|
|
Development
|
|
|
37,578
|
|
|
|
18,979
|
|
|
|
18,979
|
|
|
|
15,980
|
|
|
|
6,766
|
|
Unimproved
land
|
|
|
111,548
|
|
|
|
63,831
|
|
|
|
35,213
|
|
|
|
18,314
|
|
|
|
16,637
|
|
1-4
family construction
|
|
|
29,265
|
|
|
|
8,818
|
|
|
|
8,818
|
|
|
|
6,590
|
|
|
|
4,368
|
|
Other
construction
|
|
|
40,646
|
|
|
|
28,133
|
|
|
|
17,259
|
|
|
|
12,627
|
|
|
|
6,498
|
|
Construction
and land development loans
|
|
|
301,509
|
|
|
|
140,595
|
|
|
|
96,491
|
|
|
|
64,593
|
|
|
|
39,665
|
|
Commercial,
commercial real estate and consumer
|
|
|
315,966
|
|
|
|
31,723
|
|
|
|
20,791
|
|
|
|
6,532
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Florida loans
|
|
$
|
617,475
|
|
|
$
|
172,318
|
|
|
$
|
117,282
|
|
|
$
|
71,125
|
|
|
$
|
39,954
|
|
FLORIDA
CREDIT
QUALITY
(continued)
|
|
Total Loans Less Impaired
Loans
|
|
|
Loan Loss Reserves
|
|
|
Loan Loss Reserve % of Non-Impaired
Loans
|
|
Construction
and land development loans:
|
|
|
|
|
|
|
|
|
|
Lots
|
|
$
|
77,076
|
|
|
$
|
4,647
|
|
|
|
6.03
|
%
|
Development
|
|
|
30,812
|
|
|
|
2,035
|
|
|
|
6.60
|
%
|
Unimproved
land
|
|
|
94,911
|
|
|
|
4,935
|
|
|
|
5.20
|
%
|
1-4
family construction
|
|
|
24,897
|
|
|
|
906
|
|
|
|
3.64
|
%
|
Other
construction
|
|
|
34,148
|
|
|
|
2,319
|
|
|
|
6.79
|
%
|
Construction
and land development loans
|
|
|
261,844
|
|
|
|
14,842
|
|
|
|
5.67
|
%
|
Commercial,
commercial real estate and consumer
|
|
|
315,677
|
|
|
|
6,892
|
|
|
|
2.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Florida loans
|
|
$
|
577,521
|
|
|
$
|
21,734
|
|
|
|
3.76
|
%
|
(1)
|
Criticized
loans include all classified loans as defined in (2) below as well as
other loans that exhibit potential credit weaknesses that, if not
resolved, may ultimately result in a more severe
classification.
|
(2)
|
Classified
loans include those loans identified by management as exhibiting well
defined credit weaknesses that may jeopardize repayment in full of the
debt.
|
(3)
|
All
nonaccrual loans over $1 million are individually assessed for impairment
in accordance with SFAS No. 114. Impaired loans have been
determined to be collateral dependent and assessed using a fair value
approach. Fair value estimates begin with appraised values,
normally from recently received and reviewed
appraisals. Appraised values are adjusted down for costs
associated with asset disposal. When a loan is deemed to be
impaired, the full difference between book value and the most likely
estimate of the asset’s net realizable value is charged
off.
|
As seen
in the table below, Trustmark’s net charges-offs totaled $10.2 million during
the third quarter of 2008 and $48.7 million for the first nine months of the
year. The increase for the first nine months of 2008 can be
attributed to work performed by Trustmark’s loan review teams during the second
quarter as well as a continued lack of residential real estate
sales activity in Trustmark’s Florida Panhandle market. Management continues to
monitor the impact of declining real estate values on borrowers and is
proactively managing these situations.
|
|
Quarter Ended
|
|
|
Nine Months Ended
September 30,
|
|
NET CHARGE-OFFS
|
|
9/30/2008
|
|
|
9/30/2007
|
|
|
2008
|
|
|
2007
|
|
Florida
|
|
$
|
3,779
|
|
|
$
|
799
|
|
|
$
|
35,531
|
|
|
$
|
880
|
|
Mississippi
(1)
|
|
|
4,515
|
|
|
|
2,312
|
|
|
|
10,303
|
|
|
|
4,738
|
|
Tennessee
(2)
|
|
|
1,291
|
|
|
|
166
|
|
|
|
1,525
|
|
|
|
216
|
|
Texas
|
|
|
576
|
|
|
|
302
|
|
|
|
1,332
|
|
|
|
679
|
|
Total
net charge-offs
|
|
$
|
10,161
|
|
|
$
|
3,579
|
|
|
$
|
48,691
|
|
|
$
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
- Mississippi includes Central and Southern Mississippi
Regions
|
|
(2)
- Tennessee includes Memphis, Tennessee and Northern Mississippi
Regions
|
|
Trustmark’s
loan policy dictates the guidelines to be followed in determining when a loan is
charged-off. Commercial purpose loans are charged-off when a
determination is made that the loan is uncollectible and continuance as a
bankable asset is not warranted. Consumer loans secured by residential real
estate are generally charged-off or written down when the credit becomes
severely delinquent, and the balance exceeds the fair value of the property less
costs to sell. Non-real estate consumer purpose loans, including both secured
and unsecured, are generally charged-off in full no later than when the loan
becomes 120 days past due. Credit card loans are generally
charged-off in full when the loan becomes 180 days past due.
Other
Earning Assets
Federal
funds sold and securities purchased under reverse repurchase agreements were
$14.8 million at September 30, 2008, an decrease of $3.2 million when compared
with December 31, 2007. 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 $6.938
billion at September 30, 2008, compared with $6.869 billion at December 31,
2007, an increase of $68.4 million, or 1.0%. When compared with June
30, 2008, deposit balances during the third quarter decreased by $186.0
million. Declines in interest-bearing deposits during the third
quarter were impacted by a larger than normal balance for matured CDs classified
as noninterest-bearing deposits as well as Trustmark’s decision to maintain a
strategy of disciplined deposit pricing in light of its strong liquidity
position.
Trustmark’s
commitment to increasing its presence in higher-growth markets is illustrated by
its strategic initiative to build additional banking centers within its
four-state banking franchise. This commitment will also benefit
Trustmark’s continued focus on increasing core deposit
relationships. Thus far in 2008, Trustmark has opened five new
banking centers and anticipates opening an additional banking center later this
year.
Trustmark
uses short-term borrowings to fund growth of earning assets in excess of deposit
growth. Short-term borrowings consist of federal funds purchased,
securities sold under repurchase agreements, short-term FHLB advances and the
treasury tax and loan note option account. Short-term borrowings
totaled $961.9 million at September 30, 2008, an increase of $26.7 million when
compared with balances at December 31, 2007. Other borrowings also
included $70.1 million in junior subordinated debentures and $49.7 million in
subordinated notes outstanding at September 30, 2008.
LEGAL
ENVIRONMENT
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 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. In recent years, the legal environment in Mississippi has
been considered by many to be adverse to business interests, with regards to the
overall treatment of tort and contract litigation as well as the award of
punitive damages. However, tort reform legislation that became
effective during recent years may reduce the likelihood of unexpected, sizable
awards. At the present time, Management believes, based on the advice
of legal counsel and Management’s evaluation, that the final resolution of
pending legal proceedings will not have a material impact on Trustmark’s
consolidated financial position or results of operations; however, Management is
unable to estimate a range of potential loss on these matters because of the
nature of the legal environment in states where Trustmark conducts
business.
OFF-BALANCE
SHEET ARRANGEMENTS
Trustmark
makes commitments to extend credit and issues standby and commercial letters of
credit in the normal course of business in order to fulfill the financing needs
of its customers. These loan commitments and letters of credit are
off-balance sheet arrangements.
Commitments
to extend credit are agreements to lend money to customers pursuant to certain
specified conditions. Commitments generally have fixed expiration
dates or other termination clauses. Since many of these commitments
are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Trustmark applies
the same credit policies and standards as it does in the lending process when
making these commitments. The collateral obtained is based upon the
assessed creditworthiness of the borrower. At September 30, 2008 and
2007, Trustmark had commitments to extend credit of $1.8 billion and $2.1
billion, respectively.
Standby
and commercial letters of credit are conditional commitments issued by Trustmark
to ensure the performance of a customer to a third party. When
issuing letters of credit, Trustmark uses essentially the same policies
regarding credit risk and collateral which are followed in the lending
process. At September 30, 2008 and 2007, Trustmark’s maximum exposure
to credit loss in the event of nonperformance by the other party for letters of
credit was $182.8 million and $171.9 million, respectively. These
amounts consist primarily of commitments with maturities of less than three
years. Trustmark holds collateral to support certain letters of credit when
deemed necessary.
ASSET/LIABILITY
MANAGEMENT
Overview
Market
risk reflects the potential risk of loss arising from adverse changes in
interest rates and market prices. Trustmark has risk management policies to
monitor and limit exposure to market risk. Trustmark’s primary market
risk is interest rate risk created by core banking
activities. Interest rate risk is the potential variability of the
income generated by Trustmark’s financial products or services, or the value of
same, which results from changes in various market interest
rates. Market rate changes may take the form of absolute shifts,
variances in the relationships between different rates and changes in the shape
or slope of the interest rate term structure.
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 invest capital effectively
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.
Financial
simulation models are the primary tools used by Trustmark’s Asset/Liability
Committee to measure interest rate exposure. Using a wide range of
sophisticated simulation techniques provides Management with extensive
information on the potential impact to net interest income caused by changes in
interest rates. Models are structured to simulate cash flows and
accrual characteristics of Trustmark’s balance sheet. Assumptions are
made about the direction and volatility of interest rates, the slope of the
yield curve and the changing composition of Trustmark’s balance sheet, resulting
from both strategic plans and customer behavior. In addition, the
model incorporates Management’s assumptions and expectations regarding such
factors as loan and deposit growth, pricing, prepayment speeds and spreads
between interest rates.
Based on
the results of the simulation models using static balances at September 30,
2008
,
it is estimated
that net interest income may decrease 2.8% in a one-year, shocked, up 200 basis
point rate shift scenario, compared to a base case, flat rate scenario for the
same time period. At June 30, 2008, the results of the simulation models using
static balances indicated that net interest income would decrease 1.8% in the
same one-year, shocked, up 200 basis point shift scenario. In the
event of a 100 basis point decrease in interest rates using static balances at
September 30, 2008, it is estimated net interest income would increase 0.6%;
compared with remaining flat at June 30, 2008. When compared with
June 30, 2008, the various changes in net interest income at September 30, 2008
are considered minimal. These minor changes in forecasted net interest income in
the various third quarter rate scenarios illustrate Management’s strategy to
mitigate Trustmark’s exposure to changes in interest rates by maintaining a
neutral position in its interest rate risk position. Management
cannot provide any assurance about the actual effect of changes in interest
rates on net interest income. The estimates provided do not include
the effects of possible strategic changes in the balances of various assets and
liabilities throughout 2008 or additional actions Trustmark could undertake in
response to changes in interest rates. Management will continue to prudently
manage the balance sheet in an effort to control interest rate risk and maintain
profitability over the long term.
Another
component of interest rate risk management is measuring the economic
value-at-risk for a given change in market interest rates. The economic
value-at-risk may indicate risks associated with longer term balance sheet items
that are not fully reflected in the shorter time period evaluated in the net
interest income simulation. Trustmark also uses computer-modeling techniques to
determine the present value of all asset and liability cash flows (both on- and
off-balance sheet), adjusted for prepayment expectations, using a market
discount rate. The net change in the present value of the asset and liability
cash flows in the different market rate environments is the amount of economic
value at risk from those rate movements which is referred to as net portfolio
value. As of September 30, 2008, the economic value of equity at risk for an
instantaneous up 200 basis point shift in rates produced a decline in net
portfolio value of 6.5%, while an instantaneous 200 basis point decrease in
interest rates produced an increase in net portfolio value of
0.5%. In comparison, the models indicated a net portfolio value
decrease of 5.9% as of June 30, 2008, had interest rates moved up
instantaneously 200 basis points, and a decrease of 0.8%, had an instantaneous
200 basis points decrease in interest rates occurred.
Derivatives
Trustmark
uses financial derivatives for management of interest rate risk. The
Asset/Liability Committee, in its oversight role for the management of interest
rate risk, approves the use of derivatives in balance sheet hedging
strategies. The most common derivatives employed by Trustmark are
interest rate lock commitments, forward contracts and both futures contracts and
options on futures contracts.
As part
of Trustmark’s risk management strategy in the mortgage banking area, various
derivative instruments such as interest rate lock commitments and forward sales
contracts are utilized. Rate lock commitments are residential mortgage loan
commitments with customers, which guarantee a specified interest rate for a
specified period of time. 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. These derivative
instruments are designated as fair value hedges for certain of these
transactions that qualify as fair value hedges under SFAS No.
133. Trustmark’s off-balance sheet obligations under these derivative
instruments totaled $262.9 million at September 30, 2008, with a positive
valuation adjustment of $111 thousand, compared to $211.3 million at December
31, 2007, with a negative valuation adjustment of $686 thousand.
Trustmark
utilizes derivative instruments, specifically Treasury note futures contracts
and exchange-traded option contracts, to offset changes in the fair value of MSR
attributable to changes in interest rates. These transactions are
considered freestanding derivatives that do not otherwise qualify for hedge
accounting. Changes in the fair value of these derivative instruments
are recorded in noninterest income in mortgage banking, net and are offset by
the changes in the fair value of MSR. MSR fair values represent the
effect of present value decay and the effect of changes in market
rates. Ineffectiveness of hedging MSR fair value is measured by
comparing total hedge cost to the fair value of the MSR attributable to market
changes. This hedge is discussed further in the mortgage banking
section of the noninterest income discussion earlier in this
document.
RECENT
PRONOUNCEMENTS
Accounting
Standards Adopted in 2008
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 allows
entities the option to measure eligible financial instruments at fair value as
of specified dates. Such election, which may be applied on an
instrument-by-instrument basis, is typically irrevocable once elected. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007, and early
application is allowed under certain circumstances. Management elected not to
apply the fair value option to any of its assets or liabilities at January 1,
2008.
In June
2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No.
06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards.” EITF 06-11 states that an entity should recognize a realized
tax benefit associated with dividends on nonvested equity shares, nonvested
equity share units and outstanding equity share options charged to retained
earnings as an increase in additional paid in capital. EITF 06-11
should be applied prospectively to income tax benefits of dividends on
equity-classified share-based payment awards that are declared in fiscal years
beginning after December 15, 2007. The adoption of EITF 06-11 did not
have a material impact on Trustmark’s balance sheets or results of
operations.
In
November 2007, the SEC issued SAB No. 109 (SAB 109), “Written Loan
Commitments Recorded at Fair Value Through Earnings.”
SAB 109 rescinds SAB
105’s prohibition on inclusion of expected net future cash flows related to loan
servicing activities in the fair value measurement of a written loan commitment.
SAB 109 also applies to any loan commitments for which fair value accounting is
elected under SFAS No. 159. SAB 109 is effective prospectively for derivative
loan commitments issued or modified in fiscal quarters beginning after
December 15, 2007. The adoption of SAB 109 did not have a
material impact on Trustmark’s balance sheets or results of
operations.
New
Accounting Standards
Other new
pronouncements issued but not effective until after September 30, 2008, include
the following:
On
October 10, 2008, the FASB posted FASB Staff Position (FSP) 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active.” For more information on the impact of FSP 157-3 on
Trustmark, please see Note 11 – Fair Value.
On June
16, 2008, the FASB posted FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” FSP No. EITF 03-6-1 stipulates that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of EPS pursuant to the two-class
method. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008. Management is
currently evaluating the impact that FSP No. EITF 03-6-1 will have on
Trustmark’s consolidated financial statements.
In May 2008, the FASB
issued SFAS No. 162, “
The Hierarchy of Generally
Accepted Accounting Principles
.” SFAS No. 162
identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP
hierarchy). The hierarchical guidance provided by SFAS No. 162 did
not have a significant impact on Trustmark’s consolidated financial
statements.
On April
25, 2008, the FASB posted FSP 142-3, “Determination of the Useful Life of
Intangible Assets.” This FSP
amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to
improve the consistency between the useful life of a recognized intangible asset
under Statement 142 and the period of expected cash flows used to measure the
fair value of the asset under FASB Statement No. 141R, “Business Combinations.”
This FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2008.
Management is currently
evaluating the impact that
FSP 142-3
will have on Trustmark’s
balance sheets and results of operations.
In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133” (SFAS No. 161).
SFAS No. 161 expands quarterly disclosure requirements in SFAS No. 133 about an
entity’s derivative instruments and hedging activities. SFAS No. 161 is
effective for fiscal years beginning after November 15,
2008. Management is currently evaluating the impact that SFAS No. 161
will have on Trustmark’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(revised), “Business
Combinations.” SFAS No. 141R expands the definition of transactions and
events that qualify as business combinations; requires that the acquired assets
and liabilities, including contingencies, be recorded at fair value determined
on the acquisition date; changes the recognition timing for restructuring costs;
and requires the expensing of acquisition costs as incurred. SFAS No. 141R is
required to be applied to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008, with earlier adoption being prohibited.
Also in
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51.” SFAS
No. 160 states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. The statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. This statement is effective prospectively for fiscal years
beginning after December 15, 2008. Management is currently evaluating the impact
of SFAS No. 160 on its balance sheets and results of operations.