TRUSTMARK CORP
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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T
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended December 31,
2009
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or
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number 000-3683
TRUSTMARK
CORPORATION
(Exact
name of Registrant as specified in its charter)
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MISSISSIPPI
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64-0471500
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification Number)
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248
East Capitol Street, Jackson, Mississippi
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39201
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
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(601)
208-5111
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Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, no par value
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NASDAQ
Stock Market
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(Title
of Class)
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(Name
of Exchange on Which Registered)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
T
No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
£
No
T
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
T
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
£
No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large accelerated filer
T
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Accelerated filer
£
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Non-accelerated filer
£
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Smaller
reporting company
£
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(Do
not check if a smaller reporting
company)
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|||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.) Yes
£
No
T
Based on
the closing sales price at June 30, 2009, the last business day of the
registrant’s most recently completed second fiscal quarter, the aggregate market
value of the shares of common stock held by nonaffiliates of the registrant was
approximately $918 million.
As of
January 29, 2010, there were issued and outstanding 63,694,189 shares of the
registrant’s Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for Trustmark’s 2010 Annual Meeting of Shareholders to be
held May 11, 2010 are incorporated by reference to Part III of the Form 10-K
report.
TRUS
TMARK CORPORATION
ANNUAL
REPORT ON FORM 10-K
TABLE
OF CONTENTS
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PART
I
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PAGE
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Item
1.
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3
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Item
1A.
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13
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Item
1B.
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18
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Item
2.
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18
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Item
3.
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18
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Item
4.
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19
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PART
II
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Item
5.
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19
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Item
6.
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21
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Item
7.
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23
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Item
7A.
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62
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Item
8.
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64
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Item
9.
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109
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Item
9A.
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109
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Item
9B.
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110
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PART
III
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Item
10.
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111
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Item
11.
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111
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Item
12.
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111
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Item
13.
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111
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Item
14.
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111
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PART
IV
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Item
15.
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111
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115
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ITEM
1.
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BUSINESS
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The
Corporation
Description
of Business
Trustmark
Corporation (Trustmark), a Mississippi business corporation incorporated in
1968, is a bank holding company headquartered in Jackson,
Mississippi. Trustmark’s principal subsidiary is Trustmark National
Bank (TNB), initially chartered by the State of Mississippi in
1889. At December 31, 2009, TNB had total assets of $9.4 billion,
which represents over 98% of the consolidated assets of Trustmark.
Through
TNB and its other subsidiaries, Trustmark operates as a financial services
organization providing banking and other financial solutions through
approximately 150 offices and 2,524 full-time equivalent associates located
in the states of Mississippi, Tennessee (in Memphis and the Northern Mississippi
region, which is collectively referred to herein as Trustmark’s Tennessee
market), Florida (primarily in the northwest or “Panhandle” region of that
state) and Texas (primarily in Houston, which is referred to herein as
Trustmark’s Texas market). The principal products produced and
services rendered by TNB and Trustmark’s other subsidiaries are as
follows:
Trustmark
National Bank
Commercial
Banking – TNB provides a full range of commercial banking services to
corporations and other business customers. Loans are provided for a
variety of general corporate purposes, including financing for commercial and
industrial projects, income producing commercial real estate, owner-occupied
real estate and construction and land development. TNB also provides
deposit services, including checking, savings and money market accounts and
certificates of deposit as well as treasury management services.
Consumer
Banking – TNB provides banking services to consumers, including checking,
savings, and money market accounts as well as certificates of deposit and
individual retirement accounts. In addition, TNB provides consumer
customers with installment and real estate loans and lines of
credit.
Mortgage
Banking – TNB provides mortgage banking services, including construction
financing, production of conventional and government insured mortgages,
secondary marketing and mortgage servicing. At December 31, 2009,
TNB’s mortgage loan portfolio totaled approximately $1.0 billion, while its
portfolio of mortgage loans serviced for others, including, FNMA, FHLMC and
GNMA, totaled approximately $4.2 billion.
Wealth
Management and Trust Services – TNB offers specialized services and expertise in
the areas of wealth management, trust, investment and custodial services for
corporate and individual customers. These services include the
administration of personal trusts and estates as well as the management of
investment accounts for individuals, employee benefit plans and charitable
foundations. TNB also provides corporate trust and institutional
custody, securities brokerage, financial and estate planning, retirement plan
services as well as life insurance and other risk management services provided
by Trustmark Risk Management, Inc. (TRMI). TRMI engages in individual
insurance product sales as a broker of life and long-term care insurance for
wealth management customers. TNB’s wealth management division is also
served by Trustmark Investment Advisors, Inc. (TIA), a Securities and Exchange
Commission (SEC)-registered investment adviser. TIA provides
customized investment management services for TNB customers and also serves as
investment advisor to The Performance Funds, a proprietary family of mutual
funds. At December 31, 2009, assets under management and
administration totaled $7.2 billion.
Insurance
–
TNB provides a
competitive array of insurance solutions for business and individual risk
management needs. Business insurance offerings include services and specialized
products for medical professionals, construction, manufacturing, hospitality,
real estate and group life and health plans. Individual customers are
also provided life and health insurance, and personal line
policies. TNB provides these services through The Bottrell Insurance
Agency, Inc. (Bottrell), which is based in Jackson, Mississippi, and
Fisher-Brown, Incorporated (Fisher-Brown), headquartered in Pensacola,
Florida.
Somerville
Bank & Trust Company
Somerville
Bank & Trust Company (Somerville), headquartered in Somerville, Tennessee,
provides banking services in the eastern Memphis metropolitan statistical area
(MSA) through five offices. At December 31, 2009, Somerville had
total assets of $187 million.
Capital
Trusts
Trustmark
Preferred Capital Trust I (Trustmark Trust) is a Delaware trust affiliate formed
in 2006 to facilitate a private placement of $60.0 million in trust preferred
securities. Republic Bancshares Capital Trust I (Republic Trust) is a
Delaware trust affiliate acquired as the result of Trustmark’s 2006 acquisition
of Republic Bancshares of Texas, Inc. Republic Trust was formed to
facilitate the issuance of $8.0 million in trust preferred
securities. As defined in applicable accounting standards, both
Trustmark Trust and Republic Trust are considered variable interest entities for
which Trustmark is not the primary beneficiary. Accordingly, the
accounts of both trusts are not included in Trustmark’s consolidated financial
statements.
Strategy
Trustmark
seeks to be a premier diversified financial services company in its markets,
providing a broad range of banking, wealth management and insurance solutions to
its customers. Trustmark’s products and services are designed to
strengthen and expand customer relationships and enhance the organization’s
competitive advantages in its markets, as well as to provide cross-selling
opportunities that will enable Trustmark to continue to diversify its revenue
and earnings streams. Much of the growth in Trustmark’s total
revenues has been derived from organic growth of existing lines of business. For
example, the development of Trustmark’s business has been enhanced by its 2006
acquisition of Houston-based Republic Bancshares of Texas, Inc., which expanded
Trustmark’s penetration of the Houston banking market.
The
following table sets forth summary data regarding Trustmark’s securities, loans,
assets, deposits, equity and revenue growth over the past five
years.
Summary
Information
($
in thousands)
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December 31,
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2009
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2008
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2007
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2006
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2005
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|||||||||||||||
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Securities
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$ | 1,917,380 | $ | 1,802,470 | $ | 717,441 | $ | 1,050,515 | $ | 1,295,784 | ||||||||||
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Total
securities growth (decline)
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$ | 114,910 | $ | 1,085,029 | $ | (333,074 | ) | $ | (245,269 | ) | $ | (359,837 | ) | |||||||
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Total
securities growth (decline)
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6.38 | % | 151.24 | % | -31.71 | % | -18.93 | % | -21.73 | % | ||||||||||
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Loans
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$ | 6,319,797 | $ | 6,722,403 | $ | 7,040,792 | $ | 6,563,153 | $ | 5,913,343 | ||||||||||
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Total
loans (decline) growth
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$ | (402,606 | ) | $ | (318,389 | ) | $ | 477,639 | $ | 649,810 | $ | 567,559 | ||||||||
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Total
loans (decline) growth
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-5.99 | % | -4.52 | % | 7.28 | % | 10.99 | % | 10.62 | % | ||||||||||
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Assets
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$ | 9,526,018 | $ | 9,790,909 | $ | 8,966,802 | $ | 8,840,970 | $ | 8,389,750 | ||||||||||
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Total
assets (decline) growth
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$ | (264,891 | ) | $ | 824,107 | $ | 125,832 | $ | 451,220 | $ | 336,793 | |||||||||
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Total
assets (decline) growth
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-2.71 | % | 9.19 | % | 1.42 | % | 5.38 | % | 4.18 | % | ||||||||||
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Deposits
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$ | 7,188,465 | $ | 6,823,870 | $ | 6,869,272 | $ | 6,976,164 | $ | 6,282,814 | ||||||||||
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Total
deposits growth (decline)
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$ | 364,595 | $ | (45,402 | ) | $ | (106,892 | ) | $ | 693,350 | $ | 832,721 | ||||||||
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Total
deposits growth (decline)
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5.34 | % | -0.66 | % | -1.53 | % | 11.04 | % | 15.28 | % | ||||||||||
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Equity
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$ | 1,110,060 | $ | 1,178,466 | $ | 919,636 | $ | 891,335 | $ | 741,463 | ||||||||||
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Total
equity (decline) growth
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$ | (68,406 | ) | $ | 258,830 | $ | 28,301 | $ | 149,872 | $ | (8,933 | ) | ||||||||
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Total
equity (decline) growth
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-5.80 | % | 28.14 | % | 3.18 | % | 20.21 | % | -1.19 | % | ||||||||||
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Years Ended December 31,
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||||||||||||||||||||
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Revenue
*
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$ | 522,451 | $ | 496,418 | $ | 463,230 | $ | 435,699 | $ | 419,548 | ||||||||||
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Total
revenue growth
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$ | 26,033 | $ | 33,188 | $ | 27,531 | $ | 16,151 | $ | 19,903 | ||||||||||
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Total
revenue growth
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5.24 | % | 7.16 | % | 6.32 | % | 3.85 | % | 4.98 | % | ||||||||||
* -
Revenue is defined as net interest income plus noninterest income
For
additional information regarding the general development of Trustmark’s
business, see Selected Financial Data and Management’s Discussion and Analysis
of Financial Condition and Results of Operations in Items 6 and 7 of this
report.
Geographic
Information
The
following table shows Trustmark’s percentage of loans, deposits and revenues for
each of the geographic regions in which it operates at and for the year ended
December 31, 2009 ($ in thousands):
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Loans
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Deposits
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Revenue (3)
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||||||||||||||||||||||
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Amount
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%
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Amount
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%
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Amount
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%
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|||||||||||||||||||
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Mississippi
(1)
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$ | 4,425,413 | 70.0 | % | $ | 5,421,597 | 75.4 | % | $ | 426,923 | 81.7 | % | ||||||||||||
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Tennessee
(2)
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562,700 | 8.9 | % | 1,033,011 | 14.4 | % | 38,239 | 7.3 | % | |||||||||||||||
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Florida
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523,654 | 8.3 | % | 203,001 | 2.8 | % | 26,238 | 5.0 | % | |||||||||||||||
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Texas
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808,030 | 12.8 | % | 530,856 | 7.4 | % | 31,051 | 6.0 | % | |||||||||||||||
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Total
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$ | 6,319,797 | 100.0 | % | $ | 7,188,465 | 100.0 | % | $ | 522,451 | 100.0 | % | ||||||||||||
(1)
- Mississippi includes Central and Southern Mississippi Regions
(2)
- Tennessee includes Memphis, Tennessee and Northern Mississippi
Region
(3)
- Revenue is defined as net interest income plus noninterest income
Segment
Information
For the
year ended December 31, 2009, Trustmark operated through three operating
segments -- General Banking, Insurance and Wealth Management. (See
Note 19 to the accompanying audited financial statements). The table
below presents segment data regarding net interest income (expense), noninterest
income, net income and average assets for each segment for the last three years
($ in thousands):
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Years ended December 31,
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||||||||||||
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2009
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2008
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2007
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General
Banking
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Net
interest income
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$ | 349,790 | $ | 314,860 | $ | 296,761 | ||||||
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Noninterest
income
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116,335 | 116,141 | 100,440 | |||||||||
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Net
income
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84,313 | 79,471 | 94,837 | |||||||||
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Average
assets
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9,406,775 | 9,012,458 | 8,733,634 | |||||||||
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Insurance
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||||||||||||
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Net
interest income (expense)
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$ | 296 | $ | 224 | $ | (3 | ) | |||||
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Noninterest
income
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29,099 | 32,544 | 35,574 | |||||||||
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Net
income
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4,248 | 5,377 | 6,908 | |||||||||
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Average
assets
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17,751 | 20,489 | 21,670 | |||||||||
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Wealth
Management
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||||||||||||
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Net
interest income
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$ | 4,123 | $ | 4,076 | $ | 4,025 | ||||||
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Noninterest
income
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22,808 | 28,573 | 26,433 | |||||||||
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Net
income
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4,486 | 7,569 | 6,850 | |||||||||
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Average
assets
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95,916 | 98,240 | 90,533 | |||||||||
For
information on Trustmark’s Segments, please see Results of Segment Operations in
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results
of Operations and Note 19 - Segment Information included in Item 8 - Financial
Statements and Supplementary Data, which are located elsewhere in this
report.
The
Current Economic Recession
The
economic recession continued to impact Trustmark’s consolidated financial
statements in 2009. Loans declined by $402.6 million during 2009,
reflecting decreased demand from large commercial customers as well as from the
Corporation’s efforts to reduce exposure to construction and land development
lending and the decision to discontinue indirect auto lending in
2008. Reflecting the recessionary economic environment, nonperforming
assets increased by $79 million to $231.3 million, representing 3.48% of loans
and other real estate at December 31, 2009. Net charge offs in 2009
totaled $68.4 million or 1.01% of average loans, while the provision for loan
losses increased to $77.1 million. The increase in each of these
metrics is principally attributable to commercial developments of residential
real estate conditions, principally in Trustmark’s Florida market.
To
address the downturn in the Florida real estate market, Trustmark established a
dedicated problem asset working group in early 2008. This group is
composed of experienced lenders and is charged with managing problem assets in
the Florida Market. In addition, a special committee of executive
management was formed to provide guidance and monitor the resolutions of problem
assets. Aside from these new processes, Trustmark conducts quarterly reviews and
assessments of all criticized loans in all its markets.
These
comprehensive assessments, which long pre-date the current economic recession,
include the formulation of action plans and updates of recent developments on
all criticized loans. Managing credit risks and real estate market
conditions during this recession continues to be a primary focus for
Trustmark.
In 2008,
Trustmark dedicated staff to seek to mitigate foreclosure of primary residences
on borrowers that are subject to adverse financial conditions in the current
economic environment. Loss mitigation counselors and additional
support staff were added to accommodate loss mitigation
activity. Trustmark continues to utilize personnel in its collections
department and has conducted regular training of its personnel on foreclosure
mitigation. In some cases, Trustmark may make deferred payment
arrangements with such borrowers on a short-term basis. Likewise,
Trustmark is following the Fannie Mae, Freddie Mac and GNMA guidelines for
foreclosure moratoriums in its portfolio of loans serviced for
others.
Loan
modifications made to date have substantially all occurred on loans serviced for
outside investors. During 2010, Trustmark established an in-house
mortgage modification program. The program is focused on extending
loan maturities, which results in a reduced payment for those customers meeting
program criteria. Based upon Trustmark's portfolio composite, a
limited demand for this program is anticipated.
As for new
loan originations, Trustmark follows, in substantially all situations, the
underwriting standards of the government agencies. As those agencies
have revised standards on new originations, so has Trustmark.
Total
deposits at December 31, 2009 of $7.188 billion reflected a 5.3% increase from
$6.824 billion at December 31, 2008. This growth in deposits is
comprised of an increase in both noninterest-bearing and interest-bearing
deposits of $189.0 million and $175.6 million, respectively. The
increase in noninterest-bearing deposits can be primarily attributed to normal
fluctuations in business Demand Deposit Accounts (DDA) balances as well as a
“flight to quality” from depositors, especially large corporate depositors, to
the unlimited deposit insurance of FDIC Transaction Account Guaranteed qualified
accounts. Increases in interest-bearing deposits resulted primarily
from growth in balances held by public entities and individuals.
In
November 2008, Trustmark participated in the Troubled Asset Relief Program
(TARP)-Capital Purchase Program (CPP) sponsored by the U. S. Treasury (Treasury)
to reinforce its strong capital position, advance the Treasury’s efforts to
facilitate additional lending, maintain its competitive advantage over less
well-capitalized competitors, support its foreclosure mitigation programs and
support its general operations. On December 7, 2009, Trustmark completed the
issuance of 6,216,216 shares of common stock in an underwritten public offering
yielding net proceeds of $109.3 million. Following discussions with
its federal regulators and utilizing the funding provided by the common stock
offering, Trustmark redeemed all the Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, (Senior Preferred Stock) from the Treasury on December 9,
2009. The amount paid by Trustmark to redeem the Senior Preferred
Stock consisted of $215.0 million, which was equivalent to both the original
issuance price and the liquidation value of the Senior Preferred Stock, plus
final accrued dividends of $716.7 thousand. As a result of the
redemption, Trustmark incurred a one-time, non-cash charge of $8.2 million to
net income available to common shareholders for the unaccreted discount recorded
at the date of the issuance of the Senior Preferred Stock. In
addition, on December 30, 2009 Trustmark repurchased the ten-year warrant (the
Warrant) from the Treasury for its fair value of $10.0 million.
For
additional discussion of the impact of the current economic recession on the
financial condition and results of operations of Trustmark and its subsidiaries,
see Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” elsewhere in this report.
Competition
There is
significant competition within the banking and financial services industry in
the markets in which Trustmark operates. Changes in regulation,
technology and product delivery systems have resulted in an increasingly
competitive environment. Trustmark expects to continue to face
increasing competition from online and traditional financial institutions
seeking to attract customers by providing access to similar services and
products.
Trustmark
and its subsidiaries compete with national and state chartered banking
institutions of comparable or larger size and resources and with smaller
community banking organizations. Trustmark has numerous local,
regional and national nonbank competitors, including savings and loan
associations, credit unions, mortgage companies, insurance companies, finance
companies, financial service operations of major retailers, investment brokerage
and financial advisory firms and mutual fund companies. Because
nonbank financial institutions are not subject to the same regulatory
restrictions as banks and bank holding companies, they can often operate with
greater flexibility and lower cost structures. Currently, Trustmark
does not face meaningful competition from international banks in its markets,
although that could change in the future.
The table
below presents FDIC deposit data regarding TNB’s deposit market share by state
as of June 30, 2009.
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Market
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Deposit Market Share
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|||
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Mississippi
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13.38 | % | ||
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Texas
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0.12 | % | ||
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Tennessee
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0.25 | % | ||
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Florida
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0.05 | % | ||
Services
provided by the Wealth Management segment face competition from many national,
regional and local financial institutions. Companies that offer broad
services similar to those provided by Trustmark, such as other banks, trust
companies and full service brokerage firms, as well as companies that specialize
in particular services offered by Trustmark, such as investment advisors and
mutual fund providers, all compete with Trustmark’s Wealth Management
segment.
Trustmark’s
insurance subsidiaries face competition from local, regional and national
insurance companies, independent insurance agencies as well as from other
financial institutions offering insurance products.
Trustmark’s
ability to compete effectively is a result of being able to provide customers
with desired products and services in a convenient and cost effective
manner. Customers for commercial, consumer and mortgage banking as
well as wealth management and insurance services are influenced by convenience,
quality of service, personal contacts, availability of products and services and
related pricing. Trustmark continually reviews its products,
locations, alternative delivery channels, and pricing strategies to maintain and
enhance its competitive position. While Trustmark’s position varies
by market, Management believes it can compete effectively as a result of local
market knowledge and awareness of customer needs.
Supervision
and Regulation
The
following discussion sets forth certain material elements of the regulatory
framework applicable to bank holding companies and their subsidiaries and
provides certain specific information relevant to Trustmark. The
discussion is qualified in its entirety by reference to the full text of
statutes, regulations and policies that are described. Also, such
statutes, regulations and policies are continually under the review of Congress
and state legislatures as well as federal and state regulatory
agencies. A change in statutes, regulations or regulatory policies
could have a material impact on the business of Trustmark and its
subsidiaries.
General
Trustmark
is a registered bank holding company under the Bank Holding Company Act (BHC) of
1956, as amended. As such, Trustmark and its nonbank subsidiaries are
subject to the supervision, examination and reporting requirements of the BHC
Act and the regulations of the Federal Reserve Board. In addition, as
part of Federal Reserve policy, a bank holding company is expected to act as a
source of financial and managerial strength to subsidiary banks and to maintain
resources adequate to support each subsidiary bank. The BHC Act
requires every bank holding company to obtain the prior approval of the Federal
Reserve before: (i) it may acquire direct or indirect ownership or control of
any voting shares of any bank if, after such acquisition, the bank holding
company will directly or indirectly own or control more than 5.0% of the voting
shares of the bank; (ii) it or any of its subsidiaries, other than a bank, may
acquire all or substantially all of the assets of any bank; or (iii) it may
merge or consolidate with any other bank holding company.
The BHC
Act further provides that the Federal Reserve may not approve any transaction
that would result in a monopoly or would be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the business of banking in any
section of the United States, or the effect of which may be substantially to
lessen competition or to tend to create a monopoly in any section of the
country, or that in any other manner would be in restraint of trade, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by
the public interest in meeting the convenience and needs of the community to be
served. The Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and
banks concerned and the convenience and needs of the community to be served.
Consideration of financial resources generally focuses on capital adequacy, and
consideration of convenience and needs issues includes the parties’ performance
under the Community Reinvestment Act of 1977.
The BHC
Act, as amended by the interstate banking provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 repealed the prior
statutory restrictions on interstate acquisitions of banks by bank holding
companies, such that Trustmark may now acquire a bank located in any other
state, regardless of state law to the contrary, subject to certain
deposit-percentage, aging requirements, and other restrictions. The Interstate
Bank Branching Act also generally provided that, after June 1, 1997, national
and state-chartered banks may branch interstate through acquisitions of banks in
other states.
In
addition, bank holding companies generally may engage, directly or indirectly,
only in banking and such other activities as are determined by the Federal
Reserve Board to be closely related to banking. Trustmark is also
subject to regulation by the State of Mississippi under its general business
corporation laws. In addition to the impact of regulation, Trustmark and its
subsidiaries may be affected by legislation that can change banking statutes in
substantial and unexpected ways and by the actions of the Federal Reserve Board
as it attempts to control the money supply and credit availability in order to
influence the economy.
TNB is a
national banking association and, as such, is subject to regulation by the
Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC) and the Federal Reserve Board. Almost every area
of the operations and financial condition of TNB is subject to extensive
regulation and supervision and to various requirements and restrictions under
federal and state law including loans, reserves, investments, issuance of
securities, establishment of branches, capital adequacy, liquidity, earnings,
dividends, management practices and the provision of services. Somerville is a
state-chartered commercial bank, subject to regulation primarily by the FDIC and
secondarily by the Tennessee Department of Financial Institutions.
TNB’s
nonbanking subsidiaries are subject to a variety of state and federal
laws. TIA, a registered investment advisor, is subject to supervision
and regulation by the SEC and the State of Mississippi. Bottrell,
Fisher-Brown and TRMI are subject to the insurance laws and regulations of the
states in which they are active.
Trustmark
is also under the jurisdiction of the SEC for matters relating to the offering,
sale and trading of its securities. Trustmark is subject to the
disclosure and regulatory requirements of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, as administered by
the SEC.
The
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (Act) was signed
into law on November 12, 1999. As a result of the Act, banks are able
to offer customers a wide range of financial products and services without the
restraints of previous legislation. In addition, bank holding
companies and other financial services providers have been able to commence new
activities and develop new affiliations much more readily. The primary
provisions of the Act related to the establishment of financial holding
companies and financial subsidiaries became effective on March 11,
2000. The Act authorizes national banks to own or control a
“financial subsidiary” that engages in activities that are not permissible for
national banks to engage in directly. The Act contains a number of
provisions dealing with insurance activities by bank
subsidiaries. Generally, the Act affirms the role of the states in
regulating insurance activities, including the insurance activities of financial
subsidiaries of banks, but the Act also preempts certain state
laws. As a result of the Act, TNB elected for Bottrell, Fisher-Brown
and TRMI to become financial subsidiaries. This enables TNB to engage
in insurance agency activities at any location.
The Act
also imposed new requirements related to the privacy of customer financial
information. In accordance with the Act, federal banking regulators adopted
rules that limit the ability of banks and other financial institutions to
disclose nonpublic information about consumers to nonaffiliated third
parties. These limitations require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers to prevent disclosure of
certain personal information to a nonaffiliated third party. The
privacy provisions of the Act affect how consumer information is transmitted
through diversified financial companies and conveyed to outside
vendors. Trustmark has complied with these requirements and
recognizes the need for its customers’ privacy.
Anti-Money
Laundering Initiatives and the USA Patriot Act
Trustmark
is also subject to extensive regulations aimed at combating money laundering and
terrorist financing. The USA Patriot Act of 2001 (the USA Patriot Act)
substantially broadened the scope of United States anti-money laundering laws
and regulations by imposing significant new compliance and due diligence
obligations, creating new crimes and penalties and expanding the
extra-territorial jurisdiction of the United States. The Treasury has issued a
number of implementing regulations to financial institutions that apply to
various requirements of the USA Patriot Act. These regulations impose
obligations on financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and
terrorist financing and to verify the identity of their customers. Failure of a
financial institution to maintain and implement adequate programs to combat
money laundering and terrorist financing, or to comply with all of the relevant
laws or regulations, could have serious legal and financial consequences for the
institution.
Capital
Adequacy
Banks and
bank holding companies are subject to various regulatory capital requirements
administered by state and federal banking agencies. Capital adequacy
guidelines and, additionally for banks, prompt corrective action regulations,
involve quantitative measures of assets, liabilities, and certain off-balance
sheet items calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weighting and other factors.
The
Federal Reserve Board and the OCC, the primary regulators of Trustmark and TNB,
respectively, have substantially similar risk-based capital ratio and leverage
ratio guidelines for banking organizations. Under the guidelines,
banking organizations are required to maintain minimum ratios for Tier 1 capital
and total capital to risk-weighted assets. For purposes of
calculating these ratios, a banking organization’s assets and some of its
specified off-balance sheet commitments and obligations are assigned to various
risk categories. Capital, at both the holding company and bank level,
is classified in one of three tiers depending on type. Core capital (Tier 1) for
both Trustmark and TNB includes total equity capital, with the impact of
accumulated other comprehensive income (loss) eliminated plus
allowable trust preferred securities less goodwill, other identifiable
intangible assets and disallowed servicing assets. Supplementary
capital (Tier 2) includes the allowance for loan losses, subject to certain
limitations, as well as allowable subordinated debt. Total capital
for both Trustmark and TNB is a combination of Tier 1 and Tier 2
capital.
Trustmark
and TNB are required to maintain Tier 1 and total capital equal to at least 4%
and 8% of their total risk-weighted assets, respectively. At December
31, 2009, Trustmark exceeded both requirements with Tier 1 capital and total
capital equal to 12.61% and 14.58% of its total risk-weighted assets,
respectively. At December 31, 2009, TNB also exceeded both
requirements with Tier 1 capital and total capital equal to 12.21% and 14.16% of
its total risk-weighted assets, respectively.
The
Federal Reserve Board also requires bank holding companies to maintain a minimum
leverage ratio. The guidelines provide for a minimum leverage ratio of 3% for
banks and bank holding companies that meet certain specified criteria, including
having the highest regulatory rating or have implemented the appropriate federal
regulatory authority’s risk-adjusted measure for market risk. All other holding
companies and national banks are required to maintain a minimum leverage ratio
of 4%, unless an appropriate regulatory authority specifies a different minimum
ratio. For TNB to be considered well-capitalized under the regulatory
framework for prompt corrective action, its leverage ratio must be at least
5%. At December 31, 2009, the leverage ratios for Trustmark and TNB
were 9.74% and 9.45%, respectively.
Failure
to meet minimum capital requirements could subject a bank to a variety of
enforcement remedies. The Federal Deposit Insurance Act, as amended,
(FDIA), identifies five capital categories for insured depository
institutions. These include well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. FDIA requires banking regulators to take prompt
corrective action whenever financial institutions do not meet minimum capital
requirements. Failure to meet the capital guidelines could also
subject a depository institution to capital raising requirements. In
addition, a depository institution is generally prohibited from making capital
distributions, including paying dividends, or paying management fees to a
holding company if the institution would thereafter be
undercapitalized. As of December 31, 2009, the most recent
notification from the OCC categorized TNB as well-capitalized based on the
ratios and guidelines described above. In addition, FDIA requires the
various regulatory agencies to prescribe certain noncapital standards for safety
and soundness relating generally to operations and management, asset quality and
executive compensation and permits regulatory action against a financial
institution that does not meet such standards.
The
minimum risk-based capital requirements adopted by the U.S. federal banking
agencies follow the Capital Accord of the Basel Committee on Banking
Supervision. In 2004, the Basel Committee published a revision to the Accord
(Basel II) and in December 2007, U.S. banking regulators published a final Basel
II rule. The Basel II guidelines became operational in April 2008, but are
mandatory only for banks with consolidated total assets of $250 billion or more
or consolidated on-balance sheet foreign exposures of $10 billion or more. The
U.S. implementation timetable consists of a parallel calculation period under
the current regulatory capital regime (Basel I) and Basel II, starting any time
between April 1, 2008 and April 1, 2010 followed by a three-year transition
period, typically starting 12 months after the beginning of parallel reporting.
The U.S. banking regulators have reserved the right to change how Basel II is
applied in the U.S. following a review at the end of the second year of the
transitional period, and to retain the existing prompt corrective action and
leverage capital requirements applicable to banking organizations in the U.S.
The
Basel II requirements are
the subject of political debate and potential change in light of recent events.
Trustmark and TNB are not required to comply with Basel II at this time
due to its asset size and lack of on-balance sheet foreign
exposure.
Somerville,
which is not a significant subsidiary as defined by the SEC and thus is not
discussed in detail in this section, was also in compliance with all applicable
capital adequacy guidelines at December 31, 2009.
Payment
of Dividends and Other Restrictions
The
principal source of Trustmark’s cash revenues is dividends from TNB. There are
various legal and regulatory provisions that limit the amount of dividends TNB
can pay to Trustmark without regulatory approval. Approval of the OCC
is required if the total of all dividends declared in any calendar year exceeds
the total of its net income for that year combined with its retained net income
from the preceding two years. TNB will have available in 2010
approximately $57.2 million plus its net income for that year to pay as
dividends. In addition, subsidiary banks of a bank holding company
are subject to certain restrictions imposed by the Federal Reserve Act on
extensions of credit to the bank holding company or any of its
subsidiaries. Further, subsidiary banks of a bank holding company are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of any services to
the bank holding company.
FDIC
Deposit Insurance Assessments
The
deposits of TNB are insured up to regulatory limits set by the Deposit Insurance
Fund (DIF), as administered by the FDIC, and, accordingly, are subject to
deposit insurance assessments to maintain the DIF. The FDIC uses a risk based
assessment system that imposes insurance premiums based upon a risk matrix that
takes into account a bank’s capital level and supervisory rating (the CAMELS
component rating). For Risk Category I institutions (generally those
institutions with less than $10 billion in assets), including Trustmark National
Bank, assessment rates are determined from a combination of financial ratios and
CAMELS component ratings. The minimum annualized assessment rate for Risk
Category I institutions during 2009 was 12 basis points per $100 of deposits
with the maximum rate being 16 basis points. Assessment rates for institutions
in Risk Category I may vary within this range depending upon changes in CAMELS
component ratings and financial ratios.
In 2009,
TNB’s expenses related to deposit insurance premiums totaled $14.7 million,
which reflects the impact of both increased assessment rates as well as a five
basis point special assessment. In addition, TNB also paid
approximately $711 thousand in Financing Corporation (FICO) assessments related
to outstanding FICO bonds for which the FDIC serves as collection agent. The
bonds issued by the FICO are due to mature from 2017 through 2019. For the
quarter ended December 31, 2009, the FICO assessment was equal to 1.06 basis
points per $100 of deposits. Somerville’s total FDIC expenses for
2009 totaled $367 thousand.
On
October 3, 2008, as part of the Emergency Economic Stabilization Act of 2008
(EESA), the basic limit on federal deposit insurance coverage was increased from
$100,000 to $250,000 per depositor. The EESA, as amended by the Helping Families
Save Their Homes Act of 2009, provides that the basic deposit insurance limit
will return to $100,000 after December 31, 2013, except for IRAs and certain
other retirement accounts, which will remain at $250,000 per
depositor.
On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(TLGP), which was designed to strengthen confidence and encourage liquidity in
the banking system. The TLGP consists of two components: a temporary guarantee
of certain newly-issued unsecured debt (the Debt Guarantee Program) and a
temporary unlimited deposit insurance on funds in noninterest-bearing
transaction deposit accounts not covered by the federal deposit insurance
coverage limit of $250,000 (the Transaction Account Guarantee Program). Under
the Debt Guarantee Program, the FDIC guarantees, with certain limitations, newly
issued senior unsecured debt with a term greater than 30 days of eligible
participating entities. Under the Transaction Account Guarantee Program, the
FDIC guarantees noninterest-bearing transaction accounts, as well as Negotiable
Order of Withdrawal, or NOW, accounts with interest rates of 50 basis points or
less. Trustmark and its banking subsidiaries opted to participate in both
programs, but incurred no additional assessment for the Debt Guarantee Program
since it currently has no qualifying debt outstanding. Participants in the
Transaction Account Guarantee Program, including Trustmark, paid an assessment
of 10 basis points for covered deposits exceeding $250,000. The Debt Guarantee
Program expired on October 31, 2009, although the FDIC established a limited
emergency guarantee facility that is available to entities that apply to and
receive prior approval from the FDIC. The FDIC extended the Transaction Account
Guarantee Program (which had originally been set to expire on December 31, 2009)
to June 30, 2010 and increased the assessment rate to 15, 20 or 25 basis points,
depending on the institution’s risk category. The assessment rate applicable to
Trustmark for participation in the Transaction Account Guarantee Program from
December 31, 2009 to June 30, 2010 will be 15 basis points, based on Trustmark’s
inclusion in Risk Category I.
The FDIC
has stated its intention, as part of a proposed plan to restore the DIF
following significant decreases in its reserves, to increase deposit insurance
assessments. On January 1, 2009, the FDIC increased its assessment rates and has
since imposed further rate increases and changes to the current risk-based
assessment system. On May 22, 2009, the FDIC adopted a final rule imposing a
five basis point special assessment on each insured depository institution’s
assets less Tier 1 capital as of June 30, 2009.
On September 29, 2009, the
FDIC increased annual assessment rates uniformly by 3 basis points beginning in
2011.
On November 12, 2009, the FDIC adopted a final rule requiring a
majority of institutions to prepay their quarterly risk-based assessments for
the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Trustmark’s
prepaid assessment amount was approximately $39.1 million and was collected by
the FDIC on December 30, 2009.
Recent
Regulatory Developments
In
November 2009, the Federal Reserve Board adopted final rules that prohibit
financial institutions, such as Trustmark, from charging customers for paying
overdrafts on ATM and one-time debt card transactions, unless the consumer
consents to the overdraft service for those products. This change
will reduce the fees that Trustmark is able to charge when customers have
insufficient funds in an account. Trustmark estimates that this
charge, which becomes effective on July 1, 2010, may reduce noninterest income
by approximately $5 million to $7 million for the year ending December 31,
2010.
Available
Information
Trustmark’s
internet address is www.trustmark.com. Information contained on this
website is not a part of this report. Trustmark makes available
through this address, free of charge, its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after such material is electronically
filed, or furnished to, the SEC.
Employees
At
December 31, 2009, Trustmark employed 2,524 full-time equivalent associates,
none of which are represented by a collective bargaining
agreement. Trustmark believes its employee relations to be
good.
Executive
Officers of the Registrant
The
executive officers of Trustmark Corporation (the Registrant) and its primary
bank subsidiary, Trustmark National Bank, including their ages, positions and
principal occupations for the last five years are as follows:
Richard
G. Hickson, 65
Trustmark
Corporation
Chairman,
President and Chief Executive Officer since April 2002
Trustmark
National Bank
Chairman
and Chief Executive Officer since April 2002
Gerard R.
Host, 55
Trustmark
Corporation
Interim
Principal Financial Officer from November 2006 to January 2007
Trustmark
National Bank
President
and Chief Operating Officer since March 2008
President
– General Banking from February 2004 to March 2008
Louis E.
Greer, 55
Trustmark
Corporation
Treasurer
and Principal Financial Officer since January 2007
Chief
Accounting Officer from January 2003 to January 2007
Trustmark
National Bank
Executive
Vice President and Chief Financial Officer since February 2007
Senior
Vice President and Chief Accounting Officer from February 2004 to February
2007
T. Harris
Collier III, 61
Trustmark
Corporation
Secretary
since April 2002
Trustmark
National Bank
General
Counsel since January 1990
Duane A.
Dewey, 51
Trustmark
National Bank
Executive
Vice President and Corporate Banking Manager since September 2008
President
– Central Region from February 2007 to September 2008
President
– Wealth Management Division from August 2003 to February 2007
George C.
Gunn, 58
Trustmark
National Bank
Executive
Vice President and Real Estate Banking Manager since September 2008
Executive
Vice President and Corporate Banking Manager from February 2004 to September
2008
Glynn
Ingram, 58
Trustmark
National Bank
Executive
Vice President and Chief Information Officer since September 2008
Senior
Vice President and Chief Information Officer from December 2007 to September
2008
Chief
Information Officer from December 2006 to December 2007
Saks
Incorporated
Vice
President – Telecommunications from July 2001 to December 2006
James M.
Outlaw, Jr., 56
Trustmark
National Bank
President
and Chief Operating Officer – Texas since August 2006
Executive
Vice President and Chief Information Officer from September 1999 to August
2006
W. Arthur
Stevens, 45
Trustmark
National Bank
President
– Mississippi Region since September 2008
President
– South Region from February 2005 to September 2008
Senior
Vice President and Manager of Retail Administration from February 2003 to
February 2005
Breck W.
Tyler, 51
Trustmark
National Bank
Executive
Vice President and Mortgage Services Manager since June 2006
Senior
Vice President and Mortgage Services Manager from September 1999 to June
2006
Rebecca
N. Vaughn-Furlow, 65
Trustmark
National Bank
Executive
Vice President and Human Resources Director since June 2006
Senior
Vice President and Human Resources Director from February 1999 to June
2006
Harry M.
Walker, 59
Trustmark
National Bank
President
– Jackson Metro since February 2004
Chester
A. (Buddy) Wood, Jr., 61
Trustmark
National Bank
Executive
Vice President and Chief Risk Officer since February 2007
Senior
Vice President and Treasurer from January 2005 to February 2007
C. Scott
Woods, 53
Trustmark
National Bank
Executive
Vice President and Insurance Services Manager since June 2006
Senior
Vice President and Insurance Services Manager from September 2002 to June
2006
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ITEM
1A.
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RISK
F
AC
TORS
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Trustmark
and its subsidiaries could be adversely impacted by various risks and
uncertainties, which are difficult to predict. As a financial
institution, Trustmark has significant exposure to market risk, including
interest rate risk, liquidity risk and credit risk. This section
includes a description of the risks, uncertainties and assumptions identified by
Management that could materially affect Trustmark’s financial condition and
results of operations, as well as the value of Trustmark’s financial instruments
in general, and Trustmark common stock, in particular. Additional
risks and uncertainties that Management currently deems immaterial or is unaware
of may also impair Trustmark’s financial condition and results of
operations. This report is qualified in its entirety by the risk
factors that are identified below. The occurrence of any one of, or
of a combination of, these risk factors could have a material negative effect on
Trustmark’s financial condition or results of operations.
Trustmark’s
largest source of revenue (net interest income) is subject to interest rate
risk.
Trustmark
is exposed to interest rate risk in its core banking activities of lending and
deposit taking, since assets and liabilities reprice at different times and by
different amounts as interest rates change. For the year ended
December 31, 2009, Trustmark’s total interest income was $442.1 million while
net interest income was approximately $354.2 million. Trustmark’s
simulation model using balances at December 31, 2009 estimated that in the event
of a 200 basis point increase in interest rates, there would be a reduction in
net interest income of 3.2%. Net interest income is Trustmark’s
largest revenue source, and it is important to understand how Trustmark is
subject to interest rate risk.
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In
general, for a given change in interest rates, the amount of the change in
value (positive or negative) is larger for assets and liabilities with
longer remaining maturities. The shape of the yield curve may
affect new loan yields, funding costs and investment income
differently.
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The
remaining maturity of various assets or liabilities may shorten or
lengthen as payment behavior changes in response to changes in interest
rates. For example, if interest rates decline sharply, loans
may pre-pay, or pay down, faster than anticipated, thus reducing future
cash flows and interest income. Conversely, if interest rates
increase, depositors may cash in their certificates of deposit prior to
term (notwithstanding any applicable early withdrawal penalties) or
otherwise reduce their deposits to pursue higher yielding investment
alternatives.
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Repricing
frequencies and maturity profiles for assets and liabilities may occur at
different times. For example, in a falling rate environment, if assets
reprice faster than liabilities, there will be an initial decline in
earnings. Moreover, if assets and liabilities reprice at the
same time, they may not be by the same increment. For instance,
if the Federal funds rate increased 50 basis points, rates on demand
deposits may rise by 10 basis points, whereas rates on prime-based loans
will instantly rise 50 basis
points.
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Trustmark
may face increased regulation of its industry. Compliance with
such regulation may increase its costs and limit its ability to pursue
business opportunities.
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Financial
instruments do not respond in a parallel fashion to rising or falling interest
rates. This causes asymmetry in the magnitude of changes in net
interest income, net economic value and investment income resulting from the
hypothetical increases and decreases in interest rates. Therefore,
Management monitors interest rate risk and adjusts Trustmark’s funding
strategies to mitigate adverse effects of interest rate shifts on Trustmark’s
balance sheet.
Trustmark
utilizes derivative contracts to hedge Mortgage Servicing Rights (MSR) in order
to offset changes in fair value resulting from rapidly changing interest rate
environments. In spite of Trustmark’s due diligence in regard to
these hedging strategies, significant risks are involved that, if realized, may
prove such strategies to be ineffective, which could adversely affect results of
operations. Risks associated with these strategies include the risk
that counterparties in any such derivative and other hedging transactions may
not perform; the risk that these hedging strategies rely on Management’s
assumptions and projections regarding these assets and general market factors,
including prepayment risk, basis risk, market volatility and changes in the
shape of the yield curve, and that these assumptions and projections may prove
to be incorrect; the risk that these hedging strategies do not adequately
mitigate the impact of changes in interest rates, prepayment speeds or other
forecasted inputs to the hedging model; and, the risk that the models used to
forecast the effectiveness of hedging instruments may project expectations that
differ from actual results.
Trustmark
closely monitors the sensitivity of net interest income and investment income to
changes in interest rates and attempts to limit the variability of net interest
income as interest rates change. Trustmark makes use of both on- and
off-balance sheet financial instruments to mitigate exposure to interest rate
risk.
The
national economic recession has increased the business risks for
Trustmark.
The
capital and credit markets have been experiencing volatility and disruption
during the last two years. Issues in the housing market over the past year, with
anemic improvement in home prices, along with prolonged losses of jobs
continuing to add uncertainty to the employment outlook, have negatively
impacted the credit performance of loans and resulted in writedowns of asset
values by financial institutions, including Trustmark. For example,
in Trustmark’s Florida market, which is the market in which Trustmark has
experienced the greatest impact from the economic recession, at December 31,
2009, approximately $190.3 million in aggregate principal amount of loans, or
approximately 36.3% of total Florida loans of approximately $523.7 million, were
classified as criticized, meaning that those loans exhibit potential credit
weaknesses. Of those loans, approximately $45.3 million in aggregate
principal amount of loans were classified as “impaired,” meaning that they are
collateral dependent, and that Trustmark charges off the full difference between
the loan value and the net realizable value of the underlying
collateral. For Trustmark, the amount of nonaccrual loans rose by
approximately 23.8% from December 31, 2008 to approximately $141.2 million at
December 31, 2009. At December 31, 2009, Trustmark’s total
nonperforming assets amounted to approximately $231.3 million, an increase of
approximately 51.5% over total nonperforming assets at December 31,
2008.
Trustmark
does not assume that the difficult conditions in the economy and in the
financial markets generally, and in particular in the Florida market, will
improve significantly in the near future. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions on Trustmark. In particular, Trustmark may face the
following risks in connection with these events:
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Market
developments and the resulting economic pressure on consumers may affect
consumer confidence levels and may cause increases in delinquencies and
default rates, which, among other effects, could further affect
Trustmark’s charge-offs and provision for loan
losses.
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Conditions
in Trustmark’s markets in Mississippi, Tennessee or Texas, which to date
have been less severe than in Trustmark’s Florida market, could
worsen.
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Competition
in the industry could intensify as a result of the increasing
consolidation of financial services companies in connection with current
market conditions.
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The
current market disruptions make valuation of assets even more difficult
and subjective, and Management’s ability to measure the fair value of
Trustmark’s assets could be adversely affected. If Management
determines that a significant portion of its assets have values that are
significantly below their recorded carrying value, Trustmark could
recognize a material charge to earnings in the quarter during which such
determination was made, Trustmark’s capital ratios would be adversely
affected by any such change and a rating agency might downgrade its credit
rating or put Trustmark on credit
watch.
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●
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Trustmark
may face increased regulation of its industry as a result of the issuance
of new regulations. Compliance with such regulation may increase its costs
and limit its ability to pursue business
opportunities.
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Trustmark
is subject to lending risk, which could impact the adequacy of the allowance for
loan losses and results of operations.
There are
inherent risks associated with Trustmark’s lending activities. As
discussed above, the current economic recession resulted in increases in
Trustmark’s loan losses and impaired loans. If current trends in the
housing and real estate markets continue, Trustmark may continue to experience
higher than normal delinquencies and credit losses. Moreover, if a
prolonged recession occurs, Management expects that it could severely affect
economic conditions in Trustmark’s market areas and that Trustmark could
experience significantly higher delinquencies and credit losses. In
addition, bank regulatory agencies periodically review Trustmark’s allowance for
loan losses and may require an increase in the provision for loan losses or the
recognition of further charge-offs, based on judgments different from those of
Management. As a result, Trustmark may elect to make further
increases in its provision for loan losses in the future, particularly if
economic conditions continue to deteriorate.
Trustmark
is subject to liquidity risk, which could disrupt its ability to meet its
financial obligations.
Liquidity
refers to Trustmark’s ability to ensure that sufficient cash flow and liquid
assets are available to satisfy current and future financial obligations,
including demand for loans and deposit withdrawals, funding operating costs and
other corporate purposes. Liquidity risk arises whenever the
maturities of financial instruments included in assets and liabilities
differ. Trustmark obtains funding through deposits and various
short-term and long-term wholesale borrowings, including federal funds purchased
and securities sold under agreements to repurchase, brokered deposits, the
Federal Reserve Discount Window, Federal Home Loan Bank (FHLB) advances and TAF
borrowings. Any significant restriction or disruption of Trustmark’s
ability to obtain funding from these or other sources could have a negative
effect on Trustmark’s ability to satisfy its current and future financial
obligations, which could materially affect Trustmark’s financial
condition.
In
addition to the risk that one or more of the funding sources may become
constrained due to market conditions unrelated to Trustmark, there is the risk
that Trustmark’s credit profile may decline such that one or more of these
funding sources becomes partially or wholly unavailable to
Trustmark.
Trustmark
attempts to quantify such credit event risk by modeling scenarios that estimate
the liquidity impact resulting from a short-term ratings downgrade over various
grading levels. Trustmark estimates such impact by attempting to
measure the effect on available unsecured lines of credit, available capacity
from secured borrowing sources and securitizable assets. To mitigate
such risk, Trustmark maintains available lines of credit with the FRB and the
FHLB that are secured by loans and investment securities. Management
continuously monitors Trustmark’s liquidity position for compliance with
internal policies.
Declines
in asset values may result in impairment charges and adversely affect the value
of our investments.
We
maintain an investment portfolio that includes, among other asset classes,
obligations of states and municipalities, agency mortgage-related securities and
corporate securities. As of December 31, 2009, we had approximately $1.7 billion
of securities available for sale and $0.2 billion of securities held to
maturity. We may be required to record mark-to-market adjustments on our
investment securities. The market value of investments in our investment
portfolio may be affected by factors other than interest rates or the underlying
performance of the issuer of the securities, such as ratings downgrades, adverse
changes in the business climate and a lack of pricing information or liquidity
in the secondary market for certain investment securities. In addition,
government involvement or intervention in the financial markets or the lack
thereof or market perceptions regarding the existence or absence of such
activities could affect the market and the market prices for these securities,
such as the conservatorship of FNMA and FHLMC.
On a
quarterly basis, we evaluate investments and other assets for impairment
indicators. As of December 31, 2009, we had total gross unrealized losses in
respect of our temporarily impaired securities of $2.2 million. We may be
required to record impairment charges if our investments suffer a decline in
value that is other-than-temporary. If we determine that a significant
impairment has occurred, we would be required to charge against earnings the
credit-related portion of the other-than temporary impairment, which could have
a material adverse effect on our results of operations in the period in which a
write-off, if any, occurs.
The
effects of the Federal Government’s efforts to wind down various programs
implemented to support the financial markets cannot be predicted.
Economic
conditions, particularly over the course of the last year and a half, have
resulted in government regulatory agencies and political bodies placing
increased focus on and scrutiny of the financial services
industry. The Federal government has intervened on an unprecedented
scale. Many of these programs are in the process of being unwound, as
the government seeks to affect an orderly withdrawal of this
support. The effects of this wind down on Trustmark, or on the
markets in which we compete, cannot be predicted.
Legislators
and regulators are considering a wide range of potential regulatory initiatives
relating to the financial services industry, which, if enacted, could materially
affect Trustmark’s results of operations, financial condition, liquidity or the
market price of our common stock.
The
Federal government is considering various proposals for a comprehensive overhaul
of the regulatory structure for the financial markets. In addition,
various forms of taxes on financial institutions to fund government resolution
authority for failed large institutions, as well as taxes designed to, in
effect, reimburse the Federal government for the perceived costs incurred by the
Federal government to date in its actions to support the markets. It
is not possible to predict the form any such new regulations or taxes, if
enacted, will take, or whether any such efforts will succeed in improving
economic conditions nationally or in our markets, or whether the measures
adopted will have consequences that prove to be adverse to the markets, either
nationally or in which Trustmark competes. It is possible that these
measures could adversely affect the creditworthiness of counterparties of
Trustmark, which could increase our risk profile.
Trustmark
operates in a highly competitive financial services industry.
Trustmark
faces substantial competition in all areas of its operations from a variety of
different competitors, many of which are larger and may have more financial
resources. Such competitors primarily include national and regional
banks, as well as community banks within the various markets in which Trustmark
operates. At this time, major international banks do not compete
directly with Trustmark in its markets, although they may do so in the
future. Trustmark also faces competition from many other types of
financial institutions, including savings and loans, credit unions, finance
companies, brokerage firms, insurance companies, factoring companies and other
financial intermediaries. The financial services industry could
become even more competitive as a result of legislative, regulatory and
technological changes and continued consolidation.
Some of
Trustmark’s competitors have fewer regulatory constraints and may have lower
cost structures. Additionally, due to their size, many of Trustmark’s larger
competitors may be able to achieve economies of scale and, as a result, may
offer a broader range of products and services as well as better pricing for
those products and services than Trustmark.
Trustmark’s
ability to compete successfully depends on a number of factors, including: the
ability to develop, maintain and build upon long-term customer relationships
based on top quality service, high ethical standards and safe, sound assets; the
ability to continue to expand Trustmark’s market position through organic growth
and acquisitions; the scope, relevance and pricing of products and services
offered to meet customer needs and demands; the rate at which Trustmark
introduces new products and services relative to its competitors; and industry
and general economic trends. Failure to perform in any of these areas
could significantly weaken Trustmark’s competitive position, which could
adversely affect Trustmark’s growth and profitability.
Trustmark
may be required to pay significantly higher FDIC premiums in the
future.
A
significant increase in insured institution failures during 2009 has resulted in
a decline in the designated reserve ratio of the Deposit Insurance Fund (DIF) to
historical lows. On November 12, 2009, the FDIC adopted a final rule requiring
substantially all institutions to prepay their quarterly risk-based assessments
for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. On
September 29, 2009, the FDIC increased annual assessment rates uniformly by 3
basis points beginning in 2011. As a result, an institution’s total base
assessment rate for purposes of estimating an institution’s prepaid assessment
for 2011 and 2012 will be increased by an annualized 3 basis points beginning in
2011. Again for purposes of calculating the amount that an institution will
prepay, an institution’s third quarter 2009 assessment base will be increased
quarterly at a 5 percent annual growth rate through the end of
2012. Trustmark’s prepaid assessment amount was approximately $39.1
million and was collected by the FDIC on December 30, 2009. At least
semi-annually hereafter, the FDIC will update its loss and income projections
for the DIF. If necessary to return the reserve ratio to its mandated minimum,
the FDIC could increase assessment rates during its restoration period, which
could have an adverse impact on Trustmark’s results of operations.
The
stock price of financial institutions, like Trustmark, can be
volatile.
The
volatility in the stock prices of companies in the financial services industry
may make it more difficult for you to resell your Trustmark common stock at
prices you find attractive and at the time you want. Trustmark’s
stock price can fluctuate significantly in response to a variety of factors,
including factors affecting the financial industry as a
whole. Trustmark’s stock price in 2009 was subjected to increased
volatility, reflecting the volatility faced by the financial markets in
general. Since January 1, 2009, Trustmark’s stock reached a high of
$23.45 per share on February 9, 2009 and a low of $14.18 per share on March 6,
2009. The factors affecting financial stocks generally and
Trustmark’s stock price in particular include:
|
|
●
|
actual
or anticipated variations in
earnings;
|
|
|
●
|
changes
in analysts’ recommendations or
projections;
|
|
|
●
|
operating
and stock performance of other companies deemed to be
peers;
|
|
|
●
|
perception
in the marketplace regarding Trustmark, its competitors and/or the
industry as a whole;
|
|
|
●
|
significant
acquisitions or business combinations involving Trustmark or its
competitors;
|
|
|
●
|
changes
in government regulation;
|
|
|
●
|
failure
to integrate acquisitions or realize anticipated benefits from
acquisitions and;
|
|
|
●
|
volatility
affecting the financial markets in
general.
|
General
market fluctuations, industry factors and general economic and political
conditions could also cause Trustmark’s stock price to decrease regardless of
operating results.
Potential
acquisitions by Trustmark may disrupt Trustmark’s business and dilute
shareholder value.
Since
January 1, 2004, Trustmark has consummated three significant
acquisitions: (i) five branches of Allied Houston Bank, on March 12,
2004; (ii) Fisher-Brown, Incorporated, a northwest Florida insurance agency, on
December 1, 2004; and (iii) Republic Bancshares of Texas, Inc., on August 25,
2006. Trustmark seeks merger or acquisition partners that are
culturally similar and have experienced management and possess either
significant market presence or have potential for improved profitability through
financial management, economies of scale or expanded services, and Trustmark
will likely continue to seek to acquire such businesses in the
future. Acquiring other banks, businesses, or branches involves
various risks commonly associated with acquisitions, including: potential
exposure to unknown or contingent liabilities of the target company; exposure to
potential asset quality issues of the target company; difficulty and expense of
integrating the operations and personnel of the target company; potential
disruption to Trustmark’s business; potential diversion of Trustmark’s
Management’s time and attention; the possible loss of key employees and
customers of the target company; difficulty in estimating the value of the
target company and potential changes in banking or tax laws or regulations that
may affect the target company. Acquisitions may involve the payment
of a premium over book and market values, and, therefore, some dilution of
Trustmark’s tangible book value and net income per share of common stock may
occur in connection with any future transaction. Furthermore, failure to realize
the expected revenue projections, cost savings, increases in geographic or
product presence, and/or other projected benefits from an acquisition could have
a material adverse effect on Trustmark’s financial condition and results of
operations.
Changes
in accounting standards may affect how Trustmark reports its financial condition
and results of operations.
Trustmark’s
accounting policies and methods are fundamental to how Trustmark records and
reports its financial condition and results of operations. From time
to time, the Financial Accounting Standards Board (FASB) changes the financial
accounting and reporting standards that govern the preparation of Trustmark’s
financial statements. The ongoing economic recession has resulted in
increased scrutiny of accounting standards by regulators and legislators,
particularly as they relate to fair value accounting principles. In
addition, ongoing efforts to achieve convergence between U.S. generally accepted
accounting principles (GAAP) and International Financial Reporting Standards may
result in changes to U.S. GAAP. Any such changes can be difficult to
predict and can materially affect how Trustmark records and reports its
financial condition and results of operations.
We
are exposed to operational, reputational and regulatory risk and we must utilize
new technologies to deliver our products and services.
As is
customary in the banking industry, we are dependent upon automated and
non-automated systems to record and process our transaction volume. This poses
the risk that technical system flaws, employee errors or tampering or
manipulation of those systems by employees, customers or outsiders will result
in losses. Any such losses, which may be difficult to detect, could adversely
affect our financial condition or results of operations. In addition, the
occurrence of such a loss could expose us to reputational risk, the loss of
customer business, additional regulatory scrutiny or civil litigation and
possible financial liability. We may also be subject to disruptions of our
operating systems arising from events that are beyond our control (for example,
computer viruses or electrical or telecommunications outages). We are further
exposed to the risk that our third party service providers may be unable to
fulfill their contractual obligations (or will be subject to the same risk of
fraud or operational errors as us). These disruptions may interfere with service
to our customers and result in a financial loss or liability that could
adversely affect our financial condition or results of operations. In order to
deliver new products and services and to improve the productivity of existing
products and services, the banking industry relies on rapidly evolving
technologies. Our ability effectively to utilize new technologies to address our
customers’ needs and create operating efficiencies could materially affect our
future prospects. We can not provide any assurances that we will be successful
in utilizing such new technologies.
Natural
disasters, such as hurricanes, could have a significant negative impact on
Trustmark’s business.
Many of
Trustmark’s loans are secured by property or are made to businesses in or near
the Gulf coast regions of Texas, Mississippi and Florida, which regions are
often in the path of seasonal hurricanes. As reported in previous
filings, Hurricane Katrina had a catastrophic effect on Trustmark’s Mississippi
market, and in late summer 2008, Hurricane Gustav threatened to create a similar
result in the Houston metropolitan area, which is the location of Trustmark’s
Texas operations. Natural disasters, such as hurricanes, could have a
significant negative impact on the stability of Trustmark’s deposit base, the
ability of borrowers to repay outstanding loans and the value of collateral
securing loans, and could cause Trustmark to incur material additional
expenses. Although Management has established disaster recovery
policies and procedures, the occurrence of a natural disaster, especially if any
applicable insurance coverage is not adequate to enable Trustmark’s borrowers to
recover from the effects of the event, could have a material adverse effect on
Trustmark.
|
ITEM
1B.
|
UN
RES
OLVED STAFF COMMENTS
|
None
|
ITEM
2.
|
PROPER
TI
ES
|
Trustmark’s
principal offices are housed in its complex located in downtown Jackson,
Mississippi and owned by TNB. Approximately 224,000 square feet, or 85%, of the
available space in the main office building is allocated to bank use with the
remainder occupied or available for occupancy by tenants on a lease
basis. Trustmark, through its two banking subsidiaries, also operates
140 full-service branches, 17 limited-service branches, one in-store branch and
an ATM network, which includes 132 ATMs at on-premise locations and 73 ATMs
located at off-premise sites. In addition, Trustmark’s Insurance
Division utilizes three off-site locations while the Mortgage Banking Group has
one additional off-site location. Trustmark leases 105 of its 235
locations with the remainder being owned.
|
ITEM
3.
|
LEGAL
PRO
CEE
DINGS
|
Trustmark’s
wholly-owned subsidiary, TNB, has been named as a defendant in a purported class
action complaint that was filed on August 23, 2009 in the District Court of
Harris County, Texas, by Peggy Roif Rotstain, Guthrie Abbott, Catherine Burnell,
Steven Queyrouze, Jaime Alexis Arroyo Bornstein and Juan C. Olano, on behalf of
themselves and all others similarly situated, naming TNB and four other
financial institutions unaffiliated with the Company as defendants. The
complaint seeks to recover (i) alleged fraudulent transfers from each of the
defendants in the amount of fees received by each defendant from entities
controlled by R. Allen Stanford (collectively, the “Stanford Financial Group”)
and (ii) damages allegedly attributable to alleged conspiracies by one or more
of the defendants with the Stanford Financial Group to commit fraud and/or aid
and abet fraud arising from the facts set forth in pending federal criminal
indictments and civil complaints against Mr. Stanford, other individuals and the
Stanford Financial Group. Plaintiffs have demanded a jury trial. In November
2009, the lawsuit was removed to federal court by certain defendants and then
transferred by the United States Panel on Multidistrict Litigation to federal
court in the Northern District of Texas (Dallas) where multiple Stanford related
matters are being consolidated for pre-trial proceedings.
TNB’s
relationship with the Stanford Financial Group began as a result of Trustmark’s
acquisition of a Houston-based bank in August 2006, and consisted of
correspondent banking and other traditional banking services in the ordinary
course of business. The lawsuit is in its preliminary stage and has been
previously reported in the press. Trustmark believes that the lawsuit is
entirely without merit and intends to defend vigorously against it.
Trustmark
and its subsidiaries are also parties to other 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.
|
ITEM
4.
|
SUBMI
SSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
There
were no matters submitted to Trustmark’s shareholders during the fourth quarter
of 2009.
|
ITEM
5.
|
MARKET
FOR THE REGISTRANT’S
COMM
ON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Common
Stock Prices and Dividends
Trustmark’s
common stock is listed on the NASDAQ Stock Market and is traded under the symbol
TRMK. The table below represents, for each quarter of 2009 and 2008,
the high and low intra-day sales price per share of Trustmark’s common stock and
the cash dividends declared per common share.
|
2009
|
2008
|
|||||||||||||||
|
Sales Price Per Share
|
High
|
Low
|
High
|
Low
|
||||||||||||
|
First
quarter
|
$ | 23.45 | $ | 14.18 | $ | 25.72 | $ | 17.60 | ||||||||
|
Second
quarter
|
23.30 | 17.36 | 24.00 | 17.64 | ||||||||||||
|
Third
quarter
|
22.00 | 17.32 | 34.00 | 14.31 | ||||||||||||
|
Fourth
quarter
|
22.99 | 18.07 | 23.50 | 14.51 | ||||||||||||
|
Dividends Per Share
|
2009
|
2008
|
||||||
|
First
quarter
|
$ | 0.23 | $ | 0.23 | ||||
|
Second
quarter
|
0.23 | 0.23 | ||||||
|
Third
quarter
|
0.23 | 0.23 | ||||||
|
Fourth
quarter
|
0.23 | 0.23 | ||||||
|
Total
|
$ | 0.92 | $ | 0.92 | ||||
At
January 28, 2010, there were 3,710 holders of record of Trustmark’s common
stock. Other information required by this item can be found in Note
15 - Shareholders’ Equity included in Item 8 - Financial Statements and
Supplementary Data located elsewhere in this document.
Stock
Repurchase Plans
Trustmark
did not repurchase any common shares during 2009 or 2008 and currently has no
authorization from the Board of Directors to repurchase its common
stock. During 2007, Trustmark repurchased approximately 1.4 million
shares of its common stock.
Stock
Price Performance Graph
The
following graph compares Trustmark’s annual percentage change in cumulative
total return on common shares over the past five years with the cumulative total
return of companies comprising the NASDAQ market value index and the Hemscott
Industry Group 413. The Hemscott Industry Group 413 is an industry
index published by Hemscott, Inc., and consists of 75 bank holding companies
located in the Southeastern United States. This presentation assumes
that $100 was invested in shares of the relevant issuers on December 31, 2004,
and that dividends received were immediately invested in additional
shares. The graph plots the value of the initial $100 investment at
one-year intervals for the fiscal years shown.
|
Company
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||||
|
Trustmark
|
100 | 90.99 | 111.35 | 89.18 | 79.53 | 87.16 | ||||||||||||||||||
|
Hemscott
Industry Group 413
|
100 | 101.26 | 119.31 | 81.54 | 48.16 | 46.90 | ||||||||||||||||||
|
NASDAQ
|
100 | 102.20 | 112.68 | 124.57 | 74.71 | 108.56 | ||||||||||||||||||
|
ITEM
6.
|
SELECTED
FINAN
CIA
L DATA
|
The
following unaudited consolidated financial data is derived from Trustmark’s
audited financial statements as of and for the five years ended December 31,
2009 ($ in thousands except per share data). The data should be read
in conjunction with Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Item 8 – Financial Statements and
Supplementary Data found elsewhere in this report.
|
Years Ended December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Total
interest income
|
$ | 442,062 | $ | 483,279 | $ | 543,143 | $ | 482,746 | $ | 415,697 | ||||||||||
|
Total
interest expense
|
87,853 | 164,119 | 242,360 | 202,175 | 139,256 | |||||||||||||||
|
Net
interest income
|
354,209 | 319,160 | 300,783 | 280,571 | 276,441 | |||||||||||||||
|
Provision
for loan losses
|
77,112 | 76,412 | 23,784 | (5,938 | ) | 19,541 | ||||||||||||||
|
Noninterest
income
|
168,242 | 177,258 | 162,447 | 155,128 | 143,107 | |||||||||||||||
|
Noninterest
expense
|
308,259 | 283,719 | 276,449 | 260,480 | 243,276 | |||||||||||||||
|
Income
before income taxes
|
137,080 | 136,287 | 162,997 | 181,157 | 156,731 | |||||||||||||||
|
Income
taxes
|
44,033 | 43,870 | 54,402 | 61,884 | 53,780 | |||||||||||||||
|
Net
Income
|
93,047 | 92,417 | 108,595 | 119,273 | 102,951 | |||||||||||||||
|
Preferred
stock dividends/discount accretion
|
19,998 | 1,353 | - | - | - | |||||||||||||||
|
Net
Income Available to Common Shareholders
|
$ | 73,049 | $ | 91,064 | $ | 108,595 | $ | 119,273 | $ | 102,951 | ||||||||||
|
Common
Share Data
|
||||||||||||||||||||
|
Basic
earnings per share
|
$ | 1.26 | $ | 1.59 | $ | 1.88 | $ | 2.11 | $ | 1.82 | ||||||||||
|
Diluted
earnings per share
|
1.26 | 1.59 | 1.88 | 2.09 | 1.81 | |||||||||||||||
|
Cash
dividends per share
|
0.92 | 0.92 | 0.89 | 0.85 | 0.81 | |||||||||||||||
|
Performance
Ratios
|
||||||||||||||||||||
|
Return
on average common equity
|
7.22 | % | 9.62 | % | 12.02 | % | 14.89 | % | 13.86 | % | ||||||||||
|
Return
on average tangible common equity
|
10.80 | % | 14.88 | % | 19.17 | % | 20.78 | % | 18.24 | % | ||||||||||
|
Return
on average total equity
|
7.72 | % | 9.53 | % | 12.02 | % | 14.89 | % | 13.86 | % | ||||||||||
|
Return
on average assets
|
0.98 | % | 1.01 | % | 1.23 | % | 1.42 | % | 1.25 | % | ||||||||||
|
Net
interest margin (fully taxable equivalent)
|
4.25 | % | 4.01 | % | 3.91 | % | 3.84 | % | 3.85 | % | ||||||||||
|
Credit
Quality Ratios
|
||||||||||||||||||||
|
Net
charge-offs/average loans
|
1.01 | % | 0.87 | % | 0.23 | % | 0.06 | % | 0.13 | % | ||||||||||
|
Provision
for loan losses/average loans
|
1.14 | % | 1.09 | % | 0.35 | % | -0.09 | % | 0.34 | % | ||||||||||
|
Nonperforming
loans/total loans (incl LHFS*)
|
2.16 | % | 1.64 | % | 0.91 | % | 0.55 | % | 0.48 | % | ||||||||||
|
Nonperforming
assets/total loans (incl LHFS*) plus ORE**
|
3.48 | % | 2.18 | % | 1.02 | % | 0.58 | % | 0.56 | % | ||||||||||
|
Allowance
for loan losses/total loans (excl LHFS*)
|
1.64 | % | 1.41 | % | 1.13 | % | 1.10 | % | 1.30 | % | ||||||||||
|
December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Total
assets
|
$ | 9,526,018 | $ | 9,790,909 | $ | 8,966,802 | $ | 8,840,970 | $ | 8,389,750 | ||||||||||
|
Securities
|
1,917,380 | 1,802,470 | 717,441 | 1,050,515 | 1,295,784 | |||||||||||||||
|
Loans
(including loans held for sale)
|
6,546,022 | 6,960,668 | 7,188,300 | 6,658,528 | 6,060,279 | |||||||||||||||
|
Deposits
|
7,188,465 | 6,823,870 | 6,869,272 | 6,976,164 | 6,282,814 | |||||||||||||||
|
Common
shareholders' equity
|
1,110,060 | 973,340 | 919,636 | 891,335 | 741,463 | |||||||||||||||
|
Preferred
shareholder equity
|
- | 205,126 | - | - | - | |||||||||||||||
|
Capital
Ratios
|
||||||||||||||||||||
|
Total
equity/total assets
|
11.65 | % | 12.04 | % | 10.26 | % | 10.08 | % | 8.84 | % | ||||||||||
|
Common
equity/total assets
|
11.65 | % | 9.94 | % | 10.26 | % | 10.08 | % | 8.84 | % | ||||||||||
|
Tangible
equity/tangible assets
|
8.67 | % | 9.11 | % | 6.94 | % | 6.67 | % | 7.00 | % | ||||||||||
|
Tangible
common equity/tangible assets
|
8.67 | % | 6.95 | % | 6.94 | % | 6.67 | % | 7.00 | % | ||||||||||
|
Tier
1 leverage ratio
|
9.74 | % | 10.42 | % | 7.86 | % | 7.65 | % | 7.19 | % | ||||||||||
|
Tier
1 risk-based capital ratio
|
12.61 | % | 13.01 | % | 9.17 | % | 9.60 | % | 9.53 | % | ||||||||||
|
Total
risk-based capital ratio
|
14.58 | % | 14.95 | % | 10.93 | % | 11.40 | % | 10.78 | % | ||||||||||
* - LHFS
is Loans Held for Sale.
** - ORE
is Other Real Estate.
The
following unaudited tables represent Trustmark’s summary of quarterly operations
for the years ended December 31, 2009 and 2008 ($ in thousands except per share
data).
|
2009
|
1Q | 2Q | 3Q | 4Q | ||||||||||||
|
Interest
income
|
$ | 113,805 | $ | 112,173 | $ | 109,348 | $ | 106,736 | ||||||||
|
Net
interest income
|
88,549 | 88,491 | 88,877 | 88,292 | ||||||||||||
|
Provision
for loan losses
|
16,866 | 26,767 | 15,770 | 17,709 | ||||||||||||
|
Noninterest
income
|
43,004 | 40,816 | 44,139 | 40,283 | ||||||||||||
|
Noninterest
expense
|
74,407 | 78,971 | 79,234 | 75,647 | ||||||||||||
|
Income
before income taxes
|
40,280 | 23,569 | 38,012 | 35,219 | ||||||||||||
|
Net
income
|
26,485 | 16,575 | 25,510 | 24,477 | ||||||||||||
|
Net
income available to common shareholders
|
23,359 | 13,443 | 22,370 | 13,877 | ||||||||||||
|
Earnings
per common share
|
||||||||||||||||
|
Basic
|
0.41 | 0.23 | 0.39 | 0.23 | ||||||||||||
|
Diluted
|
0.41 | 0.23 | 0.39 | 0.23 | ||||||||||||
|
2008
|
||||||||||||||||
|
Interest
income
|
$ | 126,014 | $ | 120,441 | $ | 118,032 | $ | 118,792 | ||||||||
|
Net
interest income
|
74,749 | 77,618 | 79,396 | 87,397 | ||||||||||||
|
Provision
for loan losses
|
14,243 | 31,012 | 14,473 | 16,684 | ||||||||||||
|
Noninterest
income
|
48,516 | 48,466 | 41,950 | 38,326 | ||||||||||||
|
Noninterest
expense
|
69,826 | 69,614 | 72,734 | 71,545 | ||||||||||||
|
Income
before income taxes
|
39,196 | 25,458 | 34,139 | 37,494 | ||||||||||||
|
Net
income
|
26,179 | 17,552 | 23,354 | 25,332 | ||||||||||||
|
Net
income available to common shareholders
|
26,179 | 17,552 | 23,354 | 23,979 | ||||||||||||
|
Earnings
per share
|
||||||||||||||||
|
Basic
|
0.46 | 0.31 | 0.41 | 0.42 | ||||||||||||
|
Diluted
|
0.46 | 0.31 | 0.41 | 0.42 | ||||||||||||
|
ITEM
7.
|
MANAGEM
ENT
’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
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 Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. You can identify forward-looking
statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,”
“anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,”
“continue,” “could,” “future” or the negative of those terms or other words of
similar meaning. You should read statements that contain these words carefully
because they discuss our future expectations or state other “forward-looking”
information. 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, 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. You should be aware that the
occurrence of the events described under the caption Item 1A. Risk Factors, in
this report could have an adverse effect on our business, results of operations
and financial condition. 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.
Risks
that could cause actual results to differ materially from current expectations
of Management 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 the current volatility
in the credit and financial markets, changes in our ability to measure the fair
value of assets in our portfolio, material changes in the level and/or
volatility of market interest rates, the performance and demand for the products
and services we offer, including the level and timing of withdrawals from our
deposit accounts, the costs and effects of litigation and of unexpected or
adverse outcomes in such litigation, our ability to attract noninterest-bearing
deposits and other low-cost funds, competition in loan and deposit pricing, as
well as the entry of new competitors into our markets through de novo expansion
and acquisitions, economic conditions and monetary and other governmental
actions designed to address the level and volatility of interest rates and the
volatility of securities, currency and other markets, the enactment of
legislation and changes in existing regulations, or enforcement practices, or
the adoption of new regulations, changes in accounting standards and practices,
including changes in the interpretation of existing standards, that affect our
consolidated financial statements, changes in consumer spending, borrowings and
savings habits, technological changes, changes in the financial performance or
condition of our borrowers, changes in our ability to control expenses, changes
in our compensation and benefit plans, greater than expected costs or
difficulties related to the integration of new products and lines of business,
natural disasters, acts of war or terrorism and other risks described in our
filings with the Securities and Exchange Commission.
Although
we believe that the expectations reflected in such forward-looking statements
are reasonable, we can give no assurance that such expectations will prove to be
correct. Except as required by law, we undertake no obligation to update or
revise any of this information, whether as the result of new information, future
events or developments or otherwise.
Executive
Overview
In 2009,
the national economy continued to face numerous challenging macro-economic
conditions. The economy was in recession and experienced rising
unemployment, declining home values, extremely low liquidity in the debt markets
and declining values and high volatility in the equity markets. As a
result of these conditions, consumer confidence and spending decreased
substantially and asset values declined. The capital and earnings
levels of numerous financial institutions were negatively affected and a number
of financial institutions failed or merged, in some cases with government
involvement, with stronger financial institutions.
During
2009, Management monitored carefully the impact of illiquidity in the financial
markets, declining values of securities and other assets, loan performance,
default rates and other financial and macro-economic indicators, in order to
navigate the challenging economic environment. Management implemented
strategic decisions to reduce certain loan classifications, including
construction, land development and other land loans and indirect auto
loans. Throughout 2009, Trustmark and TNB’s capital ratios exceeded
the minimum levels required for it to be ranked well-capitalized, both prior to
and after Trustmark’s participation in the U.S. Treasury’s TARP
CPP.
During
2009, Management also monitored the trend of weakening commercial developments
of residential real estate property values and increasing default rates, most of
which is in the Florida Panhandle region. Trustmark’s other markets
have experienced less of a decline in values and a marginal increase in default
rates to date. The non-Florida markets in which Trustmark operates
did not experience the dramatic rise in real estate values prior to the
recession as was prevalent in Florida and other sections of the
country. As a result, the impact of the recession on property values
in Trustmark’s other markets has been less severe.
In 2009,
Trustmark did not make significant changes to its loan underwriting
standards. Trustmark’s willingness to make loans to qualified
applicants that meet its traditional, prudent lending standards has not
changed. However, TNB has revised its concentration limits of
commercial real estate loans, which adheres to its primary regulator’s
guidelines. As a result, TNB has been more restrictive in granting
credit involving certain categories of real estate, particularly in
Florida. Furthermore, in the current economic downturn, TNB makes
fewer exceptions to its loan policy as compared to prior periods.
During
2009, Management continued its practice of maintaining excess funding capacity
to provide Trustmark with adequate liquidity for its ongoing
operations. In this regard, Trustmark benefits from its strong
deposit base, its investment portfolio and its access to funding from a variety
of external funding sources such as upstream Federal funds lines, Federal
Reserve Discount Window, FHLB advances, TAF borrowings and brokered
deposits.
On
December 7, 2009, Trustmark completed a public offering of 6,216,216 shares of
its common stock, including 810,810 shares issued pursuant to the exercise of
the underwriters’ over-allotment option, at a price of $18.50 per share.
Trustmark received net proceeds of approximately $109.3 million after deducting
underwriting discounts, commissions and estimated offering
expenses. Proceeds from this offering were used in the redemption of
Senior Preferred Stock discussed below.
TARP
Capital Purchase Program
In the
fourth quarter of 2008, Trustmark chose to participate in the TARP CPP in order
to reinforce its strong capital position, advance the Treasury’s efforts to
facilitate additional lending in the markets where Trustmark operates, maintain
its competitive advantage over its less well-capitalized competitors, support
its foreclosure mitigation programs and support its general
operations. Trustmark’s decision to participate in the TARP CPP was
also affected by discussions with its regulators, including the OCC, the Federal
Reserve and the Treasury. Trustmark elected to participate in the
TARP CPP as a healthy, well-capitalized bank.
As a
participant in the TARP CPP, on November 21, 2008, Trustmark issued 215,000
shares of Senior Preferred Stock to the. Treasury, and Trustmark also issued to
the Treasury a ten-year warrant (the Warrant) to purchase up to 1,647,931 shares
of Trustmark’s common stock, at an initial exercise price of $19.57 per share,
subject to customary anti-dilution adjustments.
In the
fourth quarter of 2009, Trustmark exited the TARP
CPP. Following discussions with its federal banking regulators
and the completion of the public offering of common stock discussed above,
Trustmark redeemed all the Senior Preferred Stock from the Treasury on December
9, 2009. The amount paid by Trustmark to redeem the Senior Preferred
Stock consisted of $215.0 million, which was equivalent to both the original
issuance price and the liquidation value of the Senior Preferred Stock, plus a
final accrued dividend of approximately $716.7 thousand. As a result
of the redemption of the Senior Preferred Stock, in the fourth quarter of 2009,
Trustmark incurred a one-time, non-cash charge of $8.2 million to net income
available to common shareholders for the unaccreted discount recorded at the
date of issuance of the Senior Preferred Stock. On December 30, 2009,
Trustmark repurchased the Warrant from the Treasury for its fair value of $10.0
million.
Use
of Capital
Based on
analysis of the market conditions at the time of issuance, Trustmark determined
that the proceeds of the Treasury investment in its Senior Preferred Stock
initially would be best deployed in U.S. Government Agency mortgage-backed
securities (MBS) until loan demand improved. Trustmark retained $10.0
million of the proceeds to provide for the 2009 dividend payments on the Senior
Preferred Stock and invested the remaining $205.0 million in TNB. In
turn, TNB invested the $205.0 million of the proceeds, along with other funds
obtained to leverage the TARP CPP investment, in MBS, pending deployment in more
permanent uses. With these investments, Trustmark provided
incremental liquidity to the residential mortgage markets and at the same time
obtained products that generate cash flow. Trustmark is holding the
MBS assets on its balance sheet as available for sale. Trustmark
intends to utilize its cash flows, including those derived from its MBS
investments and the proceeds of any sale or disposition of its MBS investments,
to fund commercial and residential loans that meet Trustmark’s long-standing
prudent lending standards as the demand for high-quality loans rises in the
markets it serves, as well as to advance foreclosure mitigation efforts and
otherwise support its business.
Trustmark
is committed to making credit available to the markets it serves and fulfilling
the needs of its customers. In 2009, to insure that all lending
growth opportunities were addressed, Trustmark restructured its Senior Loan
Committee to form two new committees, composed of senior and executive
management: the Commercial Loan Committee and the Real Estate Loan
Committee. Additionally, senior executives were placed in lending
roles specializing in particular loan products to address the needs of existing
and prospective customers. In certain sectors, such as commercial
lending, loan demand has diminished consistent with the overall economy as
customers have taken a conservative direction and postponed
investments. Conversely, residential mortgage activity increased in
December 2008 and throughout 2009 in response to favorable interest rates and
new Government Agency programs; nearly three quarters of this activity was in
the form of refinancings, with the balance consisting of new purchases. While
the TARP CPP funds were not segregated, and this increased lending was not
directly traceable in a dollar-for-dollar manner to the TARP CPP, the
strengthening of Trustmark’s balance sheet during the year ended December 31,
2009 by the TARP CPP investment directly facilitated increased lending
activity.
In
addition, Trustmark initiated programs and dedicated additional resources and
staff to seek to mitigate foreclosure of primary residences on borrowers that
are subject to adverse financial conditions in the current economic environment.
Loss mitigation counselors and additional support staff were added to
accommodate loss mitigation activity. During 2009, Trustmark utilized
personnel in its collections department and conducted regular training of its
personnel on foreclosure mitigation in order to respond to this
need. In some cases, Trustmark may make deferred payment arrangements
with such borrowers on a short-term basis. Likewise, Trustmark is
following the Fannie Mae, Freddie Mac and GNMA guidelines for foreclosure
moratoriums in its portfolio of loans serviced for others.
Loan
modifications made to date have substantially all occurred on loans serviced for
outside investors. To date, there have been comparatively less need
for, or use of, loan modification programs on Trustmark’s primary residence
mortgage portfolio. This is a function of Trustmark’s preference for
shorter average loan terms and the aging of its portfolio, as well as adherence
to its prudent lending standards. However, Trustmark is prepared for
a potential increase in demand for loan modifications on its loans covering
primary residences, and intends to carry out specific programs as
needed. As for new residential mortgage loan originations, Trustmark
follows, in substantially all situations, the underwriting standards of the
government agencies. As those agencies have revised standards on new
originations, so has Trustmark.
Effects
of TARP CPP Participation
Prior to
its participation in the TARP CPP, Trustmark and TNB exceeded all minimal
regulatory capital ratios. In addition, TNB met applicable regulatory
guidelines to be considered well-capitalized. At December 31, 2008,
immediately following its participation in the TARP CPP program, Trustmark and
TNB substantially exceeded all minimal regulatory capital requirements as listed
below:
|
Trustmark
|
TNB
|
|||||||
|
Tier
1 Leverage Ratio
|
10.42 | % | 10.13 | % | ||||
|
Tier
1 Risk-Based Capital Ratio
|
13.01 | % | 12.63 | % | ||||
|
Total
Risk-Based Capital Ratio
|
14.95 | % | 14.52 | % | ||||
As
previously mentioned, upon its successful public offering of common stock as
well as the redemption of the Senior Preferred Stock and repurchase of the
Warrant by Trustmark, at December 31, 2009 both Trustmark and TNB continued to
substantially exceed all minimal regulatory capital requirements as listed
below:
|
Trustmark
|
TNB
|
|||||||
|
Tier
1 Leverage Ratio
|
9.74 | % | 9.45 | % | ||||
|
Tier
1 Risk-Based Capital Ratio
|
12.61 | % | 12.21 | % | ||||
|
Total
Risk-Based Capital Ratio
|
14.58 | % | 14.16 | % | ||||
Trustmark’s
participation in the TARP CPP affected the income available to common
shareholders in two ways: (1) prior to the redemption in full of the Senior
Preferred Stock, Trustmark was prohibited from paying any dividend on the common
stock other than regular quarterly cash dividends of not more than $0.23 per
share of common stock, and (2) the dividend payments which were made on the
Senior Preferred Stock to the Treasury had the effect of reducing the net income
otherwise available to the common stockholders.
Trustmark
complied with the executive compensation and corporate governance requirements
of each of (i) the Emergency Economic Stabilization Act (EESA) of 2008, (ii) the
American Recovery and Reinvestment Act of 2009 (ARRA), which was signed into law
on February 17, 2009, and (iii) the Treasury guidance thereunder issued on June
10, 2009, during the period that the Senior Preferred Stock was held by the
Treasury.
Furthermore,
as required by EESA and the Securities Purchase Agreement, on November 11, 2008,
Trustmark’s Board of Directors approved a resolution to adopt an omnibus
amendment to all compensation plans, which was in effect, pursuant to EESA, as
amended, for the period that Trustmark’s Senior Preferred Stock was
outstanding. That amendment conformed all of Trustmark’s benefit
plans to the requirements of EESA and applied to any senior executive officer
(SEO) thereunder, and included the following:
|
|
●
|
Clawback
Provision
|
|
|
●
|
Golden
Parachute Limitation
|
|
|
●
|
Signed
Consent by all SEOs
|
Pursuant
to EESA, these amendments were effective only for so long as the Treasury held
the Senior Preferred Stock. Thus, upon the redemption in full of the
Senior Preferred Stock by Trustmark on December 9, 2009, these amendments ceased
to be effective and the benefit plans reverted to their respective forms prior
to Trustmark’s participation in the TARP CPP.
As
required by EESA and ARRA, Trustmark has limited the Section 162(m) tax
deduction for executive compensation to $500,000 per year for any SEO for the
fiscal years ended December 31, 2009 and 2008, and in future tax periods
Trustmark will continue to limit the Section 162(m) tax deduction for executive
compensation to $500,000 per year, or as prorated, for any SEO with respect to
restricted stock granted in the fiscal years ended December 31, 2009 and 2008
that vest in such tax future periods. This legislation impacted two SEOs and was
not considered material to Trustmark’s results of operations or financial
condition.
In
addition, as required by EESA and ARRA and the regulations adopted thereunder,
within 90 days of Treasury’s purchase of the Senior Preferred Stock and the
Warrant, an executive compensation risk assessment was performed by Trustmark’s
senior risk officers. Based on the materials reviewed and discussions
with subject matter experts, Trustmark’s senior risk officers concluded that the
executive compensation and incentive program as then in effect did not encourage
the SEOs to take unnecessary and excessive risks. The findings of
this risk assessment were presented to the Human Resources Committee of
Trustmark’s Board of Directors on January 14, 2009, and the final Executive
Compensation Risk Assessment Conclusion Memorandum was provided to this
committee on February 18, 2009. A certification statement was
included within the Human Resources Committee Report in the Trustmark 2009 Proxy
Statement. In addition, the Human Resources Committee, which is
composed entirely of independent directors, discussed Trustmark’s compensation
arrangements in light of such a risk assessment at least semi-annually during
the period that the Senior Preferred Stock was held by the
Treasury. Pursuant to EESA and ARRA, Trustmark ceased to be required
to perform future executive compensation risk assessments upon its redemption in
full of the Senior Preferred Stock.
As
required by EESA, Trustmark’s 2009 Proxy Statement included a nonbinding
shareholder vote to provide advisory approval of the compensation of Trustmark’s
executives.
Critical
Accounting Policies
Trustmark’s
consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles (GAAP) 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. These
critical accounting policies are described in detail below.
For
additional information regarding the accounting policies discussed below, please
see the notes to Trustmark’s Consolidated Financial Statements set forth in Item
8 – Financial Statements and Supplementary Data.
Allowance
for Loan Losses
The
allowance for loan losses is established through provisions for estimated loan
losses charged against net income. The allowance for loan losses is
maintained at a level believed adequate by management, based on estimated
probable losses within the existing loan portfolio. Each such
evaluation is inherently subjective, as it requires a range of estimates,
assumptions and judgments as to the facts and circumstances of the particular
situation, including the amounts and timings of future cash flows expected to be
received on impaired loans that may be susceptible to significant
change.
Trustmark’s
allowance for probable 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 on other regulatory
guidance. The allowance for loan losses consists of three elements:
(i) specific valuation allowances determined in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic
310 “Receivables,” based on probable losses on specific loans; (ii) historical
valuation allowances determined in accordance with FASB ASC Topic 450,
“Contingencies,” based on historical loan loss experience for similar loans with
similar characteristics and trends; and (iii) qualitative risk valuation
allowances determined in accordance with FASB ASC Topic 450 based on general
economic conditions and other qualitative risk factors, both internal and
external, to Trustmark. Each of these elements calls for estimates,
assumptions and judgments, as described below.
Loans-Specific
Valuation Allowances
Valuation
allowances for probable losses on specific commercial loans are based on an
ongoing analysis and evaluation of classified loans. Loans are
classified based on Trustmark’s internal credit risk grading process that
evaluates, among other things: (i) the obligor’s ability and willingness to
repay; (ii) the value of any underlying collateral; (iii) the ability of any
guarantor to perform its payment obligation, and (iv) the economic environment
and industry in which the borrower operates. Once a loan is
classified, it is subject to periodic review to determine whether or not the
loan is impaired. If determined to be impaired, the loan is evaluated
using one of the valuation criteria permitted under FASB ASC Topic
310. The amount of impairment, if any, becomes a specific allocated
portion of the allowance for loan losses and segregated from any pool of
loans. Specific valuation allowances are determined based upon
analysis of the factors identified above, among other things. If,
after review, a specific valuation allowance is not assigned to the loan and the
loan is not considered to be impaired, the loan remains with a pool of similar
risk-rated loans that is assigned a valuation allowance appropriate for
non-impaired classified loans, based on Trustmark’s internal loan grading
system.
Historical
Valuation Allowances
Historical
valuation allowances are calculated for pools of loans based on the historical
loss experience of specific types of loans and Trustmark’s internal commercial
loan grading system. Trustmark calculates historical loss ratios for
pools of loans with similar characteristics based on the proportion of actual
charge-offs experienced to the total population of loans in the
pool. The historical loss ratios are periodically updated based on
subsequent charge-off experience. A historical valuation allowance is
established for each pool of similar loans based upon the product of the
historical loss ratio and the total dollar amount of the loans in the
pool. Trustmark’s pools of similar loans include consumer loans and
1-4 family residential mortgages.
Qualitative
Risk Valuation Allowances
These
allowances are based on general economic conditions and other qualitative
factors, both internal and external to the bank. These allowances are
determined by evaluating a range of potential factors, which may include one or
more of the following: (i) the experience, ability and effectiveness of the
bank’s lending management and staff assigned to the loan; (ii) adherence to
Trustmark’s loan policies, procedures and internal controls; (iii) impact of
recent performance trends; (iv) national and regional economic trends and
conditions; (v) concentrations of commercial and consumer credits in Trustmark’s
loan portfolio; (vi) collateral, financial and underwriting exception trends by
region; (vii) the impact of recent significant natural disasters or catastrophes
and (viii) the impact of recent acquisitions.
Management
evaluates the degree of risk that these components have on the quality of the
loan portfolio not less frequently than quarterly. The results are
then input into a “qualitative factor allocation matrix” to determine an
appropriate qualitative risk allowance.
A
significant shift in one or more factors identified above could result in a
material change to Trustmark’s allowance for loan losses. For
example, if there were changes in one or more of these estimates, assumptions or
judgments as they relate to a portfolio of commercial loans, Trustmark could
find that it needs to increase the level of future provisions for possible loan
losses in respect of that portfolio. Additionally, credit
deterioration of specific borrowers due to changes in these factors could cause
the risk rating of those borrowers’ commercial loans on Trustmark’s internal
loan grading system to shift to a more severe risk rating. As a
result, Trustmark could find that it needs to increase the level of future
provisions for possible loan losses in respect of these loans. Given
the interdependent and highly factual nature of many of these estimates,
assumptions and judgments, it is not possible to provide meaningful quantitative
estimates of the impact of any such potential shifts.
Mortgage
Servicing Rights
Trustmark
recognizes as an asset the rights to service mortgage loans for others (mortgage
servicing rights, or MSR) with respect to loans originated by Trustmark or
acquired through its wholesale network. Trustmark carries MSR on its
balance sheet at fair value.
Trustmark
determines the fair value of MSR using a valuation model that calculates the
present value of estimated future net servicing income. The model
incorporates assumptions that market participants use in estimating future net
servicing income, including estimates of prepayment speeds, discount rate,
default rates, cost to service (including delinquency and foreclosure costs),
escrow account earnings, contractual servicing fee income, ancillary income and
late fees.
To reduce
the sensitivity of earnings to interest rate fluctuations, Trustmark utilizes
derivative instruments such as interest rate futures contracts and
exchange-traded options to achieve a return that is intended to substantially
offset the changes in the fair value of MSR attributable to interest rates,
depending on the amount of MSR hedged. Trustmark may choose not to
fully hedge the MSR, partly because origination volume tends to act as a natural
hedge. For example, as interest rates decline, the fair value of MSR
generally decreases and fees from new originations tend to
increase. Conversely, as interest rates increase, the fair value of
the MSR generally increases, while fees from new originations tend to
decline.
Trustmark
utilizes a dynamic and sophisticated model, administered by a third party, to
estimate the fair value of its MSR. Management reviews all
significant assumptions quarterly. Mortgage loan prepayment speed, a
key assumption in the model, is the annual rate at which borrowers are
forecasted to repay their mortgage loan principal. The discount rate
used to determine the present value of estimated future net servicing income,
another key assumption in the model, is an estimate of the required rate of
return investors in the market would require for an asset with similar
risk. Both assumptions can, and generally will, change as market
conditions and interest rates change.
By way of
example, an increase in either the prepayment speed or discount rate assumption
will result in a decrease in the fair value of the MSR, while a decrease in
either assumption will result in an increase in the fair value of the
MSR. In recent years, there have been significant market-driven
fluctuations in loan prepayment speeds and discount rates. These
fluctuations can be rapid and may continue to be
significant. Therefore, estimating prepayment speed and/or discount
rates within ranges that market participants would use in determining the fair
value of MSR requires significant management judgment.
At
December 31, 2009, MSR fair value was approximately $50.5 million. The impact on
MSR fair value at that date of a 10% adverse change in prepayment speed or a 100
basis point increase in discount rate would be a decline in fair value of
approximately $2.2 million and $1.4 million, respectively. Changes of
equal magnitude in the opposite direction would produce increases in fair value
in the same respective amounts.
Goodwill
and Identifiable Intangible Assets
Trustmark
records all assets and liabilities acquired in purchase acquisitions, including
goodwill and other intangible assets, at fair value as required by FASB ASC
Topic 805, “Business Combinations.” The carrying amount of goodwill
at December 31, 2009 totals $246.7 million for the General Banking segment and
$44.4 million for the Insurance segment, a consolidated total of $291.1 million.
Trustmark’s goodwill is not amortized but is subject to annual tests for
impairment or more often if events or circumstances indicate it may be
impaired. Trustmark’s identifiable intangible assets, which totaled
$19.8 million at December 31, 2009, are amortized over their estimated useful
lives and are subject to impairment tests if events or circumstances indicate a
possible inability to realize the carrying amount.
The
initial recording and subsequent impairment testing of goodwill requires
subjective judgments concerning estimates of the fair value of the acquired
assets. The goodwill impairment test is performed in two phases. The
first step compares the fair value of the reporting unit with its carrying
amount, including goodwill. If the fair value of the reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired; however, if the carrying amount of the reporting unit exceeds its fair
value, an additional procedure must be performed. That additional procedure, or
a second step, compares the implied fair value of the reporting unit’s goodwill
with the carrying amount of that goodwill. An impairment loss is
recorded to the extent that the carrying amount of goodwill exceeds its implied
fair value. Trustmark performed an annual impairment test of goodwill
for reporting units contained in both the General Banking and Insurance segments
as of October 1, 2009, 2008 and 2007, respectively, which indicated that no
impairment charge was required. The impairment test for the General Banking
reporting unit utilized valuations based on comparable deal values for financial
institutions while the test for the Insurance reporting unit utilizes varying
valuation scenarios for the multiple of earnings before interest, income taxes,
depreciation and amortization (EBITDA) method based on recent acquisition
activity. At December 31, 2009, Trustmark performed an additional
impairment due to recent changes in market conditions for reporting units
included in both the General Banking and Insurance segments and concluded that
no impairment charge was required. Significant changes in future
profitability and value of our reporting units could affect Trustmark’s
impairment evaluation.
The
carrying amount of Trustmark’s identifiable intangible assets subject to
amortization is not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual disposition. That
assessment shall be based on the carrying amount of the intangible assets
subject to amortization at the date it is tested for
recoverability. Intangible assets subject to amortization shall be
tested for recoverability whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable.
Fair
value may be determined using market prices, comparison to similar assets,
market multiples and other determinants. Factors that may significantly affect
the estimates include, among others, competitive forces, customer behavior and
attrition, changes in revenue growth trends and specific industry or market
sector conditions. Other key judgments in accounting for intangibles
include determining the useful life of the particular asset and classifying
assets as either goodwill (which does not require amortization) or identifiable
intangible assets (which does require amortization).
Other
Real Estate Owned
Other
real estate owned, consisting of assets that have been acquired through
foreclosure, is recorded at the lower of cost or estimated fair value less the
estimated cost of disposition. Fair value is based on independent appraisals and
other relevant factors. Other real estate owned is revalued on an
annual basis or more often if market conditions necessitate. Valuation
adjustments required at foreclosure are charged to the allowance for loan
losses. Subsequent to foreclosure, losses on the periodic revaluation
of the property are charged to net income as other expense. Significant
judgments and complex estimates are required in estimating the fair value of
other real estate, and the period of time within which such estimates can be
considered current is significantly shortened during periods of market
volatility, as experienced during 2009 and 2008. As a result, the net
proceeds realized from sales transactions could differ significantly from
appraisals, comparable sales, and other estimates used to determine the fair
value of other real estate.
Defined
Benefit Plans
Trustmark’s
plan assets, projected benefit liabilities and pension cost are determined
utilizing actuarially-determined present value calculations. The
valuation of the projected benefit obligation and net periodic pension expense
for Trustmark’s plans (Capital Accumulation Plan and Supplemental Retirement
Plan) requires management (with the assistance of third-party actuaries) to make
estimates regarding the amount and timing of expected cash
outflows. Several variables affect these calculations, including (i)
size and characteristics of the associate population, (ii) discount rate, (iii)
expected long-term rate of return on plan assets and (iv) recognition of actual
returns on plan assets. Below is a brief description of these variables and the
effect they have on pension cost.
|
|
●
|
Population
and Characteristics of Associates.
Pension cost is
directly related to the number of associates covered by the plan and
characteristics such as salary, age, years of service and benefit
terms. In an effort to control expenses, the Board voted to
freeze plan benefits effective May 15, 2009. Individuals will
not earn additional benefits, except for interest as required by the IRS
regulations, after the effective date. Associates will retain
their previously earned pension benefits.
At December 31,
2009, the pension plan census totaled 2,963
associates.
|
|
|
●
|
Discount
Rate
.
The
discount rate utilized in determining the present value of the future
benefit obligation is currently 5.50%. The discount rate for
each plan is determined by matching the expected cash flows of each plan
to a yield curve based on long term, high quality fixed income debt
instruments available as of the measurement date (for the 2009 fiscal year
the measurement date was December 31, 2009). The discount rate
is reset annually on the measurement date to reflect current economic
conditions.
|
If
Trustmark assumes a 1.00% increase or decrease in the discount rate for
Trustmark’s defined benefit plans and kept all other assumptions constant, the
benefit cost associated with these plans would decrease or increase by
approximately $660 thousand and $770 thousand, respectively.
|
|
●
|
Expected
Long-Term Rate of Return on Plan Assets. Based on historical
experience and market projection of the target asset allocation set forth
in the investment policy for the Capital Accumulation Plan, the current
pre-tax expected rate of return on the plan assets is 8%. This
expected rate of return is dependent upon the asset allocation decisions
made with respect to plan assets.
|
Annual
differences, if any, between expected and actual return are included in the
unrecognized net actuarial gain or loss amount. Trustmark generally
amortizes any cumulative unrecognized net actuarial gain or loss in excess of
10% of the greater of the projected benefit obligation or the fair value of the
plan assets.
If
Trustmark assumes a 1.00% increase or decrease in the expected long-term rate of
return for the Capital Accumulation Plan, holding all other actuarial
assumptions constant, the pension cost would decrease or increase by
approximately $760 thousand.
|
|
●
|
Recognition
of Actual Asset Returns. Trustmark utilizes the provision of
FASB ASC Topic 715, which allow for the use of asset values that smoothes
investment gains and losses over a period of up to five
years. This could partially mitigate the impact of short-term
gains or losses on reported net
income.
|
|
|
●
|
Other
Actuarial Assumptions. To estimate the projected benefit
obligation, actuarial assumptions are required to be made by management,
including mortality rate, retirement rate, disability rate and the rate of
compensation increases. These factors do not change
significantly over time, so the range of assumptions and their impact on
net periodic pension expense is generally
limited.
|
Contingent
Liabilities
Trustmark
estimates contingent liabilities based on management’s evaluation of the
probability of outcomes and their ability to estimate the range of
exposure. As stated in FASB ASC Topic 450, a liability is contingent
if the amount is not presently known but may become known in the future as a
result of the occurrence of some uncertain future event. Accounting
standards require that a liability be recorded if management determines that it
is probable that a loss has occurred, and the loss can be reasonably
estimated. In addition, it must be probable that the loss will be
confirmed by some future event. As part of the estimation process,
management is required to make assumptions about matters that are, by their
nature, highly uncertain. The assessment of contingent liabilities,
including legal contingencies and income tax liabilities, involves the use of
critical estimates, assumptions and judgments. Management’s estimates
are based on their belief that future events will validate the current
assumptions regarding the ultimate outcome of these
exposures. However, there can be no assurance that future events,
such as court decisions or Internal Revenue Service positions, will not differ
from management’s assessments. Whenever practicable, management
consults with outside experts (attorneys, consultants, claims administrators,
etc.) to assist with the gathering and evaluation of information related to
contingent liabilities.
Financial
Highlights
Net
income available to common shareholders totaled $73.0 million for the year ended
December 31, 2009, compared with $91.1 million for 2008 and $108.6 million for
2007. For 2009, Trustmark’s basic and diluted earnings per common share were
$1.26 compared with $1.59 for 2008 and $1.88 for 2007. At December
31, 2009, Trustmark reported gross loans, including loans held for sale, of
$6.546 billion, total assets of $9.526 billion, total deposits of $7.188 billion
and total shareholders’ equity of $1.110 billion. Trustmark’s
financial performance for 2009 resulted in a return on average tangible common
shareholders’ equity of 10.80%, a return on common equity of 7.22% and a return
on assets of 0.98%. These compared with 2008 ratios of 14.88% for
return on average tangible common shareholders’ equity, 9.62% for return on
common equity and 1.01% for return on assets, while in 2007 the return on
average tangible common shareholders’ equity was 19.17%, the return on common
equity was 12.02% and the return on assets was 1.23%.
Net
income available to common shareholders for 2009 decreased $18.0 million, or
19.8% compared to 2008. The decrease was primarily the result of
preferred stock dividends and the accretion of preferred stock discount, $8.2
million of which was accelerated at the payoff of TARP CPP, which reduced net
income available to common shareholders by approximately $20.0
million. Excluding preferred stock dividends and the accretion of
preferred stock discount, net income increased $630 thousand, or 0.7%, compared
to 2008. This improvement resulted from an increase in net interest
income of $35.0 million offset by a decrease in noninterest income of $9.0
million and an increase in noninterest expense of $24.5 million. The
decrease in noninterest income was due largely to the reduction in other, net of
$7.7 million, which resulted from gains booked during 2008 related to the sale
of MasterCard shares ($5.4 million) as well as the Visa initial public offering
($1.0 million). The growth in noninterest expense primarily resulted
from an increase in other expense of $24.1 million, which can be attributed to
additional costs related to FDIC deposit insurance assessments ($12.3 million)
as well as real estate foreclosures ($10.4 million). For additional
information on the changes in noninterest income and noninterest expense, please
see accompanying sections included in Results of Operations.
Trustmark’s
2009 provision for loan losses totaled $77.1 million, a slight increase of $700
thousand when compared to 2008, while total charge-offs increased to $80.7
million during 2009, compared to $71.8 million for 2008 and $26.8 million for
2007. Total nonperforming assets were $231.3 million at December 31,
2009, an increase of $78.7 million compared to December 31, 2008. In
addition, the percentage of loans that are 30 days or more past due and
nonaccrual loans rose in 2009 to 4.49%, from 3.20% in 2008 and 2.37% in
2007. These measures are predominantly attributable to economic
difficulties in the Florida Panhandle market.
An
acceleration or significantly extended deterioration in loan performance and
default levels, a significant increase in foreclosure activity, a material
decline in the value of Trustmark’s assets (including loans and investment
securities), or any combination of more than one of these trends could have a
material adverse effect on Trustmark’s financial condition or results of
operations.
Significant
Nonrecurring Transactions
Presented
below are adjustments to net income as reported in accordance with U.S. GAAP
resulting from significant nonrecurring items occurring during the periods
presented. Management believes this information will help readers
compare Trustmark’s current results to those of prior periods as presented in
the accompanying selected financial data table ($ in thousands, except for per
share amounts) and the audited consolidated financial
statements. Readers are cautioned that these adjustments are not
permitted under GAAP. Trustmark encourages readers to consider its
audited consolidated financial statements and the notes related thereto in their
entirety, and not to rely on any single financial measure.
|
Years Ended December 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amount
|
Basic EPS
|
Amount
|
Basic EPS
|
Amount
|
Basic EPS
|
|||||||||||||||||||
|
Net
Income available to common shareholders (GAAP)
|
$ | 73,049 | $ | 1.263 | $ | 91,064 | $ | 1.589 | $ | 108,595 | $ | 1.882 | ||||||||||||
|
Significant
nonrecurring transactions (net of taxes):
|
||||||||||||||||||||||||
|
Accelerated
preferred stock accretion
|
8,234 | 0.142 | - | - | - | - | ||||||||||||||||||
|
FDIC
special assessment
|
2,700 | 0.047 | - | - | - | - | ||||||||||||||||||
|
Capital
accumulation plan curtailment gain
|
(1,169 | ) | (0.020 | ) | - | - | - | - | ||||||||||||||||
|
MasterCard
Class A common
|
- | - | (3,308 | ) | (0.058 | ) | - | - | ||||||||||||||||
|
Visa
litigation contingency
|
- | - | (936 | ) | (0.016 | ) | 494 | 0.009 | ||||||||||||||||
|
Hurricane
Katrina
|
- | - | - | - | (665 | ) | (0.012 | ) | ||||||||||||||||
|
Correction
of accounting error
|
- | - | - | - | (1,623 | ) | (0.028 | ) | ||||||||||||||||
| 9,765 | 0.169 | (4,244 | ) | (0.074 | ) | (1,794 | ) | (0.031 | ) | |||||||||||||||
|
Net
Income available to common shareholders adjusted for significant
nonrecurring transactions (Non-GAAP)
|
$ | 82,814 | $ | 1.432 | $ | 86,820 | $ | 1.515 | $ | 106,801 | $ | 1.851 | ||||||||||||
Accelerated
Preferred Stock Accretion
On
December 9, 2009, Trustmark completed the repurchase of its 215,000 shares of
Senior Preferred Stock from the Treasury at a purchase price of $215.0 million
plus a final accrued dividend of $716.7 thousand. The repurchase of
the Senior Preferred Stock resulted in a one-time, non-cash charge of $8.2
million to net income available to common shareholders in Trustmark’s fourth
quarter financial statements for the unaccreted discount recorded at the date of
issuance of the Senior Preferred Stock.
FDIC
Special Assessment
In May
2009, the FDIC adopted a final rule imposing a five basis point special
assessment on each insured depository institution’s assets minus Tier 1 capital
as of June 30, 2009. This special assessment was implemented in light
of the FDIC’s projections of a substantially higher rate of institution failures
during 2009 and in the next few years, which would create a significant decrease
in the reserve ratio of the Deposit Insurance Fund (DIF). The funding
from this special assessment, along with higher assessment rates, would help
restore the DIF to its regulatory required ratio during the next seven
years. Trustmark’s special assessment resulted in an after-tax
expense of $2.7 million.
Capital
Accumulation Plan Curtailment Gain
In an
effort to control expenses, Trustmark’s Board voted to freeze plan benefits of
the Capital Accumulation Plan effective May 15, 2009. During the
second quarter of 2009, Trustmark recorded an after-tax curtailment gain
of $1.2 million as a result of the freeze in plan benefits due to the
recognition of the prior service credits previously included in accumulated
other comprehensive loss.
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). At
December 31, 2009 and 2008, Trustmark’s contingent obligation for the Visa
litigation, net of Visa’s litigation escrow account, was $225 thousand and $355
thousand, respectively.
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. Since 2005, Trustmark has continually reevaluated its
estimates for probable losses resulting from Hurricane
Katrina. During 2007, Trustmark reduced its allowance for loan losses
by $0.6 million and other reserves by $0.4 million on a pretax basis resulting
in an increase to Trustmark’s net income of $0.7 million, or $0.01 per share. At
December 31, 2008, the allowance for loan losses included $319 thousand related
to possible Hurricane Katrina losses. At December 31, 2009, Management
determined that no specific Katrina allowance for loan losses were needed based
on the immaterial losses experienced during 2009.
Correction
of Accounting Error
Trustmark’s
consolidated financial statements for the fourth quarter of 2007 included a
pre-tax benefit of $3.2 million for the correction of an error relating to the
amortization of deferred loan fees, which is included in interest income on
loans. Of this amount, $2.6 million arose in prior periods, while
$593 thousand was incurred over the first three quarters of
2007. Trustmark’s Management as well as the Audit and Finance
Committee of the Board of Directors reviewed this accounting error utilizing SEC
SAB Nos. 99 and 108 and determined the impact of this error was not material to
2007 or prior period consolidated financial statements.
Government
Programs
During
the fourth quarter of 2008, Trustmark participated in two government
programs. The first was the TARP CPP sponsored by the Treasury, and
the second was the TAF sponsored by the Federal Reserve Bank of New
York. During the fourth quarter of 2009, Trustmark repurchased the
Senior Preferred Stock and Warrant from the Treasury, which ended its
involvement in the TARP CPP. In addition, at December 31, 2009,
Trustmark no longer participated in TAF in favor of other funding sources and
had no TAF borrowings outstanding.
Non-GAAP
Financial Measures
In
addition to capital ratios defined by GAAP and banking regulators, Trustmark
utilizes various tangible common equity measures when evaluating capital
utilization and adequacy. Tangible common equity, as defined by
Trustmark, represents common equity less goodwill and identifiable intangible
assets.
Trustmark
believes these measures are important because they reflect the level of capital
available to withstand unexpected market conditions. Additionally, presentation
of these measures allows readers to compare certain aspects of Trustmark’s
capitalization to other organizations. These ratios differ from
capital measures defined by banking regulators principally in that the numerator
excludes shareholders’ equity associated with preferred securities, the nature
and extent of which varies across organizations.
These
calculations are intended to complement the capital ratios defined by GAAP and
banking regulators. Because GAAP does not include these capital ratio
measures, Trustmark believes there are no comparable GAAP financial measures to
these tangible common equity ratios. Despite the importance of these measures to
Trustmark, there are no standardized definitions for them and, as a result,
Trustmark’s calculations may not be comparable with other organizations. Also
there may be limits in the usefulness of these measures to investors. As a
result, Trustmark encourages readers to consider its consolidated financial
statements in their entirety and not to rely on any single financial
measure. The following table reconciles Trustmark’s calculation of
these measures to amounts reported under GAAP.
In
addition, Trustmark presents in this report a table which illustrates the impact
of significant nonrecurring transactions on net income available to common
shareholders as reported under GAAP. For this table, please see
Financial Highlights – Significant Nonrecurring Transactions shown above
.
Reconciliation
of Non-GAAP Financial Measures
($
in thousands)
|
Years Ended December 31,
|
|||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||
|
TANGIBLE
COMMON EQUITY
|
|||||||||||||
|
AVERAGE
BALANCES
|
|||||||||||||
|
Total
shareholders' equity
|
$ | 1,205,642 | $ | 970,061 | $ | 903,375 | |||||||
|
Less
Preferred stock
|
(193,616 | ) | (22,971 | ) | - | ||||||||
|
Total
average common equity
|
1,012,026 | 947,090 | 903,375 | ||||||||||
|
Less:
Goodwill
|
(291,104 | ) | (291,153 | ) | (290,688 | ) | |||||||
|
Identifiable
intangible assets
|
(21,920 | ) | (26,069 | ) | (30,653 | ) | |||||||
|
Total
average tangible common equity
|
$ | 699,002 | $ | 629,868 | $ | 582,034 | |||||||
|
PERIOD
END BALANCES
|
|||||||||||||
|
Total
shareholders' equity
|
$ | 1,110,060 | $ | 1,178,466 | $ | 919,636 | |||||||
|
Less:
Preferred stock
|
- | (205,126 | ) | - | |||||||||
|
Total
common equity
|
1,110,060 | 973,340 | 919,636 | ||||||||||
|
Less:
Goodwill
|
(291,104 | ) | (291,104 | ) | (291,177 | ) | |||||||
|
Identifiable
intangible assets
|
(19,825 | ) | (23,821 | ) | (28,102 | ) | |||||||
|
Total
tangible common equity
|
(a)
|
$ | 799,131 | $ | 658,415 | $ | 600,357 | ||||||
|
TANGIBLE
ASSETS
|
|||||||||||||
|
Total
assets
|
$ | 9,526,018 | $ | 9,790,909 | $ | 8,966,802 | |||||||
|
Less:
Goodwill
|
(291,104 | ) | (291,104 | ) | (291,177 | ) | |||||||
|
Identifiable
intangible assets
|
(19,825 | ) | (23,821 | ) | (28,102 | ) | |||||||
|
Total
tangible assets
|
(b)
|
$ | 9,215,089 | $ | 9,475,984 | $ | 8,647,523 | ||||||
|
Risk-weighted
assets
|
(c)
|
$ | 6,918,802 | $ | 7,294,633 | $ | 7,368,865 | ||||||
|
NET
INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION
|
|||||||||||||
|
Net
income available to common shareholders
|
$ | 73,049 | $ | 91,064 | $ | 108,595 | |||||||
|
Plus:
Intangible amortization net of tax
|
2,469 | 2,644 | 3,000 | ||||||||||
|
Net
income adjusted for intangible amortization
|
$ | 75,518 | $ | 93,708 | $ | 111,595 | |||||||
|
Period
end common shares outstanding
|
(d)
|
63,673,839 | 57,324,737 | 57,272,408 | |||||||||
|
TANGIBLE
COMMON EQUITY MEASUREMENTS
|
|||||||||||||
|
Return on average tangible common
equity
1
|
10.80 | % | 14.88 | % | 19.17 | % | |||||||
|
Tangible
common equity/tangible assets
|
(a)/(b)
|
8.67 | % | 6.95 | % | 6.94 | % | ||||||
|
Tangible
common equity/risk-weighted assets
|
(a)/(c)
|
11.55 | % | 9.03 | % | 8.15 | % | ||||||
|
Tangible
common book value
|
(a)/(d)*1,000
|
$ | 12.55 | $ | 11.49 | $ | 10.48 | ||||||
|
TIER
1 COMMON RISK-BASED CAPITAL
|
|||||||||||||
|
Total
shareholders' equity
|
$ | 1,110,060 | $ | 1,178,466 | $ | 919,636 | |||||||
|
Eliminate
qualifying AOCI
|
1,624 | 14,717 | 14,451 | ||||||||||
|
Qualifying
tier 1 capital
|
68,000 | 68,000 | 68,000 | ||||||||||
|
Disallowed
goodwill
|
(291,104 | ) | (291,104 | ) | (291,177 | ) | |||||||
|
Adj
to goodwill allowed for deferred taxes
|
8,805 | 7,395 | - | ||||||||||
|
Other
disallowed intangibles
|
(19,825 | ) | (23,821 | ) | (28,102 | ) | |||||||
|
Disallowed
servicing intangible
|
(5,051 | ) | (4,288 | ) | (6,719 | ) | |||||||
|
Total
tier 1 capital
|
$ | 872,509 | $ | 949,365 | $ | 676,089 | |||||||
|
Less:
Qualifying tier 1 capital
|
(68,000 | ) | (68,000 | ) | (68,000 | ) | |||||||
|
Preferred
stock
|
- | (205,126 | ) | - | |||||||||
|
Total
tier 1 common capital
|
(e)
|
$ | 804,509 | $ | 676,239 | $ | 608,089 | ||||||
|
Tier
1 common risk-based capital ratio
|
(e)/(c)
|
11.63 | % | 9.27 | % | 8.25 | % | ||||||
1
Calculation = net income
adjusted for intangible amortization/total average tangible common
equity
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 upon
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 associated with the average loan balances are
immaterial.
Net
interest income-FTE for 2009 increased $35.6 million, or 10.9%, when compared
with 2008. Trustmark expanded its net interest margin during 2009
through diligent management of its assets and liabilities. The
increase in the net interest margin was primarily due to three main factors; 1)
disciplined deposit pricing afforded to Trustmark due to a strong liquidity
position, 2) prudent loan pricing, including the use of minimum loan
rates/floors and 3) the purchase of fixed rate securities in 2008, of which were
funded mostly with declining short-term floating rate liabilities. The
combination of these factors resulted in a NIM of 4.25% during 2009, a 24 basis
point increase when compared with 2008.
Average
interest-earning assets for 2009 were $8.570 billion, compared with $8.179
billion for 2008, an increase of $391.1 million. This growth was primarily due
to an increase in average total securities of $645.7 million, or 59.2% during
2009, as a result of management’s strategic focus on increasing its holding of
certain investment securities in order to capitalize upon advantageous market
conditions. During 2009, the overall yield on securities increased by 17 basis
points when compared to 2008 due to
purchases
of securities in a higher rate environment and a slightly longer duration
of the securities purchased
. Average total loans decreased
$249.0 million in 2009 when compared to 2008, which reflects Trustmark’s
continued efforts to reduce exposure to construction and land development
lending and the decision to discontinue indirect auto financing. Due
to a decrease in interest rates during 2009, the yield on loans decreased 88
basis points when compared to 2008. As a result of these factors,
interest income-FTE decreased $40.6 million, or 8.3%, when 2009 is compared with
2008. The impact of these changes is also illustrated by the decline
in the yield on total earning assets, which fell from 6.02% in 2008 to 5.27% in
2009, a decrease of 75 basis points.
Average
interest-bearing liabilities for 2009 totaled $6.673 billion compared with
$6.614 billion for 2008, an increase of $59.1 million, or
0.9%. Management’s continued strategy of disciplined deposit pricing
resulted in a modest 1.8% decrease in interest-bearing deposits during 2009
while the combination of federal funds purchased, securities sold under
repurchase agreements and other borrowings increased by 15.6%. Due to decreased
funding costs, as well as the continued availability of low-cost wholesale
funding sources, the overall yield on liabilities declined 116 basis points in
2009 when compared with 2008. As a result of these factors, total
interest expense for 2009 decreased $76.3 million, or 46.5%, when compared with
2008.
Net
interest income-FTE for 2008 increased $20.6 million, or 6.7%, when compared
with 2007. Trustmark expanded its net interest margin while in a
falling rate environment during 2008. This was accomplished through
deposit pricing discipline afforded to Trustmark due to a strong liquidity
position, the purchase of fixed rate securities throughout the year, and a
widening in the spread between LIBOR (reflecting yields Trustmark received on
investment securities) and the Fed Funds rate (reflecting yields Trustmark paid
on floating rate deposits) that has since dissipated. The combination
of these factors resulted in a NIM of 4.01% during 2008, a 10 basis point
increase when compared with 2007.
Average
interest-earning assets for 2008 were $8.179 billion, compared with $7.878
billion for 2007, an increase of $301.1 million. The increase was primarily due
to an increase in average total securities during 2008, which increased $185.1
million, or 20.4%, relative to 2007, that resulted from management’s strategic
focus in 2008 on increasing its holding of certain investment
securities. Also, average total loans increased $129.3 million in
2008 when compared to 2007. However, due to a decrease in interest
rates during 2008, the yield on loans decreased 110 basis points when compared
to 2007. Securities purchased in 2008 provided higher yields when
compared to previous periods partially due to a slightly longer duration of the
securities portfolio. During 2008, the overall yield on securities
increased by 35 basis points when compared to 2007. This improvement
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 $57.6 million, or 10.5%, when 2008 is compared with
2007. The impact of these factors is also illustrated by the yield on
total earning assets decreasing from 6.98% in 2007 to 6.02% in 2008, a decrease
of 96 basis points.
Average
interest-bearing liabilities for 2008 totaled $6.614 billion compared with
$6.357 billion for 2007, an increase of $257.4 million, or
4.0%. However, the mix of these liabilities has changed when these
two years are compared. During 2008, Management’s strategy of
disciplined deposit pricing resulted in a modest 1.3% increase in
interest-bearing deposits while the combination of federal funds purchased,
securities sold under repurchase agreements and other borrowings increased by
22.4%. The impact of the change in liability mix, as well as lower interest
rates, resulted in a 133 basis point decrease in the overall yield on
liabilities when 2008 is compared with 2007. As a result of these
factors, total interest expense for 2008 decreased $78.2 million, or 32.3%, when
compared with 2007.
Yield/Rate
Analysis Table
($
in thousands)
|
Years Ended December
31,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Average Balance
|
Interest
|
Yield/ Rate
|
Average Balance
|
Interest
|
Yield/
Rate
|
Average Balance
|
Interest
|
Yield/ Rate
|
||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Federal
funds sold and securities purchased under reverse repurchase
agreements
|
$ | 15,077 | $ | 66 | 0.44 | % | $ | 23,422 | $ | 502 | 2.14 | % | $ | 40,850 | $ | 2,147 | 5.26 | % | ||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
1,411,275 | 71,363 | 5.06 | % | 794,443 | 37,257 | 4.69 | % | 573,940 | 22,367 | 3.90 | % | ||||||||||||||||||||||||
|
Nontaxable
|
75,516 | 3,982 | 5.27 | % | 38,188 | 2,218 | 5.81 | % | 50,763 | 3,539 | 6.97 | % | ||||||||||||||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
191,732 | 9,352 | 4.88 | % | 182,373 | 8,904 | 4.88 | % | 195,468 | 9,417 | 4.82 | % | ||||||||||||||||||||||||
|
Nontaxable
|
58,526 | 4,247 | 7.26 | % | 76,304 | 5,648 | 7.40 | % | 86,030 | 6,404 | 7.44 | % | ||||||||||||||||||||||||
|
Loans
(including loans held for sale)
|
6,773,768 | 361,346 | 5.33 | % | 7,022,747 | 436,064 | 6.21 | % | 6,893,402 | 504,043 | 7.31 | % | ||||||||||||||||||||||||
|
Other
earning assets
|
43,925 | 1,414 | 3.22 | % | 41,251 | 1,822 | 4.42 | % | 37,133 | 2,116 | 5.70 | % | ||||||||||||||||||||||||
|
Total
interest-earning assets
|
8,569,819 | 451,770 | 5.27 | % | 8,178,728 | 492,415 | 6.02 | % | 7,877,586 | 550,033 | 6.98 | % | ||||||||||||||||||||||||
|
Cash
and due from banks
|
214,637 | 245,748 | 287,113 | |||||||||||||||||||||||||||||||||
|
Other
assets
|
839,066 | 792,835 | 753,503 | |||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(103,080 | ) | (86,124 | ) | (72,365 | ) | ||||||||||||||||||||||||||||||
|
Total
Assets
|
$ | 9,520,442 | $ | 9,131,187 | $ | 8,845,837 | ||||||||||||||||||||||||||||||
|
Liabilities
and Shareholders' Equity
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
demand deposits
|
$ | 1,133,498 | 9,515 | 0.84 | % | $ | 1,215,668 | 20,742 | 1.71 | % | $ | 1,186,683 | 39,217 | 3.30 | % | |||||||||||||||||||||
|
Savings
deposits
|
1,821,086 | 10,613 | 0.58 | % | 1,776,397 | 23,032 | 1.30 | % | 1,708,378 | 38,977 | 2.28 | % | ||||||||||||||||||||||||
|
Time
deposits
|
2,535,028 | 58,758 | 2.32 | % | 2,598,472 | 96,148 | 3.70 | % | 2,625,327 | 122,181 | 4.65 | % | ||||||||||||||||||||||||
|
Federal
funds purchased and securities sold under repurchase
agreements
|
621,638 | 1,133 | 0.18 | % | 626,767 | 10,393 | 1.66 | % | 447,438 | 20,224 | 4.52 | % | ||||||||||||||||||||||||
|
Short-term
borrowings
|
371,173 | 2,465 | 0.66 | % | 276,974 | 7,032 | 2.54 | % | 269,102 | 13,723 | 5.10 | % | ||||||||||||||||||||||||
|
Long-term
FHLB advances
|
70,890 | 494 | 0.70 | % | - | - | - | - | - | - | ||||||||||||||||||||||||||
|
Subordinated
notes
|
49,756 | 2,894 | 5.82 | % | 49,724 | 2,894 | 5.82 | % | 49,692 | 2,894 | 5.82 | % | ||||||||||||||||||||||||
|
Junior
subordinated debt securities
|
70,104 | 1,981 | 2.83 | % | 70,104 | 3,878 | 5.53 | % | 70,104 | 5,144 | 7.34 | % | ||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
6,673,173 | 87,853 | 1.32 | % | 6,614,106 | 164,119 | 2.48 | % | 6,356,724 | 242,360 | 3.81 | % | ||||||||||||||||||||||||
|
Noninterest-bearing
demand deposits
|
1,522,300 | 1,412,312 | 1,455,494 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
119,327 | 134,708 | 130,244 | |||||||||||||||||||||||||||||||||
|
Shareholders'
equity
|
1,205,642 | 970,061 | 903,375 | |||||||||||||||||||||||||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 9,520,442 | $ | 9,131,187 | $ | 8,845,837 | ||||||||||||||||||||||||||||||
|
Net
Interest Margin
|
363,917 | 4.25 | % | 328,296 | 4.01 | % | 307,673 | 3.91 | % | |||||||||||||||||||||||||||
|
Correction
of accounting error
|
- | - | 2,628 | |||||||||||||||||||||||||||||||||
|
Less
tax equivalent adjustments:
|
||||||||||||||||||||||||||||||||||||
|
Investments
|
2,880 | 2,753 | 3,480 | |||||||||||||||||||||||||||||||||
|
Loans
|
6,828 | 6,383 | 6,038 | |||||||||||||||||||||||||||||||||
|
Net
Interest Margin per Income Statements
|
$ | 354,209 | $ | 319,160 | $ | 300,783 | ||||||||||||||||||||||||||||||
The table
below shows the change from year to year for each component of the tax
equivalent net interest margin in the amount generated by volume changes and the
amount generated by changes in the yield or rate (tax equivalent
basis):
|
Volume/Rate
Analysis Table
|
2009
Compared to 2008
|
2008
Compared to 2007
|
||||||||||||||||||||||
|
($
in thousands)
|
Increase (Decrease) Due To:
|
Increase (Decrease) Due To:
|
||||||||||||||||||||||
|
Yield/
|
Yield/
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
|
Interest
earned on:
|
||||||||||||||||||||||||
|
Federal
funds sold and securities purchased under reverse repurchase
agreements
|
$ | (135 | ) | $ | (301 | ) | $ | (436 | ) | $ | (688 | ) | $ | (957 | ) | $ | (1,645 | ) | ||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||
|
Taxable
|
30,961 | 3,145 | 34,106 | 9,750 | 5,140 | 14,890 | ||||||||||||||||||
|
Nontaxable
|
1,988 | (224 | ) | 1,764 | (790 | ) | (531 | ) | (1,321 | ) | ||||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||||||||||
|
Taxable
|
448 | - | 448 | (630 | ) | 117 | (513 | ) | ||||||||||||||||
|
Nontaxable
|
(1,296 | ) | (105 | ) | (1,401 | ) | (722 | ) | (34 | ) | (756 | ) | ||||||||||||
|
Loans,
net of unearned income
|
(14,953 | ) | (59,765 | ) | (74,718 | ) | 9,277 | (77,256 | ) | (67,979 | ) | |||||||||||||
|
Other
earning assets
|
112 | (520 | ) | (408 | ) | 217 | (511 | ) | (294 | ) | ||||||||||||||
|
Total
interest-earning assets
|
17,125 | (57,770 | ) | (40,645 | ) | 16,414 | (74,032 | ) | (57,618 | ) | ||||||||||||||
|
Interest
paid on:
|
||||||||||||||||||||||||
|
Interest-bearing
demand deposits
|
(1,317 | ) | (9,910 | ) | (11,227 | ) | 930 | (19,405 | ) | (18,475 | ) | |||||||||||||
|
Savings
deposits
|
572 | (12,991 | ) | (12,419 | ) | 1,487 | (17,432 | ) | (15,945 | ) | ||||||||||||||
|
Time
deposits
|
(2,297 | ) | (35,093 | ) | (37,390 | ) | (1,242 | ) | (24,791 | ) | (26,033 | ) | ||||||||||||
|
Federal
funds purchased and securities sold under repurchase
agreements
|
(84 | ) | (9,176 | ) | (9,260 | ) | 6,113 | (15,944 | ) | (9,831 | ) | |||||||||||||
|
Short-term
borrowings
|
1,841 | (6,408 | ) | (4,567 | ) | 390 | (7,081 | ) | (6,691 | ) | ||||||||||||||
|
Long-term
FHLB advances
|
494 | - | 494 | - | - | - | ||||||||||||||||||
|
Subordinated
notes
|
- | - | - | - | - | - | ||||||||||||||||||
|
Junior
subordinated debt securities
|
- | (1,897 | ) | (1,897 | ) | 763 | (2,029 | ) | (1,266 | ) | ||||||||||||||
|
Total
interest-bearing liabilities
|
(791 | ) | (75,475 | ) | (76,266 | ) | 8,441 | (86,682 | ) | (78,241 | ) | |||||||||||||
|
Change
in net interest income on a tax equivalent basis
|
$ | 17,916 | $ | 17,705 | $ | 35,621 | $ | 7,973 | $ | 12,650 | $ | 20,623 | ||||||||||||
The
change in interest due to both volume and yield/rate has been allocated to
change due to volume and change due to yield/rate in proportion to the absolute
value of the change in each. Tax-exempt income has been adjusted to a
tax equivalent basis using a tax rate of 35% for each of the three years
presented. The balances of nonaccrual loans and related income
recognized have been included for purposes of these computations.
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. As shown in the table below, the provision for loan
losses for 2009 totaled $77.1 million, or 1.14% of average loans, compared with
$76.4 million in 2008 and $23.8 million in 2007.
|
Provision
for Loan Losses
|
||||||||||||
|
($
in thousands)
|
Years Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Florida
|
$ | 47,724 | $ | 43,360 | $ | 16,463 | ||||||
|
Mississippi
(1)
|
21,661 | 20,706 | 3,488 | |||||||||
|
Tennessee
(2)
|
3,218 | 4,707 | 1,837 | |||||||||
|
Texas
|
4,509 | 7,639 | 1,996 | |||||||||
|
Total
provision for loan losses
|
$ | 77,112 | $ | 76,412 | $ | 23,784 | ||||||
(1)
- Mississippi includes Central and Southern Mississippi Regions
(2)
- Tennessee includes Memphis, Tennessee and Northern Mississippi
Regions
Trustmark
continues to devote significant resources to managing credit risks resulting
from the slowdown in commercial developments of 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.
See the
section captioned “Loans and Allowance for Loan Losses” elsewhere in this
discussion for further analysis of the provision for loan losses, which includes
the table of nonperforming assets.
Noninterest
Income
Trustmark’s
noninterest income continues to play an important role in improving net income
and total shareholder value and represents 31.5%, 35.6% and 35.1% of total
revenue, before securities gains, net in 2009, 2008 and 2007,
respectively. Total noninterest income before securities gains, net
for 2009 decreased $14.0 million, or 7.9%, compared to 2008, while total
noninterest income before securities gains, net for 2008 increased $14.4
million, or 8.9%, compared to 2007. The comparative components of
noninterest income for the years ended December 31, 2009, 2008 and 2007, are
shown in the accompanying table.
Noninterest
Income
($
in thousands)
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amount
|
% Change
|
Amount
|
% Change
|
Amount
|
% Change
|
|||||||||||||||||||
|
Service
charges on deposit accounts
|
$ | 54,087 | 0.7 | % | $ | 53,717 | -0.9 | % | $ | 54,179 | 1.8 | % | ||||||||||||
|
Insurance
commissions
|
29,079 | -10.4 | % | 32,440 | -8.1 | % | 35,286 | 4.2 | % | |||||||||||||||
|
Wealth
management
|
22,079 | -20.0 | % | 27,600 | 7.2 | % | 25,755 | 11.1 | % | |||||||||||||||
|
General
banking-other
|
23,041 | -0.8 | % | 23,230 | -6.6 | % | 24,876 | 8.8 | % | |||||||||||||||
|
Mortgage
banking, net
|
28,873 | 9.0 | % | 26,480 | n/m | 12,024 | 19.9 | % | ||||||||||||||||
|
Other,
net
|
5,616 | -57.7 | % | 13,286 | 30.1 | % | 10,215 | 1.7 | % | |||||||||||||||
|
Total
Noninterest Income before
securities
gains, net
|
162,775 | -7.9 | % | 176,753 | 8.9 | % | 162,335 | 6.0 | % | |||||||||||||||
|
Securities
gains, net
|
5,467 | n/m | 505 | n/m | 112 | n/m | ||||||||||||||||||
|
Total
Noninterest Income
|
$ | 168,242 | -5.1 | % | $ | 177,258 | 9.1 | % | $ | 162,447 | 4.7 | % | ||||||||||||
n/m
- percentage changes greater than +/- 100% are not considered
meaningful
The
single largest component of noninterest income continues to be service charges
on deposit accounts, which increased $370 thousand, or 0.7%, during 2009,
compared to a decrease of $462 thousand, or 0.9%, during
2008. Service charges on deposit accounts include general account
service charges and NSF fees. General account service charges
decreased by $556 thousand in 2009 compared to an increase of $343 thousand in
2008. The decrease in general account service charges during 2009 is
primarily attributable to increased usage of accounts that do not charge a
monthly fee while the increase in 2008 resulted from decreases in earnings
credits earned by commercial customers. The earnings credit rate is
the value given to deposits maintained by commercial
customers. Because interest rates have trended downward during the
last two years, these deposit balances have become less valuable and are
yielding a lower earnings credit rate relative to 2007. As a result,
customers must pay for their services through fees rather than with earnings
credits applied to their deposit balances. NSF fees increased by $926
thousand during 2009 compared to an $805 thousand decrease during
2008. Compared to 2008, the growth in NSF revenues reflected
increases in both pricing, which occurred in the fourth quarter of 2008, and
collection percentage in 2009.
In November 2009, the
Federal Reserve Board adopted final rules that prohibit financial institutions,
such as Trustmark, from charging customers for paying overdrafts on ATM and
one-time debt card transactions, unless the consumer consents to the overdraft
service for those products. This change will reduce the fees that
Trustmark is able to charge when customers have insufficient funds in an
account. Trustmark estimates that this charge, which becomes
effective on July 1, 2010, may reduce noninterest income by approximately $5
million to $7 million for the year ending December 31, 2010.
Insurance
commissions were $29.1 million during 2009, compared with $32.4 million in 2008
and $35.3 million in 2007. The decline in insurance commissions
experienced during 2009 and 2008 were primarily due to lower commission volume
on commercial property and casualty policies, lower claims experience refunds
from carriers, and lower fees generated from captive insurance plans. Insurance
commission revenues have faced pressure from a generally soft insurance market,
meaning the price paid for insurance coverage is
falling. Furthermore, a recessionary economy has greatly
suppressed demand for insurance coverage by businesses for their inventories and
equipment, workers’ compensation and general liability, as well as forced
companies to downsize or close.
Wealth
management income totaled $22.1 million for 2009, compared with $27.6 million in
2008 and $25.8 million in 2007. Wealth management consists of income
related to investment management, trust and brokerage services. The
decline in wealth management income in 2009 is largely attributed to
historically low short-term interest rates that have negatively impacted money
management fee income from money market funds and sweep arrangements as well as
a smaller base throughout the year in assets under administration when compared
to 2008, which were significantly impacted by declining stock market
valuations. In addition, revenues from brokerage services have also
been negatively impacted by current market conditions. During 2008,
the growth in wealth management income was primarily due to new account growth
as well as solid and improved production from Trustmark’s team of investment
representatives. At December 31, 2009 and 2008, Trustmark held assets
under management and administration of $7.2 billion and $6.8 billion,
respectively, and brokerage assets of $1.2 billion and $1.1 billion,
respectively.
General
banking-other totaled $23.0 million during 2009, compared with $23.2 million in
2008 and $24.9 million 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. The decrease of $189 thousand in 2009 was primarily
the result of a decline in fees earned on an interest rate driven product and a
decline in fees earned on bankcard products due to lower consumer
usage.
Net
revenues from mortgage banking were $28.9 million during 2009, compared with
$26.5 million in 2008 and $12.0 million in 2007. Net mortgage banking
income increased $2.4 million during 2009 compared to an increase of $14.5
million during 2008 as Trustmark continued to take advantage of competitive
disruptions and expand market share. As shown in the accompanying
table, net mortgage servicing income increased to $15.9 million for 2009,
compared to $15.7 million in 2008 and $14.2 million in 2007. This
increase coincides with an increase in mortgage production. Loans
serviced for others totaled $4.2 billion at December 31, 2009, compared with
$5.0 billion at December 31, 2008, and $4.6 billion at December 31,
2007. The decrease in loans serviced for others in 2009 was due to
the sale of approximately $1.0 billion in mortgages serviced for others, which
also reduced Trustmark’s MSR by approximately $9.6 million. The gain
or loss resulting from this transaction was not material.
The
following table illustrates the components of mortgage banking revenues included
in noninterest income in the accompanying income statements:
Mortgage
Banking Income
($
in thousands)
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amount
|
% Change
|
Amount
|
% Change
|
Amount
|
% Change
|
|||||||||||||||||||
|
Mortgage
servicing income, net
|
$ | 15,885 | 0.9 | % | $ | 15,741 | 11.0 | % | $ | 14,184 | 7.1 | % | ||||||||||||
|
Change
in fair value-MSR from runoff
|
(8,567 | ) | 4.7 | % | (8,986 | ) | 3.8 | % | (9,343 | ) | 5.2 | % | ||||||||||||
|
Gain
on sales of loans, net
|
20,755 | n/m | 5,968 | 5.5 | % | 5,659 | 2.8 | % | ||||||||||||||||
|
Other,
net
|
822 | -68.5 | % | 2,609 | n/m | 340 | 9.3 | % | ||||||||||||||||
|
Mortgage
banking income before hedge ineffectiveness
|
28,895 | 88.5 | % | 15,332 | 41.4 | % | 10,840 | 17.7 | % | |||||||||||||||
|
Change
in fair value-MSR from market changes
|
6,607 | n/m | (34,838 | ) | n/m | (9,460 | ) | n/m | ||||||||||||||||
|
Change
in fair value of derivatives
|
(6,629 | ) | n/m | 45,986 | n/m | 10,644 | n/m | |||||||||||||||||
|
Net
(negative) positive hedge ineffectiveness
|
(22 | ) | n/m | 11,148 | n/m | 1,184 | 43.7 | % | ||||||||||||||||
|
Mortgage
banking, net
|
$ | 28,873 | 9.0 | % | $ | 26,480 | n/m | $ | 12,024 | 19.9 | % | |||||||||||||
n/m
- percentage changes greater than +/- 100% are not considered
meaningful
As part
of Trustmark’s risk management strategy, Trustmark utilizes derivatives
instruments to offset changes in the fair value of MSR attributable to changes
in interest rates. Changes in the fair value of the derivative
instrument are recorded in mortgage banking, net and are offset by changes in
the fair value of MSR. 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 cost to the fair value of the MSR attributable to market
changes.
During
2009, net negative ineffectiveness of the MSR hedge was $22 thousand, which
resulted from a tightening of the spread between primary mortgage rates and the
yield on the 10-year Treasury note as a result of various government programs as
well as a general improvement in the credit markets. Although this spread
tightening had a negative impact on the MSR hedge, this was mostly offset
by income generated from a steep yield curve and net option
premium, which are both core components of the MSR hedge strategy.
In
comparison, during 2008, net positive ineffectiveness of the MSR hedge was $11.1
million, which was primarily the result of the unusual widening of the spread
between primary mortgage rates, used to value the MSR asset, and yields on the
10-year Treasury note, which is used to hedge this asset. Also contributing to
the positive performance of the hedge was income generated from a
steep yield curve, as well as income from net option premium.
Representing
a significant component of mortgage banking income are gains on the sales of
loans, which equaled $20.8 million in 2009 compared with $6.0 million in 2008
and $5.7 million in 2007. During 2009, growth in the gain on sales of
loans coincides with an increase in the spread between primary and secondary
rates as well as an increase in loan sales from secondary marketing activities
of approximately $263.2 million, which benefited from increased refinancing
activity which began in 2008.
Other
income, net for 2009 was $5.6 million, compared with $13.3 million in 2008 and
$10.2 million in 2007. The $7.7 million, or 57.7%, decrease in 2009
primarily resulted from a $1.0 million gain from the redemption of Trustmark’s
shares in Visa upon their initial public offering along with $1.1 million of
life insurance proceeds associated with Trustmark’s supplemental retirement plan
that occurred during the first quarter of 2008. In addition,
Trustmark exercised its right to convert MasterCard Class B shares into
marketable Class A shares and sold them through a liquidation program achieving
a gain of $5.4 million during the second quarter of 2008.
During
2009, in order to manage the duration of the securities portfolio and capitalize
upon advantageous market conditions, Trustmark sold approximately $183.1 million
of primarily mortgage-related securities. This resulted in $5.5
million of securities gains, net during 2009 compared with $505 thousand during
2008.
Noninterest
Expense
Trustmark’s
noninterest expense for 2009 increased $24.5 million, or 8.6%, compared to 2008,
while noninterest expense for 2008 increased $7.3 million, or 2.6%, compared to
2007. The increase during 2009 was primarily attributable to higher
FDIC deposit insurance premiums, the FDIC special assessment and growth in both
loan expenses and real estate foreclosure expenses. These factors
accounted for over 95% of the change in noninterest expense when compared to the
same time period in 2008.
Management
considers disciplined expense management a key area of focus in the support of
improving shareholder value. The comparative components of noninterest expense
for 2009, 2008 and 2007 are shown in the accompanying table.
Noninterest
Expense
($
in thousands)
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amount
|
% Change
|
Amount
|
% Change
|
Amount
|
% Change
|
|||||||||||||||||||
|
Salaries
and employee benefits
|
$ | 169,252 | -1.1 | % | $ | 171,137 | 0.2 | % | $ | 170,722 | 6.9 | % | ||||||||||||
|
Services
and fees
|
40,292 | 5.0 | % | 38,379 | 3.0 | % | 37,259 | 1.6 | % | |||||||||||||||
|
Net
occupancy-premises
|
20,051 | 2.8 | % | 19,508 | 5.4 | % | 18,517 | 8.2 | % | |||||||||||||||
|
Equipment
expense
|
16,462 | -1.0 | % | 16,632 | 3.7 | % | 16,039 | 7.7 | % | |||||||||||||||
|
Other
expense:
|
||||||||||||||||||||||||
|
FDIC
assessment expense
|
15,808 | n/m | 3,471 | n/m | 829 | 4.9 | % | |||||||||||||||||
|
ORE/Foreclosure
expense
|
12,814 | n/m | 2,380 | n/m | 582 | 38.2 | % | |||||||||||||||||
|
Other
expense
|
33,580 | 4.2 | % | 32,212 | -0.9 | % | 32,501 | 5.2 | % | |||||||||||||||
|
Total
other expense
|
62,202 | 63.4 | % | 38,063 | 12.2 | % | 33,912 | 5.6 | % | |||||||||||||||
|
Total
noninterest expense
|
$ | 308,259 | 8.6 | % | $ | 283,719 | 2.6 | % | $ | 276,449 | 6.1 | % | ||||||||||||
n/m
- percentage changes greater than +/- 100% are not considered
meaningful
Salaries
and employee benefits, the largest category of noninterest expense, were $169.3
million in 2009, $171.1 million in 2008 and $170.7 million in
2007. During 2009, salary expense increased approximately $684
thousand when compared with 2008. This increase primarily reflects
higher stock-based and general incentive costs. Trustmark’s ongoing
human capital management initiatives resulted in a decrease of 83 FTE employees
at December 31, 2009 compared to December 31, 2008, which was primarily
accomplished through attrition resulting from technology
improvements. Employee benefits expense for 2009 decreased by
approximately $2.6 million when compared to 2008 and is primarily attributed to
a curtailment gain of $1.9 million as a result of the freeze in benefits of the
Capital Accumulation Plan and Trustmark's ongoing human capital management
initiatives previously mentioned. During 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 5 FTE employees at December 31, 2008 compared to
December 31, 2007. Employee benefits expense for 2008 increased by approximately
$305 thousand when compared to 2007 and is primarily attributed to increased
costs for employee insurance programs and stock-based compensation
plans.
Services
and fees for 2009 increased $1.9 million, or 5.0%, when compared with 2008,
while an increase of $1.1 million, or 3.0%, occurred when 2008 is compared with
2007. The 2009 growth in services and fees expenses is primarily the
result of Trustmark’s investment in a debit card rewards program implemented
during 2008 and legal and professional expenses incurred throughout the
year.
The
combined growth in net occupancy-premises expense and equipment expense for 2009
was $373 thousand, or 1.0%, compared with an increase of $1.6 million, or 4.6%,
in 2008. Growth in these expense categories can be attributed to a
decrease in Trustmark’s rental income due to the loss of a significant
lessee. During 2008, the growth resulted primarily from the opening
of six new banking centers, which increased rental expense, ad valorem and
personal property taxes, depreciation and data processing
expenses.
During
2009, other expenses increased $24.1 million, or 63.4%, while in 2008, other
expenses increased $4.2 million, or 12.2%. The growth in other expenses was
primarily the result of increases in FDIC insurance, loan expenses and real
estate foreclosure expenses, which increased $23.8 million when compared to
2008. FDIC insurance expense increased due to growth in fee
assessment rates during 2009 and a special assessment applied to all insured
institutions as of June 30, 2009. On November 12, 2009, the FDIC
adopted a final rule requiring a majority of institutions to prepay their
quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011 and 2012. Trustmark’s prepaid assessment amount was
approximately $39.1 million and was collected by the FDIC on December 30,
2009. During 2008, the growth in other expenses can be attributed to
increases in FDIC insurance and real estate foreclosure expenses, which
increased $6.1 million when compared to 2007.
Segment
Information
Results
of Segment Operations
Trustmark’s
operations are managed along three operating segments: General Banking Division,
Insurance Division and the Wealth Management Division. Beginning in
2009, Management began making its strategic decisions about General Banking as a
segment that also included the former Administration segment. The
decision to include the previously separate Administration segment within
General Banking was based on the fact that the operations of the primary
component of the Administration segment, Treasury, are solely dependent on the
existence of the General Banking operations. The decision to include
the previously separate Administration segment within General Banking was also
based on the fact that the vast majority of the resources in the other
components of Administration (which comprise Executive Administration, Corporate
Finance, and Human Resources) have historically primarily supported the General
Banking segment. A description of each segment and the methodologies
used to measure financial performance is described in Note 19 – Segment
Information located in Item 8 – Financial Statements and Supplementary
Data. Consolidated net income for 2009, 2008 and 2007 includes the
impact of Katrina. Net income by operating segment is presented below ($ in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
General
Banking
|
$ | 84,313 | $ | 79,471 | $ | 94,837 | ||||||
|
Insurance
|
4,248 | 5,377 | 6,908 | |||||||||
|
Wealth
Management
|
4,486 | 7,569 | 6,850 | |||||||||
|
Consolidated
Net Income
|
$ | 93,047 | $ | 92,417 | $ | 108,595 | ||||||
General
Banking
The
General Banking Division is responsible for all traditional banking products and
services including a full range of commercial and consumer banking services such
as checking accounts, savings programs, overdraft facilities, commercial,
installment and real estate loans, home equity loans and lines of credit,
drive-in and night deposit services and safe deposit facilities offered through
over 150 offices in Florida, Mississippi, Tennessee and Texas. The
General Banking Division also consists of internal operations that were
previously included in the former Administration segment. These
internal operations include Human Resources, Executive Administration, Treasury
(Funds Management), Public Affairs and Corporate Finance. Included in
these operational units are expenses related to mergers, mark-to-market
adjustments on loans and deposits, general incentives, stock options,
supplemental retirement and amortization of core deposits. Other than
Treasury, these business units are support-based in nature and are largely
responsible for general overhead expenditures that are not
allocated.
Net
income for the General Banking Division increased by $4.8 million during 2009,
or 6.1%, compared with 2008. The 2009 increase primarily resulted
from an increase in net interest income of $34.9 million net against a $27.0
million increase in noninterest expense. In addition to the increases
in net interest income and noninterest expense, the provision for loan losses
increased $617 thousand and noninterest income increased $194
thousand. The increase in net interest income is the result of a
$40.5 million decrease in interest income offset with a $75.4 million decrease
in interest expense. In 2009, Trustmark expanded its net interest
margin through diligent management of its assets and liabilities. The
increase in the net interest margin was primarily due to three main factors; 1)
disciplined deposit pricing afforded to Trustmark due to a strong liquidity
position, 2) prudent loan pricing, including the use of minimum loan
rates/floors and 3) the purchase of fixed rate securities in 2008, of which were
funded mostly with declining short-term, floating rate
liabilities. The $27.0 million increase in noninterest expense is due
primarily to increases in real estate foreclosure and FDIC insurance of $10.4
million and $12.3 million respectively. The increase in real estate
foreclosure expense is primarily attributed to increases of $5.7 million, $1.0
million, and $1.1 million in the Florida, Memphis, and Corporate Real Estate
business units respectively. FDIC insurance expense increased due to
growth in fee assessment rates in 2009 along with a $4.4 million special
assessment.
Net
income for the General Banking Division decreased by $15.4 million during 2008,
or 16.2%, compared with 2007. The 2008 decrease primarily resulted
from an increase in the provision for loan losses of $52.7
million. Along with the increase in the provision expense, net
interest income increased $18.1 million, noninterest expense increased $6.3
million and noninterest income increased $15.7 million. The increase
in the provision for loan losses is primarily attributed to increases in
Trustmark’s Florida and Mississippi markets of $26.9 million and $17.2 million,
respectively. The increase in the Florida provision for loan losses
is a result of growth in nonperforming loans resulting from a weakening of
homebuilder credit quality in that market. Mississippi’s increase in provision
for loan losses is due to growth in net charge-offs, criticized and classified
loans, as well as an increase in the consumer reserve factor. Net
interest income increased in 2008 by $18.1 million, or 6.1%, due to a $60.0
million decrease in interest income offset with a $78.1 million decrease in
interest expense. In 2008, Trustmark expanded its net interest margin
while in a falling rate environment. This was accomplished through
deposit pricing discipline afforded to Trustmark due to a strong liquidity
position, the purchase of fixed rate securities throughout the year and a
widening in the spread between LIBOR and the Fed Funds rate that has since
dissipated. Noninterest income grew by $15.7 million, or 15.6%, in
2008 and is the result of an increase in revenues earned from mortgage banking.
The growth in noninterest expense in 2008 totaled $6.3 million, or 2.7%, and
resulted from increases in FDIC insurance, real estate foreclosures, loan
expenses and outside services. FDIC insurance increased $2.6 million
in 2008 as Trustmark completed its utilization of credits provided by the FDIC
during 2007. In 2008, Trustmark implemented a debit rewards incentive
program with a cost of $1.4 million in outside services.
Insurance
Trustmark’s
Insurance Division includes two wholly-owned subsidiaries of TNB: Bottrell and
Fisher-Brown. 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 coverage.
Net
income decreased $1.1 million, or 21.0% in 2009, compared to a decrease of $1.5
million, or 22.2% in 2008. The decrease in net income in 2009 is
attributed to a decrease in noninterest income of $3.4 million partially offset
by a $1.5 million decrease in noninterest expense. The decline in
insurance revenues experienced during 2009 were primarily due to lower
commission volume on commercial property and casualty policies, lower claims
experience refunds from carriers and lower fees generated from captive insurance
plans. The decline in noninterest expense for 2009 is due primarily
to a $1.3 million decrease in salaries and benefits, which holds a corresponding
relationship with revenue. In 2008, noninterest income decreased $3.0
million or 8.5%. The decline in 2008 is due to pressure on premiums
caused by softening rates.
Wealth
Management
The
Wealth Management Division has been strategically organized to serve Trustmark’s
customers as a financial partner providing reliable guidance and sound,
practical advice for accumulating, preserving, and transferring
wealth. The Investment Services group, along with the Trust group,
are the primary service providers in this segment. Two wholly-owned
subsidiaries of TNB are included in Wealth Management. TIA is a
registered investment adviser that provides investment management services to
individual and institutional accounts as well as The Performance Fund Family of
Mutual Funds. TRMI acts as an agent to provide life, long-term care
and disability insurance services for wealth management customers.
Net
income in 2009 declined $3.1 million, or 40.7%, compared to an increase in 2008
of $719 thousand, or 10.5%. Wealth management revenues are primarily
fee generated. In 2009, total noninterest income declined by $5.8
million, or 20.2%, while in 2008, noninterest income grew $2.1 million, or
8.1%. The decrease in noninterest income in 2009 is the result of a
historically low short-term interest rate environment that has negatively
impacted money management fee income from money market funds and sweep
arrangements as well as a smaller base throughout the year in assets under
administration when compared with 2008, which were significantly impacted by
declining stock market valuations. Also, revenues from brokerage
services have been negatively impacted by current market
conditions. Noninterest expenses decreased in 2009 by $1.0 million,
or 4.8%, compared to an increase of $1.1 million, or 5.5%, in
2008. In 2009, the decrease in noninterest expense is from a decrease
in commissions and incentives, which is the result of the decline in noninterest
income. The growth in noninterest expense in 2008 is due primarily to
increases in salaries and benefits related to commissions and incentives that
are based on revenue performance.
Income
Taxes
For the
year ended December 31, 2009, Trustmark’s combined effective tax rate was 32.1%
compared to 32.2% in 2008 and 33.4% in 2007. The decrease in
Trustmark’s effective tax rate in 2009 is due to immaterial changes in permanent
items as a percentage of pretax income.
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 $8.570 billion, or 90.0% of total
assets, at December 31, 2009, compared with $8.179 billion, or 89.6% of total
assets, at December 31, 2008, an increase of $391.1 million, or
4.8%.
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, 2008, total investment securities increased by $114.9
million during 2009. This increase resulted primarily from purchases
of Agency guaranteed securities offset by maturities and paydowns. In
addition, during 2009, Trustmark sold approximately $188.5 million in
securities, generating a gain of approximately $5.5 million. This was
a strategy undertaken primarily to manage the duration of the securities
portfolio and capitalize upon advantageous market conditions.
The
securities portfolio is one of many tools Management uses to control exposure to
interest rate risk. Interest rate risk can be adjusted by altering
both the duration of the portfolio and the balance of the
portfolio. Trustmark has maintained a strategy of offsetting
potential exposure to higher interest rates by keeping both the average life and
the balance of investment securities at relatively low levels. The
weighted-average life during 2009 has lengthened despite the investment strategy
mentioned above primarily due to slower prepayment expectations for mortgage
related securities. As a result, the weighted-average life of the
portfolio increased to 3.58 years at December 31, 2009, compared to 1.85 years
at December 31, 2008.
The table
below indicates the amortized cost of securities available for sale and held to
maturity by type at year end for each of the last three years:
|
Amortized
Cost of Securities by Type
|
||||||||||||
|
($
in thousands)
|
||||||||||||
|
|
December 31,
|
|||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||
|
Securities
available for sale
|
||||||||||||
|
U.S.
Treasury securities
|
$ | - | $ | 6,502 | $ | 8,005 | ||||||
|
U.S.
Government agency obligations
|
||||||||||||
|
Issued
by U.S. Government agencies
|
20 | 27 | 34 | |||||||||
|
Issued
by U.S. Government sponsored agencies
|
48,685 | 24,821 | - | |||||||||
|
Obligations
of states and political subdivisions
|
115,118 | 98,323 | 45,704 | |||||||||
|
Mortgage-backed
securities
|
||||||||||||
|
Residential
mortgage pass-through securities
|
||||||||||||
|
Guaranteed
by GNMA
|
11,765 | 8,476 | 4,417 | |||||||||
|
Issued
by FNMA and FHLMC
|
49,510 | 18,519 | 4,941 | |||||||||
|
Other
residential mortgage-backed securities
|
||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
1,333,983 | 1,337,113 | 303,434 | |||||||||
|
Commercial
mortgage-backed securities
|
||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
67,294 | 11,041 | 5,989 | |||||||||
|
Corporate
debt securities
|
6,087 | 8,254 | 70,971 | |||||||||
|
Total
securities available for sale
|
$ | 1,632,462 | $ | 1,513,076 | $ | 443,495 | ||||||
|
Securities
held to maturity
|
||||||||||||
|
Obligations
of states and political subdivisions
|
$ | 74,643 | $ | 102,901 | $ | 114,497 | ||||||
|
Mortgage-backed
securities
|
||||||||||||
|
Residential
mortgage pass-through securities
|
||||||||||||
|
Guaranteed
by GNMA
|
7,044 | - | - | |||||||||
|
Other
residential mortgage-backed securities
|
||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
148,226 | 156,728 | 160,473 | |||||||||
|
Commercial
mortgage-backed securities
|
||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
3,071 | - | - | |||||||||
|
Foreign
debt securities
|
- | - | 126 | |||||||||
|
Total
securities held to maturity
|
$ | 232,984 | $ | 259,629 | $ | 275,096 | ||||||
Available
for sale (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
December 31, 2009, AFS securities totaled $1.684 billion, which represented
87.8% of the securities portfolio, compared to $1.543 billion, or 85.6%, at
December 31, 2008. At December 31, 2009, unrealized gains, net on AFS
securities totaled $51.9 million compared with unrealized gains, net of $29.8
million at December 31, 2008. At December 31, 2009, AFS securities
consisted of obligations of states and political subdivisions, mortgage related
securities, U.S. Government agency obligations 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 December 31, 2009, HTM securities totaled $233.0 million
and represented 12.2% of the total portfolio, compared with $259.6 million, or
14.4%, at the end of 2008.
Management
continues to focus on asset quality as one of the strategic goals of the
securities portfolio, which is evidenced by the investment of approximately 89%
of the portfolio in U.S. Government agency-backed obligations and other AAA
rated securities. None of the securities owned by Trustmark are
collateralized by assets which are considered sub-prime. Furthermore,
outside of membership in the Federal Home Loan Bank of Dallas, Federal Reserve
Bank and Depository Trust and Clearing Corporation, Trustmark does not hold any
equity investment in government sponsored entities.
The
following table details the maturities of securities available for sale and held
to maturity using amortized cost at December 31, 2009, and the weighted-average
yield for each range of maturities (tax equivalent basis):
|
Maturity/Yield Analysis Table
|
Maturing
|
|||||||||||||||||||||||||||||||||||
|
($
in thousands)
|
Within
One Year
|
Yield
|
After One,
But Within
Five Years
|
Yield
|
After Five,
But Within
Ten Years
|
Yield
|
After
Ten Years
|
Yield
|
Total
|
|||||||||||||||||||||||||||
|
Securities available for sale
|
||||||||||||||||||||||||||||||||||||
|
U.S.
Government agency obligations
|
||||||||||||||||||||||||||||||||||||
|
Issued
by U.S. Government agencies
|
$ | - | - | $ | 20 | 3.86 | % | $ | - | - | $ | - | - | $ | 20 | |||||||||||||||||||||
|
Issued
by U.S. Government Sponsored Agencies
|
- | - | - | - | 48,685 | 3.56 | % | - | - | 48,685 | ||||||||||||||||||||||||||
|
Obligations
of states and political subdivisions
|
4,330 | 5.27 | % | 29,110 | 5.74 | % | 57,680 | 4.91 | % | 23,998 | 5.53 | % | 115,118 | |||||||||||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||||||||||||||
|
Residential
mortgage pass-through securities
|
||||||||||||||||||||||||||||||||||||
|
Guaranteed
by GNMA
|
3 | 6.36 | % | 248 | 6.19 | % | 132 | 9.23 | % | 11,382 | 5.68 | % | 11,765 | |||||||||||||||||||||||
|
Issued
by FNMA and FHLMC
|
- | - | 8 | 5.24 | % | 436 | 6.75 | % | 49,066 | 3.92 | % | 49,510 | ||||||||||||||||||||||||
|
Other
residential mortgage-backed securities
|
||||||||||||||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC, or GNMA
|
- | - | 7,203 | 4.23 | % | 21,217 | 4.82 | % | 1,305,563 | 4.83 | % | 1,333,983 | ||||||||||||||||||||||||
|
Commercial
mortgage-backed securities
|
||||||||||||||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC, or GNMA
|
- | - | - | - | 44,401 | 4.40 | % | 22,893 | 4.94 | % | 67,294 | |||||||||||||||||||||||||
|
Corporate
debt securities
|
6,087 | 4.46 | % | - | - | - | - | - | - | 6,087 | ||||||||||||||||||||||||||
|
Total
securities available for sale
|
$ | 10,420 | 4.80 | % | $ | 36,589 | 5.44 | % | $ | 172,551 | 4.39 | % | $ | 1,412,902 | 4.82 | % | $ | 1,632,462 | ||||||||||||||||||
|
Securities
held to maturity
|
||||||||||||||||||||||||||||||||||||
|
Obligations
of states and political subdivisions
|
$ | 5,173 | 6.91 | % | $ | 25,459 | 7.14 | % | $ | 30,134 | 7.26 | % | $ | 13,877 | 8.54 | % | $ | 74,643 | ||||||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||||||||||||||
|
Residential
mortgage pass-through securities
|
||||||||||||||||||||||||||||||||||||
|
Guaranteed
by GNMA
|
- | - | - | - | - | - | 7,044 | 4.58 | % | 7,044 | ||||||||||||||||||||||||||
|
Other
residential mortgage-backed securities
|
||||||||||||||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC, or GNMA
|
- | - | - | - | - | - | 148,226 | 4.56 | % | 148,226 | ||||||||||||||||||||||||||
|
Commercial
mortgage-backed securities
|
||||||||||||||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC, or GNMA
|
- | - | - | - | - | - | 3,071 | 4.65 | % | 3,071 | ||||||||||||||||||||||||||
|
Total
securities held to maturity
|
$ | 5,173 | 6.91 | % | $ | 25,459 | 7.14 | % | $ | 30,134 | 7.26 | % | $ | 172,218 | 4.88 | % | $ | 232,984 | ||||||||||||||||||
Mortgage-backed
securities and collateralized mortgage obligations are included in maturity
categories based on their stated maturity date. Expected maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations.
As of
December 31, 2009, Trustmark did not hold securities of any one issuer with a
carrying value exceeding ten percent of total shareholders’ equity, other than
certain government-sponsored agencies which are exempt from
inclusion. Management continues to closely monitor the credit
quality as well as the ratings of the debt and mortgage-backed securities
issued by the U.S. Government sponsored entities and held in Trustmark’s
securities portfolio in light of issues currently facing these
entities.
The
following tables present Trustmark’s securities portfolio by amortized cost and
estimated fair value and by credit rating at December 31, 2009.
Securities Portfolio by Credit Rating
(1)
($
in thousands)
|
December 31, 2009
|
||||||||||||||||
|
Amortized Cost
|
Estimated Fair Value
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Securities
Available for Sale
|
||||||||||||||||
|
AAA
|
$ | 1,511,253 | 92.6 | % | $ | 1,560,696 | 92.7 | % | ||||||||
|
Aa1
to Aa3
|
35,053 | 2.1 | % | 35,810 | 2.1 | % | ||||||||||
|
A1
to A3
|
24,757 | 1.5 | % | 24,984 | 1.5 | % | ||||||||||
|
Baa1
to Baa3
|
7,545 | 0.5 | % | 7,684 | 0.5 | % | ||||||||||
|
Not
Rated (2)
|
53,854 | 3.3 | % | 55,222 | 3.2 | % | ||||||||||
|
Total
securities available for sale
|
$ | 1,632,462 | 100.0 | % | $ | 1,684,396 | 100.0 | % | ||||||||
|
Securities
Held to Maturity
|
||||||||||||||||
|
AAA
|
$ | 160,710 | 69.0 | % | $ | 166,138 | 69.0 | % | ||||||||
|
Aa1
to Aa3
|
22,341 | 9.6 | % | 23,564 | 9.8 | % | ||||||||||
|
A1
to A3
|
15,245 | 6.5 | % | 15,570 | 6.5 | % | ||||||||||
|
Baa1
to Baa3
|
3,489 | 1.5 | % | 3,543 | 1.5 | % | ||||||||||
|
Not
Rated (2)
|
31,199 | 13.4 | % | 31,859 | 13.2 | % | ||||||||||
|
Total
securities held to maturity
|
$ | 232,984 | 100.0 | % | $ | 240,674 | 100.0 | % | ||||||||
(1)
- Credit ratings obtained from Moody's Investors Service
(2)
- Not rated issues primarily consist of Mississippi municipal general
obligations
The table
presenting the credit rating of Trustmark’s securities is formatted to show the
securities according to the credit rating category, and not by category of the
underlying security. At December 31, 2009, approximately 93% of the
available for sale securities are rated AAA investment grade and the same is
true with respect to 69% of held to maturity securities, which are carried at
amortized cost.
Loans
Held for Sale
At
December 31, 2009, loans held for sale totaled $226.2 million, consisting of
$145.2 million of residential real estate mortgage loans in the process of being
sold to third parties and $81.0 million of Government National Mortgage
Association (GNMA) optional repurchase loans. At December 31, 2008, loans held
for sale totaled $238.3 million, consisting of $198.8 million in residential
real estate mortgage loans in the process of being sold to third parties and
$39.5 million in GNMA optional repurchase loans. Please refer to the
nonperforming assets table that follows for information on GNMA loans eligible
for repurchase which are past due 90 days or more.
GNMA
optional repurchase programs allow financial institutions to buy back individual
delinquent mortgage loans that meet certain criteria from the securitized loan
pool for which the institution provides servicing. At the servicer's option and
without GNMA's prior authorization, the servicer may repurchase such a
delinquent loan for an amount equal to 100 percent of the remaining principal
balance of the loan. This buy-back option is considered a conditional option
until the delinquency criteria are met, at which time the option becomes
unconditional. When Trustmark is deemed to have regained effective control over
these loans under the unconditional buy-back option, the loans can no longer be
reported as sold and must be brought back onto the balance sheet as loans held
for sale, regardless of whether Trustmark intends to exercise the buy-back
option. These loans are reported as held for sale with the offsetting
liability being reported as short-term borrowings. During the two
years ended December 31, 2009, Trustmark has not exercised their buy-back option
on any delinquent loans serviced for GNMA.
Loans
and Allowance for Loan Losses
Loans at
December 31, 2009 totaled $6.320 billion compared to $6.722 billion at December
31, 2008, a decrease of $402.6 million. These declines are directly
attributable to a strategic focus to reduce certain loan classifications,
specifically construction, land development and other land loans and indirect
consumer auto loans. In addition, these loan classifications, as well
as commercial and industrial loans, 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
December 31, 2009 had loans totaling $198.9 million; a decrease of $95.6 million
from December 31, 2008. This trend is expected to continue until the
real estate market stabilizes in Florida and overall economic conditions
improve. The consumer loan portfolio decrease of $288.7 million primarily
represents a decrease in the indirect consumer auto portfolio. The
indirect consumer auto portfolio balance at December 31, 2009, 2008, and 2007,
was $386.0 million, $634.2 million, and $845.3 million, respectively, and had an
average remaining life of 1.24 years at December 31, 2009. The
declines in these classifications reflect implementation of Management’s
determination to reduce overall exposure to these types of
assets.
The table
below shows the carrying value of the loan portfolio at the end of each of the
last five years:
|
Loan
Portfolio by Type
|
||||||||||||||||||||
|
($
in thousands)
|
December 31,
|
|||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Loans
secured by real estate:
|
||||||||||||||||||||
|
Construction,
land development and other land loans
|
$ | 830,069 | $ | 1,028,788 | $ | 1,194,940 | $ | 896,254 | $ | 715,174 | ||||||||||
|
Secured
by 1-4 family residential properties
|
1,650,743 | 1,524,061 | 1,694,757 | 1,842,886 | 1,901,196 | |||||||||||||||
|
Secured
by nonfarm, nonresidential properties
|
1,467,307 | 1,422,658 | 1,325,379 | 1,326,658 | 1,061,669 | |||||||||||||||
|
Other
real estate secured
|
197,421 | 186,915 | 167,610 | 148,921 | 166,685 | |||||||||||||||
|
Loans
to finance agricultural production and other loans to
farmers
|
23,005 | 18,641 | 23,692 | 23,938 | 40,162 | |||||||||||||||
|
Commercial
and industrial loans
|
1,126,676 | 1,305,938 | 1,283,014 | 1,106,460 | 861,167 | |||||||||||||||
|
Consumer
loans
|
606,315 | 895,046 | 1,087,337 | 934,261 | 880,868 | |||||||||||||||
|
Obligations
of states and political subdivisions
|
326,162 | 270,599 | 228,330 | 233,666 | 230,214 | |||||||||||||||
|
Loans
for purchasing or carrying securities
|
11,659 | 20,566 | 4,949 | 8,110 | 5,204 | |||||||||||||||
|
Other
loans
|
80,440 | 49,191 | 30,784 | 41,999 | 51,004 | |||||||||||||||
|
Loans
|
$ | 6,319,797 | $ | 6,722,403 | $ | 7,040,792 | $ | 6,563,153 | $ | 5,913,343 | ||||||||||
The loan
composition by region at December 31, 2009 is reflected in the following tables
($ in thousands) and reflects a diversified mix of loans by region.
|
December 31, 2009
|
||||||||||||||||||||
|
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
|
$ | 830,069 | $ | 198,906 | $ | 302,918 | $ | 59,322 | $ | 268,923 | ||||||||||
|
Secured
by 1-4 family residential properties
|
1,650,743 | 87,282 | 1,367,633 | 165,016 | 30,812 | |||||||||||||||
|
Secured
by nonfarm, nonresidential properties
|
1,467,307 | 180,267 | 828,954 | 216,520 | 241,566 | |||||||||||||||
|
Other
real estate secured
|
197,421 | 5,388 | 162,607 | 9,969 | 19,457 | |||||||||||||||
|
Commercial
and industrial loans
|
1,126,676 | 19,869 | 832,166 | 60,351 | 214,290 | |||||||||||||||
|
Consumer
loans
|
606,315 | 2,287 | 565,973 | 28,946 | 9,109 | |||||||||||||||
|
Other
loans
|
441,266 | 29,655 | 365,162 | 22,576 | 23,873 | |||||||||||||||
|
Loans
|
$ | 6,319,797 | $ | 523,654 | $ | 4,425,413 | $ | 562,700 | $ | 808,030 | ||||||||||
(1)
- Mississippi includes Central and Southern Mississippi Regions
(2)
- Tennessee includes Memphis, Tennessee and Northern Mississippi
Regions
|
Construction,
Land Development and Other Land Loans by Region
|
||||||||||||||||||||
|
Lots
|
$ | 99,738 | $ | 61,725 | $ | 24,791 | $ | 4,551 | $ | 8,671 | ||||||||||
|
Development
|
187,384 | 27,227 | 68,443 | 9,185 | 82,529 | |||||||||||||||
|
Unimproved
land
|
277,723 | 76,762 | 108,130 | 32,623 | 60,208 | |||||||||||||||
|
1-4
family construction
|
120,813 | 10,929 | 70,440 | 5,825 | 33,619 | |||||||||||||||
|
Other
construction
|
144,411 | 22,263 | 31,114 | 7,138 | 83,896 | |||||||||||||||
|
Construction,
land development and other land loans
|
$ | 830,069 | $ | 198,906 | $ | 302,918 | $ | 59,322 | $ | 268,923 | ||||||||||
|
December 31, 2009
|
||||||||||||||||||||
|
Loans
Secured by Nonfarm, Nonresidential Properties by Region
|
Total
|
Florida
|
Mississippi (Central and Southern
Regions)
|
Tennessee (Memphis, TN and Northern MS
Regions)
|
Texas
|
|||||||||||||||
|
Income
producing:
|
||||||||||||||||||||
|
Retail
|
$ | 171,790 | $ | 34,239 | $ | 83,992 | $ | 28,523 | $ | 25,036 | ||||||||||
|
Office
|
158,625 | 56,125 | 81,950 | 11,435 | 9,115 | |||||||||||||||
|
Nursing
homes/assisted living
|
122,324 | - | 112,028 | 4,921 | 5,375 | |||||||||||||||
|
Hotel/motel
|
68,864 | 13,832 | 31,000 | 11,127 | 12,905 | |||||||||||||||
|
Industrial
|
22,341 | 6,944 | 5,136 | 1,217 | 9,044 | |||||||||||||||
|
Health
care
|
11,497 | - | 11,431 | 66 | - | |||||||||||||||
|
Convenience
stores
|
7,732 | 307 | 4,873 | 1,330 | 1,222 | |||||||||||||||
|
Other
existing
|
142,166 | 13,623 | 62,134 | 17,248 | 49,161 | |||||||||||||||
|
Total
Income Producing
|
705,339 | 125,070 | 392,544 | 75,867 | 111,858 | |||||||||||||||
|
Owner-occupied:
|
||||||||||||||||||||
|
Churches
|
122,211 | 2,353 | 53,668 | 61,719 | 4,471 | |||||||||||||||
|
Office
|
116,299 | 21,714 | 57,668 | 17,730 | 19,187 | |||||||||||||||
|
Health
care
|
82,010 | 11,355 | 57,291 | 4,308 | 9,056 | |||||||||||||||
|
Industrial
warehouses
|
80,082 | 2,503 | 57,932 | 431 | 19,216 | |||||||||||||||
|
Convenience
stores
|
70,577 | 1,315 | 48,161 | 4,210 | 16,891 | |||||||||||||||
|
Retail
|
39,336 | 6,045 | 21,723 | 1,258 | 10,310 | |||||||||||||||
|
Auto
dealerships
|
22,658 | 642 | 16,997 | 1,686 | 3,333 | |||||||||||||||
|
Restaurants
|
35,718 | 900 | 25,097 | 6,153 | 3,568 | |||||||||||||||
|
Miscellaneous
commercial owner-occupied
|
193,077 | 8,370 | 97,873 | 43,158 | 43,676 | |||||||||||||||
|
Total
Owner-Occupied
|
761,968 | 55,197 | 436,410 | 140,653 | 129,708 | |||||||||||||||
|
Loans
secured by nonfarm, nonresidential properties
|
$ | 1,467,307 | $ | 180,267 | $ | 828,954 | $ | 216,520 | $ | 241,566 | ||||||||||
(1)
- Mississippi includes Central and Southern Mississippi Regions
(2)
- Tennessee includes Memphis, Tennessee and Northern Mississippi
Regions
Trustmark
makes loans in the normal course of business to certain directors, their
immediate families and companies in which they are principal
owners. Such loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility at the time of the transaction.
There is
no industry standard definition of “subprime loans.” Trustmark
categorizes certain loans as subprime for its purposes using a set of factors,
which Management believes, are consistent with industry practice. TNB
has not originated or purchased subprime mortgages. At December 31,
2009, Trustmark held “alt A” mortgages with an aggregate principal balance of
approximately $2.1 million (0.05% of total loans secured by real estate at that
date). These “alt A” loans have been originated by Trustmark as an
accommodation to certain Trustmark customers for whom Trustmark determined that
such loans were suitable under the purposes of the Fannie Mae “alt A” program
and under Trustmark’s loan origination standards. Trustmark does not
have any no-interest loans, other than a small number of loans made to customers
that are charitable organizations, the aggregate amount of which is not material
to Trustmark’s financial condition or results of operations.
Due to
the short-term nature of most commercial real estate lending and the practice of
annual renewal of commercial lines of credit, approximately one-third of
Trustmark’s portfolio matures in less than one year. Such a
short-term maturity profile is not unusual for a commercial bank and provides
Trustmark the opportunity to obtain updated financial information from its
borrowers and to actively monitor its borrowers’ credit
worthiness. This maturity profile is well matched with many of
Trustmark’s sources of funding, which are also short-term in
nature.
The
following table provides information regarding Trustmark’s loan maturities by
category at December 31, 2009:
Loan
Maturities by Category
($
in thousands)
|
Maturing
|
||||||||||||||||
|
Loan
Type
|
Within
One Year
or Less
|
One
Year Through Five
Years
|
After
Five
Years
|
Total
|
||||||||||||
|
Construction,
land development and other land loans
|
$ | 532,729 | $ | 266,542 | $ | 30,798 | $ | 830,069 | ||||||||
|
Secured
by 1-4 family residential properties
|
551,246 | 319,232 | 780,265 | 1,650,743 | ||||||||||||
|
Other
loans secured by real estate
|
462,580 | 956,843 | 245,305 | 1,664,728 | ||||||||||||
|
Commercial
and industrial
|
584,723 | 478,142 | 63,811 | 1,126,676 | ||||||||||||
|
Consumer
loans
|
97,106 | 495,177 | 14,032 | 606,315 | ||||||||||||
|
Other
loans
|
110,048 | 117,796 | 213,422 | 441,266 | ||||||||||||
|
Total
|
$ | 2,338,432 | $ | 2,633,732 | $ | 1,347,633 | $ | 6,319,797 | ||||||||
The
following table provides information regarding Trustmark’s loan maturities by
interest rate sensitivity at December 31, 2009.
Loan
Maturities by Interest Rate Sensitivity
($
in thousands)
|
Maturing
|
||||||||||||||||
|
Loan
Type
|
Within
One Year
or Less
|
One
Year Through Five
Years
|
After
Five
Years
|
Total
|
||||||||||||
|
Predetermined
interest rates
|
$ | 814,736 | $ | 2,140,774 | $ | 1,235,093 | $ | 4,190,603 | ||||||||
|
Floating
interest rates:
|
||||||||||||||||
|
Loans
which are at contractual floor
|
695,200 | 246,946 | 30,721 | 972,867 | ||||||||||||
|
Loans
which are free to float
|
828,496 | 246,012 | 81,819 | 1,156,327 | ||||||||||||
|
Total
floating interest rates
|
1,523,696 | 492,958 | 112,540 | 2,129,194 | ||||||||||||
|
Total
|
$ | 2,338,432 | $ | 2,633,732 | $ | 1,347,633 | $ | 6,319,797 | ||||||||
The
allowance for loan losses is established through provisions for estimated loan
losses charged against net income. The allowance reflects
Management’s best estimate of the probable loan losses related to specifically
identified loans, as well as probable incurred 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. Accordingly, the allowance is based upon both past
events and current economic conditions.
The table
below illustrates the changes in Trustmark’s allowance for loan losses and well
Trustmark’s loan loss experience for each of the last five years:
|
Analysis
of the Allowance for Loan Losses
|
Years Ended December 31,
|
|||||||||||||||||||
|
($
in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Balance
at beginning of period
|
$ | 94,922 | $ | 79,851 | $ | 72,098 | $ | 76,691 | $ | 64,757 | ||||||||||
|
Loans
charged off:
|
||||||||||||||||||||
|
Real
estate loans
|
(55,148 | ) | (48,182 | ) | (8,678 | ) | (1,511 | ) | (2,770 | ) | ||||||||||
|
Loans
to finance agricultural production and other loans to
farmers
|
- | (3 | ) | (297 | ) | (3 | ) | (14 | ) | |||||||||||
|
Commercial
and industrial
|
(5,715 | ) | (3,182 | ) | (2,136 | ) | (1,670 | ) | (2,978 | ) | ||||||||||
|
Consumer
|
(15,759 | ) | (15,976 | ) | (10,207 | ) | (7,740 | ) | (8,147 | ) | ||||||||||
|
All
other loans
|
(4,089 | ) | (4,424 | ) | (5,472 | ) | (4,014 | ) | (2,913 | ) | ||||||||||
|
Total
charge-offs
|
(80,711 | ) | (71,767 | ) | (26,790 | ) | (14,938 | ) | (16,822 | ) | ||||||||||
|
Recoveries
on loans previously charged off:
|
||||||||||||||||||||
|
Real
estate loans
|
555 | 208 | 57 | 152 | 135 | |||||||||||||||
|
Commercial
and industrial
|
2,935 | 1,137 | 1,356 | 1,729 | 1,006 | |||||||||||||||
|
Consumer
|
5,997 | 5,874 | 5,944 | 6,130 | 5,300 | |||||||||||||||
|
All
other loans
|
2,852 | 3,207 | 3,402 | 2,955 | 2,774 | |||||||||||||||
|
Total
recoveries
|
12,339 | 10,426 | 10,759 | 10,966 | 9,215 | |||||||||||||||
|
Net
charge-offs
|
(68,372 | ) | (61,341 | ) | (16,031 | ) | (3,972 | ) | (7,607 | ) | ||||||||||
|
Provision
for loan losses
|
77,112 | 76,412 | 23,784 | (5,938 | ) | 19,541 | ||||||||||||||
|
Allowance
of acquired bank
|
- | - | - | 5,317 | - | |||||||||||||||
|
Balance
at end of period
|
$ | 103,662 | $ | 94,922 | $ | 79,851 | $ | 72,098 | $ | 76,691 | ||||||||||
|
Percentage
of net charge-offs during period to average loans outstanding during the
period
|
1.01 | % | 0.87 | % | 0.23 | % | 0.06 | % | 0.13 | % | ||||||||||
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
SAB No. 102 as well as other regulatory guidance. The level of
Trustmark’s allowance reflects Management’s continuing evaluation of 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 industry and credit
concentration; changes in levels and trends of delinquencies and nonperforming
loans; changes in levels and trends of net charge-offs; and changes in interest
rates and collateral, financial and underwriting
exceptions.
During
the quarter ended June 30, 2009, Trustmark refined its allowance for loan loss
methodology for commercial loans based upon current regulatory guidance from its
primary regulator. This refined methodology delineates the commercial
purpose and commercial construction loan portfolios into 13 separate loan types,
which have similar characteristics, such as, repayment, collateral and risk
profiles. Within each loan type, a 10 point risk rating system is
utilized to apply a reserve factor consisting of quantitative and qualitative
components to determine the needed allowance by each loan type. This change
expanded commercial loans from a single pool in 2008 and prior years to the
thirteen separate pools as segmented below:
|
|
Ø
|
Commercial Purpose
Loans
|
|
|
●
|
Real
Estate – Owner Occupied
|
|
|
●
|
Real
Estate – Non-Owner Occupied
|
|
|
●
|
Working
Capital
|
|
|
●
|
Non-Working
Capital
|
|
|
●
|
Land
|
|
|
♦
|
Florida
|
|
|
♦
|
Mississippi,
Tennessee and Texas
|
|
|
●
|
Lots
and Development
|
|
|
♦
|
Florida
|
|
|
♦
|
Mississippi,
Tennessee and Texas
|
|
|
●
|
Political
Subdivisions
|
|
|
Ø
|
Commercial Construction
Loans
|
|
|
●
|
1
to 4 Family
|
|
|
♦
|
Florida
|
|
|
♦
|
Mississippi,
Tennessee and Texas
|
|
|
●
|
Non-1
to 4 Family
|
|
|
♦
|
Florida
|
|
|
♦
|
Mississippi,
Tennessee and Texas
|
The
quantitative factors utilized in determining the required reserve are intended
to reflect a three-year average by loan type; however, because of the current
economic recession and the development of the refined reserve methodology, a
historical 2008 loss ratio was utilized. Trustmark will develop its
three-year loss factors utilizing 2008 as a base year. The
qualitative factors utilize eight separate factors made up of unique
characteristics that, when weighted and combined, produce an estimated level of
reserve for each loan type.
Because
of these enhancements, Trustmark was able to increase risk rate factors for
commercial loans by type from 10 in 2008, to 130 in 2009. This
allowed Trustmark to reallocate loan loss reserves to loans that represent the
highest risk. As a result, approximately $8.0 million in qualitative
reserves were reallocated to specific reserves during the second quarter of
2009.
At
December 31, 2009, the allowance for loan losses was $103.7 million, an increase
of $8.7 million when compared with December 31, 2008, primarily resulting from
increased credit risk associated with growth in nonperforming
loans. Trustmark has not experienced any abnormal credit
deterioration, excluding the Florida Panhandle where, after a decade of growth,
the economy has declined as a result of overbuilding commercial developments of
residential real estate. Trustmark is actively engaged in the
resolution of credit issues in the Florida Panhandle. Total allowance
coverage of nonperforming loans, excluding impaired loans charged down to net
realizable value, at December 31, 2009, was 150.1%, compared to 166.1% at
December 31, 2008.
Trustmark’s allocation of
its allowance for loan losses represents 2.10% of commercial loans and 0.80% of
consumer and home mortgage loans, resulting in an allowance to total loans of
1.64% at December 31, 2009. This compares with an allowance to total
loans of 1.41% at December 31, 2008, which was allocated to commercial loans at
1.79% and to consumer and mortgage loans at 0.72%.
Managing
credit risks resulting from the current economic and real estate market
conditions continues to be a primary focus for Trustmark. Nonperforming assets
totaled $231.3 million at December 31, 2009, an increase of $78.7 million
relative to December 31, 2008. Collectively, total nonperforming
assets to total loans and other real estate at December 31, 2009 was
3.48% compared to 2.18% at
December 31, 2008. Net charge-offs in 2009 totaled $68.4 million, or
1.01% of average loans, while the provision for loan losses increased to $77.1
million. The increase in each of these metrics is principally
attributable to residential real estate conditions, primarily in Trustmark’s
Florida market. To put into proper perspective, the Florida market
represented approximately 8% of Trustmark’s total loans but 52% of nonperforming
assets, 62% of total provisioning and 53% of net charge-offs in
2009.
Total
nonaccrual loans increased $27.1 million during 2009 to $141.2 million, or 2.16%
of total loans, due primarily to one commercial real estate credit in
Mississippi, two commercial real estate credits in Tennessee, seven commercial
real estate credits and one consumer real estate credit in Florida, and four
commercial real estate credits in Texas regions, which were reserved for or
written-down to fair value of the underlying collateral less cost to
sell. Other real estate increased $51.5 million at December 31, 2009
compared to December 31, 2008, primarily due to six construction, land
development and other land properties in Florida; and four development projects
in Mississippi and two in Texas being moved into other real
estate. During 2009, there was $7.4 million in other real estate
valuation adjustments due
to a continual decline in
commercial developments of residential real estate values.
|
Nonperforming
Assets
|
||||||||||||||||||||
|
($
in thousands)
|
December 31,
|
|||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Nonaccrual
loans
|
||||||||||||||||||||
|
Florida
|
$ | 74,159 | $ | 75,092 | $ | 43,787 | $ | 4,429 | $ | 348 | ||||||||||
|
Mississippi
(1)
|
31,050 | 18,703 | 13,723 | 23,889 | 24,100 | |||||||||||||||
|
Tennessee
(2)
|
12,749 | 3,638 | 4,431 | 3,708 | 3,788 | |||||||||||||||
|
Texas
|
23,204 | 16,605 | 3,232 | 4,373 | 678 | |||||||||||||||
|
Total
nonaccrual loans
|
141,162 | 114,038 | 65,173 | 36,399 | 28,914 | |||||||||||||||
|
Other
real estate
|
||||||||||||||||||||
|
Florida
|
45,927 | 21,265 | 995 | - | - | |||||||||||||||
|
Mississippi
(1)
|
22,373 | 6,113 | 1,123 | 1,065 | 1,594 | |||||||||||||||
|
Tennessee
(2)
|
10,105 | 8,862 | 6,084 | 1,140 | 2,051 | |||||||||||||||
|
Texas
|
11,690 | 2,326 | 146 | 304 | 462 | |||||||||||||||
|
Total
other real estate
|
90,095 | 38,566 | 8,348 | 2,509 | 4,107 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 231,257 | $ | 152,604 | $ | 73,521 | $ | 38,908 | $ | 33,021 | ||||||||||
|
Nonperforming
assets/total loans (including
loans
held for sale) and ORE
|
3.48 | % | 2.18 | % | 1.02 | % | 0.58 | % | 0.56 | % | ||||||||||
|
Loans
Past Due 90 days or more
|
||||||||||||||||||||
|
Loans
held for investment
|
$ | 8,901 | $ | 5,139 | $ | 4,853 | $ | 2,957 | $ | 2,719 | ||||||||||
|
Serviced
GNMA loans eligible for repurchase
(no
obligation to repurchase)
|
$ | 46,661 | $ | 18,095 | $ | 11,847 | $ | 8,510 | $ | 22,769 | ||||||||||
(1)
- Mississippi includes Central and Southern Mississippi Regions
(2)
- Tennessee includes Memphis, Tennessee and Northern Mississippi
Regions
As
reported in the table above, Government National Mortgage Association (GNMA)
optional repurchase programs allow financial institutions to buy back individual
delinquent mortgage loans that meet certain criteria from the securitized loan
pool for which the institution provides servicing. At the servicer’s option and
without GNMA’s prior authorization, the servicer may repurchase such a
delinquent loan for an amount equal to 100 percent of the remaining principal
balance of the loan. This buy-back option is considered a conditional option
until the delinquency criteria are met, at which time the option becomes
unconditional. When Trustmark is deemed to have regained effective control over
these loans under the unconditional buy-back option, the loans can no longer be
reported as sold and must be brought back onto the balance sheet as loans held
for sale, regardless of whether Trustmark intends to exercise the buy-back
option. These loans are reported as held for sale with the offsetting
liability being reported as short-term borrowings. During the five
years ended December 31, 2009, Trustmark has not exercised their buy-back option
on any delinquent loans serviced for GNMA.
The
following table illustrates nonaccrual loans by loan type for the past five
years:
Nonaccrual
Loans by Loan Type
($
in thousands)
|
December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Construction,
land development and other land loans
|
$ | 81,805 | $ | 72,582 | $ | 45,999 | $ | 2,182 | $ | 1,797 | ||||||||||
|
Secured
by 1-4 family residential properties
|
31,464 | 11,699 | 10,851 | 5,314 | 8,430 | |||||||||||||||
|
Secured
by nonfarm, nonresidential properties
|
18,056 | 10,775 | 4,694 | 15,274 | 6,493 | |||||||||||||||
|
Other
loans secured by real estate
|
2,097 | 3,351 | 165 | 75 | 681 | |||||||||||||||
|
Commercial
and industrial
|
6,630 | 14,617 | 2,506 | 12,584 | 10,725 | |||||||||||||||
|
Consumer
loans
|
973 | 976 | 883 | 754 | 430 | |||||||||||||||
|
Other
loans
|
137 | 38 | 75 | 216 | 358 | |||||||||||||||
|
Total
Nonaccrual Loans by Type
|
$ | 141,162 | $ | 114,038 | $ | 65,173 | $ | 36,399 | $ | 28,914 | ||||||||||
The
following table illustrates other real estate by type of property for the past
five years:
Other
Real Estate by Property Type
($
in thousands)
|
December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Construction,
land development and other land loans
|
$ | 60,276 | $ | 28,824 | $ | 3,635 | $ | 408 | $ | 868 | ||||||||||
|
1-4
family residential properties
|
11,001 | 8,443 | 4,446 | 1,536 | 1,419 | |||||||||||||||
|
Nonfarm,
nonresidential properties
|
7,285 | 1,220 | 174 | 565 | 1,820 | |||||||||||||||
|
Other
real estate loans
|
11,533 | 79 | 93 | - | - | |||||||||||||||
|
Total
other real estate
|
$ | 90,095 | $ | 38,566 | $ | 8,348 | $ | 2,509 | $ | 4,107 | ||||||||||
Trustmark
has made significant progress in the resolution of its construction and land
development portfolio in Florida. Over the last 24 months, this
portfolio has been reduced by $187.3 million, or 48.5%, to $198.9
million. At December 31, 2009, Florida non-impaired construction and
land development loans totaled $163.0 million with an associated reserve for
loan losses of $23.9 million, or 14.7%.
As seen
in the table below, at December 31, 2009, approximately $86.4 million in
construction, land development and other loans have been classified and reserved
for at appropriate levels, including $35.9 million of impaired loans that have
been charged down to fair value of the underlying collateral less cost to
sell. Management believes that this portfolio is appropriately risk
rated and adequately reserved based upon current conditions.
Florida
Credit Quality
($
in thousands)
|
Classified (3)
|
||||||||||||||||||||||||
|
Total Loans
|
Criticized Loans (1)
|
Special Mention (2)
|
Accruing
|
Nonimpaired Nonaccrual
|
Impaired Nonaccrual (4)
|
|||||||||||||||||||
|
Construction,
land development and other land loans:
|
||||||||||||||||||||||||
|
Lots
|
$ | 61,725 | $ | 24,735 | $ | - | $ | 11,335 | $ | 10,987 | $ | 2,413 | ||||||||||||
|
Development
|
27,227 | 17,336 | - | 3,964 | 770 | 12,602 | ||||||||||||||||||
|
Unimproved
land
|
76,762 | 50,515 | 19,945 | 12,064 | 1,210 | 17,296 | ||||||||||||||||||
|
1-4
family construction
|
10,929 | 4,608 | 1,489 | - | 419 | 2,700 | ||||||||||||||||||
|
Other
construction
|
22,263 | 13,355 | 2,735 | 9,215 | 489 | 916 | ||||||||||||||||||
|
Construction,
land development and other land loans
|
198,906 | 110,549 | 24,169 | 36,578 | 13,875 | 35,927 | ||||||||||||||||||
|
Commercial,
commercial real estate and consumer
|
324,748 | 79,793 | 32,005 | 23,431 | 14,963 | 9,394 | ||||||||||||||||||
|
Total
Florida loans
|
$ | 523,654 | $ | 190,342 | $ | 56,174 | $ | 60,009 | $ | 28,838 | $ | 45,321 | ||||||||||||
|
Florida
Credit Quality (continued)
|
Total Loans Less Impaired
Loans
|
Loan Loss Reserves
|
Loan Loss Reserve % of Nonimpaired
Loans
|
|||||||||
|
Construction,
land development and other land loans:
|
||||||||||||
|
Lots
|
$ | 59,312 | $ | 7,588 | 12.79 | % | ||||||
|
Development
|
14,625 | 2,578 | 17.63 | % | ||||||||
|
Unimproved
land
|
59,466 | 9,707 | 16.32 | % | ||||||||
|
1-4
family construction
|
8,229 | 449 | 5.46 | % | ||||||||
|
Other
construction
|
21,347 | 3,622 | 16.97 | % | ||||||||
|
Construction,
land development and other land loans
|
162,979 | 23,944 | 14.69 | % | ||||||||
|
Commercial,
commercial real estate and consumer
|
315,354 | 8,439 | 2.68 | % | ||||||||
|
Total
Florida loans
|
$ | 478,333 | $ | 32,383 | 6.77 | % | ||||||
|
|
(1)
|
Criticized
loans equal all special mention and classified
loans.
|
|
|
(2)
|
Special
mention loans exhibit potential credit weaknesses that, if not resolved,
may ultimately result in a more severe
classification.
|
|
|
(3)
|
Classified
loans include those loans identified by management as exhibiting
well-defined credit weaknesses that may jeopardize repayment in full of
the debt.
|
|
|
(4)
|
All
nonaccrual loans over $1 million are individually assessed for
impairment. 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.
|
Net
charge-offs for 2009 totaled $68.4 million, or 1.01% of average loans, compared
to $61.3 million, or 0.87% in 2008, and $16.0 million, or 0.23% in
2007. The increase for 2009 and 2008 can be primarily attributed to a
continued decline in commercial developments of residential real estate property
values and sales activity. Management continues to monitor the impact
of declining real estate values on borrowers and is proactively managing these
situations.
|
Net
Charge-Offs
|
||||||||||||
|
($
in thousands)
|
Years Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Florida
|
$ | 36,405 | $ | 42,691 | $ | 4,545 | ||||||
|
Mississippi
(1)
|
21,799 | 14,690 | 8,737 | |||||||||
|
Tennessee
(2)
|
3,723 | 2,341 | 1,500 | |||||||||
|
Texas
|
6,445 | 1,619 | 1,249 | |||||||||
|
Total
net charge-offs
|
$ | 68,372 | $ | 61,341 | $ | 16,031 | ||||||
(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 commercial
developments of 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
during the month in which 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
$6.4 million at December 31, 2009, a decrease of $17.0 million when compared
with December 31, 2008. Trustmark utilizes these products as
offerings for its correspondent banking customers as well 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. Deposits include
interest-bearing and noninterest-bearing demand accounts, savings, money market,
certificates of deposit and individual retirement accounts. Total deposits were
$7.188 billion at December 31, 2009, compared with $6.824 billion at December
31, 2008, an increase of $364.6 million, or 5.3%. This growth in
deposits is comprised of an increase in both noninterest-bearing and
interest-bearing deposits of $189.0 million and $175.6 million,
respectively. The increase in noninterest-bearing deposits can be
primarily attributed to normal fluctuations in business Demand Deposit Accounts
(DDA) balances as well as a “flight to quality” from depositors, especially
large corporate depositors, to the unlimited deposit insurance of FDIC
Transaction Account Guaranteed qualified accounts. Increases in
interest-bearing deposits resulted primarily from growth in balances held by
public entities and individuals due to seasonal fluctuations.
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, the
treasury tax and loan note option account and TAF
borrowings. Short-term borrowings totaled $907.0 million at December
31, 2009, a decrease of $635.1 million, when compared with $1.542 billion at
December 31, 2008. This decrease results primarily from declines of
$158.1 million in federal funds purchased and securities sold under repurchase
agreements, $200.0 million in TAF borrowings and $325.0 million in short-term
FHLB advances as Trustmark focused on utilizing retail deposits as its primary
source of funding as well as lower funding pressures due to declining earning
asset balances.
The table
below presents information concerning qualifying components of Trustmark’s
short-term borrowings for each of the last three years ($ in
thousands):
|
Federal
funds purchased and securities sold under repurchase
agreements:
|
2009
|
2008
|
2007
|
|||||||||
|
Amount
outstanding at end of period
|
$ | 653,032 | $ | 811,129 | $ | 460,763 | ||||||
|
Weighted
average interest rate at end of period
|
0.11 | % | 0.18 | % | 3.30 | % | ||||||
|
Maximum
amount outstanding at any month end during each period
|
$ | 738,201 | $ | 927,902 | $ | 525,142 | ||||||
|
Average
amount outstanding during each period
|
$ | 621,638 | $ | 626,767 | $ | 447,438 | ||||||
|
Weighted
average interest rate during each period
|
0.18 | % | 1.66 | % | 4.52 | % | ||||||
|
Short-term
borrowings:
|
||||||||||||
|
Amount
outstanding at end of period
|
$ | 253,957 | $ | 730,958 | $ | 474,354 | ||||||
|
Weighted
average interest rate at end of period
|
0.69 | % | 0.82 | % | 4.30 | % | ||||||
|
Maximum
amount outstanding at any month end during each period
|
$ | 766,715 | $ | 730,958 | $ | 526,879 | ||||||
|
Average
amount outstanding during each period
|
$ | 371,173 | $ | 276,974 | $ | 269,102 | ||||||
|
Weighted
average interest rate during each period
|
0.66 | % | 2.54 | % | 5.10 | % | ||||||
Benefit
Plans
Capital
Accumulation Plan
As
disclosed in Note 12 – Defined Benefit and Other Postretirement Benefits
included in Item 8 - Financial Statements and Supplementary Data, Trustmark
maintains a noncontributory defined benefit pension plan, which covers
substantially all associates employed prior to January 1, 2007. The plan
provides benefits that are based on the length of credited service and final
average compensation. In an effort to control expenses, the Board
voted to freeze plan benefits effective May 15, 2009. Individuals
will not earn additional benefits, except for interest as required by the IRS
regulations, after the effective date. Associates will retain their
previously earned pension benefits. During 2009, Trustmark recorded a
curtailment gain of $1.9 million as a result of the freeze in plan benefits due
to the recognition of the prior service credits previously included in
accumulated other comprehensive loss.
At
December 31, 2009, the fair value of plan assets totaled $72.2 million and was
exceeded by the plan projected benefit obligation of $91.7 million by $19.5
million. Net periodic benefit cost equaled $51 thousand in 2009
compared to $2.3 million in 2008 and $2.5 million in 2007.
The fair
value of plan assets is determined utilizing current market quotes, while the
benefit obligation and periodic benefit costs are determined utilizing actuarial
methodology with certain weighted-average assumptions. For both 2009
and 2008, the process used to select the discount rate assumption under FASB ASC
Topic 715, “Employers’ Accounting for Pensions,” takes into account the benefit
cash flow and the segmented yields on high-quality corporate bonds that would be
available to provide for the payment of the benefit cash flow. For
2007, the discount rate was selected based on Moody’s Aa corporate bond rate
plus 0.25%. These assumptions, which have been individually chosen to
represent the estimate of a particular event as required by GAAP, have been
reviewed and approved by Management based on recommendations from its
actuaries.
For 2009,
the minimum required contribution was zero. In 2010, Trustmark’s
minimum required contribution is expected to be zero; however, Management and
the Board of Directors will monitor the plan throughout 2010 to determine any
funding requirements by the plan’s measurement date of December 31.
Supplemental
Retirement Plan
Trustmark
also maintains a nonqualified supplemental retirement plan covering directors
who 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 are anticipated to fund future
payments under the plan.
At
December 31, 2009, the accrued benefit obligation equaled $41.6 million, while
the net periodic benefit cost equaled $3.5 million in 2009, $3.7 million in 2008
and $3.3 million in 2007. The net periodic benefit cost and projected
benefit obligation are determined using actuarial assumptions as of the plan’s
measurement date on December 31. The process used to select the discount rate
assumption under FASB ASC Topic 715 takes into account the benefit cash flow and
the segmented yields on high-quality corporate bonds that would be available to
provide for the payment of the benefit cash flow. At December 31,
2009, these unrecognized actuarial losses and unrecognized prior service costs
continue to be amortized over future service periods.
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 both December 31, 2009
and 2008, Trustmark had commitments to extend credit of $1.7
billion.
Standby
and commercial letters of credit are conditional commitments issued by Trustmark
to ensure the performance of a customer to a first party. When
issuing letters of credit, Trustmark uses essentially the same policies
regarding credit risk and collateral that are followed in the lending
process. At December 31, 2009 and 2008, Trustmark’s maximum exposure
to credit loss in the event of nonperformance by the other party for letters of
credit was $187.5 million and $170.4 million, respectively. These
amounts consist primarily of commitments with maturities of less than three
years. Trustmark holds collateral to support certain letters of credit when
deemed necessary.
Contractual
Obligations
Trustmark
is obligated under certain contractual arrangements. The amount of
the payments due under those obligations as of December 31, 2009 is shown in the
table below.
Contractual
Obligations
($
in thousands)
|
Less than
One Year
|
One to Three Years
|
Three to Five Years
|
After
Five Years
|
Total
|
||||||||||||||||
|
Subordinated
notes
|
$ | - | $ | - | $ | - | $ | 49,774 | $ | 49,774 | ||||||||||
|
Junior
subordinated debt securities
|
- | - | - | 70,104 | 70,104 | |||||||||||||||
|
Operating
lease obligations
|
4,192 | 5,298 | 2,465 | 6,319 | 18,274 | |||||||||||||||
|
Time
deposits
|
2,079,683 | 314,713 | 26,206 | 129 | 2,420,731 | |||||||||||||||
|
FHLB
advances
|
125,000 | 75,000 | - | - | 200,000 | |||||||||||||||
|
Securities
sold under repurchase agreements
|
139,143 | - | - | - | 139,143 | |||||||||||||||
|
Total
|
$ | 2,348,018 | $ | 395,011 | $ | 28,671 | $ | 126,326 | $ | 2,898,026 | ||||||||||
Capital
Resources
At
December 31, 2009, Trustmark’s total shareholders’ equity was $1.110 billion, a
decrease of $68.4 million from its level at December 31, 2008. During
2009, shareholders’ equity decreased primarily as a result of the repurchases of
both the Senior Preferred Stock and the Warrant for $215.0 million and $10.0
million, respectively, and preferred and common dividends of $11.3 million and
$53.3 million, respectively. These decreases were partially offset by
net income of $93.0 million, a decrease in accumulated other comprehensive loss
of $13.1 million and an increase in common stock and surplus of $109.3 million
which resulted from the issuance of common stock in the fourth quarter of
2009. Trustmark utilizes a 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.
Common
Stock Offering
On
December 7, 2009, Trustmark completed a public offering of 6,216,216 shares of
its common stock, including 810,810 shares issued pursuant to the exercise of
the underwriters’ over-allotment option, at a price of $18.50 per share.
Trustmark received net proceeds of approximately $109.3 million after deducting
underwriting discounts, commissions and estimated offering
expenses. Proceeds from this offering were used in the redemption of
Senior Preferred Stock discussed below.
Repurchase
of Preferred Stock
On
November 21, 2008, Trustmark issued 215,000 shares of Senior Preferred Stock to
the Treasury in a private placement transaction as part of the
Troubled Assets Relief Program Capital Purchase Program (TARP CPP), a voluntary
initiative for healthy U.S. financial institutions. As part of its participation
in the TARP CPP, Trustmark also issued to the Treasury a Warrant to purchase up
to 1,647,931 shares of Trustmark’s common stock, at an initial exercise price of
$19.57 per share, subject to customary anti-dilution adjustments.
On
December 9, 2009, Trustmark completed the repurchase of its 215,000 shares of
Senior Preferred Stock from the Treasury at a purchase price of $215.0 million
plus a final accrued dividend of $716.7 thousand. The repurchase of
the Senior Preferred Stock resulted in a one-time, non-cash charge of $8.2
million to net income available to common shareholders in Trustmark’s fourth
quarter financial statements for the unaccreted discount recorded at the date of
issuance of the Senior Preferred Stock. In addition, on December 30,
2009, Trustmark repurchased in full from the Treasury, the Warrant to purchase
1,647,931 shares of Trustmark’s common stock, which was issued to the Treasury
pursuant to the TARP CPP. The purchase price paid by Trustmark to the
Treasury for the Warrant was its fair value of $10.0 million.
Regulatory
Capital
Trustmark
and TNB are subject to minimum capital requirements, which are administered by
various federal regulatory agencies. These capital requirements, as
defined by federal guidelines, involve quantitative and qualitative measures of
assets, liabilities and certain off-balance sheet
instruments. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional, discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements of both Trustmark and TNB. Trustmark aims to
exceed the well-capitalized guidelines for regulatory capital. As of
December 31, 2009, Trustmark and TNB have exceeded all of the minimum capital
standards for the parent company and its primary banking subsidiary as
established by regulatory requirements. In addition, TNB has met
applicable regulatory guidelines to be considered well-capitalized at December
31, 2009. To be categorized in this manner, TNB must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the accompanying table. There are no significant conditions or events
that have occurred since December 31, 2009, which Management believes have
affected TNB’s present classification.
In
addition, during 2006, Trustmark enhanced its capital structure with the
issuance of trust preferred securities and Subordinated Notes. For
regulatory capital purposes, the trust preferred securities qualify as Tier 1
capital while the Subordinated Notes qualify as Tier 2 capital. The
addition of these capital instruments provided Trustmark a cost effective manner
in which to manage shareholders’ equity and enhance financial
flexibility. The decrease in Tier 1 capital experienced during 2009
resulted from the repurchase of the Senior Preferred Stock, which was partially
offset somewhat by the common stock offering, all of which is considered Tier 1
capital.
Regulatory
Capital Table
($
in thousands)
|
Actual Regulatory Capital
|
Minimum Regulatory Capital
Required
|
Minimum Regulatory Provision to be
Well-Capitalized
|
||||||||||||||||||||||
|
At
December 31, 2009:
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 1,008,980 | 14.58 | % | $ | 553,504 | 8.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
967,224 | 14.16 | % | 546,344 | 8.00 | % | $ | 682,930 | 10.00 | % | ||||||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 872,509 | 12.61 | % | $ | 276,752 | 4.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
834,056 | 12.21 | % | 273,172 | 4.00 | % | $ | 409,758 | 6.00 | % | ||||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 872,509 | 9.74 | % | $ | 268,868 | 3.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
834,056 | 9.45 | % | 264,817 | 3.00 | % | $ | 441,361 | 5.00 | % | ||||||||||||||
|
At
December 31, 2008:
|
||||||||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 1,090,335 | 14.95 | % | $ | 583,571 | 8.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
1,045,769 | 14.52 | % | 576,082 | 8.00 | % | $ | 720,102 | 10.00 | % | ||||||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 949,365 | 13.01 | % | $ | 291,785 | 4.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
909,370 | 12.63 | % | 288,041 | 4.00 | % | $ | 432,061 | 6.00 | % | ||||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 949,365 | 10.42 | % | $ | 273,353 | 3.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
909,370 | 10.13 | % | 269,197 | 3.00 | % | $ | 448,662 | 5.00 | % | ||||||||||||||
Dividends
on Common Stock
Dividends
per common share for the year ended December 31, 2009 and 2008 were
$0.92. Trustmark’s dividend payout ratio for 2009, 2008 and 2007 was
73.0%, 57.9%, and 47.3%, respectively. Approval by TNB’s regulators
is required if the total of all dividends declared in any calendar year exceeds
the total of its net income for that year combined with its retained net income
of the preceding two years. TNB will have available in 2010
approximately $57.2 million plus its net income for that year to pay as
dividends.
Common
Stock Repurchase Program
Trustmark
did not repurchase any common shares during 2009 or 2008 and currently has no
authorization from the Board of Directors to repurchase its common
stock. During 2007, Trustmark repurchased approximately 1.4 million
shares of its common stock. Since 1998, capital management plans
adopted by Trustmark repurchased approximately 22.7 million shares for $518.1
million.
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.
Deposit
accounts represent Trustmark’s largest funding source. Average
deposits totaled to $7.012 billion for 2009 and represented approximately 73.7%
of average liabilities and shareholders’ equity when compared to average
deposits of $7.003 billion, which represented 76.7% of average liabilities and
shareholders’ equity for 2008. During the year ended December 31,
2009, total deposits increased approximately $364.6 million and the loan
portfolio decreased approximately $411.3 million. This increase in
deposits, offset by the payoff of TARP net of the new stock issuance as well as
net loan run-off, contributed to the reduction in the use of wholesale funding
by approximately $605 million.
Trustmark
utilizes a limited amount of brokered deposits to supplement other wholesale
funding sources. At December 31, 2009, brokered sweep Money Market
Deposit Account (MMDA) deposits totaled $107.7 million compared to $105.7
million at December 31, 2008. At December 31, 2009 and 2008,
Trustmark had no outstanding brokered certificates of deposit.
At
December 31, 2009, Trustmark had $454.0 million of upstream Federal funds
purchased, compared to $616.0 million at December 31, 2008. Trustmark
maintains adequate Federal funds lines in excess of the amount utilized to
provide sufficient short-term liquidity. Trustmark also maintains a
relationship with the FHLB, which provided $200.0 million in advances at
December 31, 2009, compared with $450.0 million in advances at December 31,
2008. Under the existing borrowing agreement, Trustmark had
sufficient qualifying collateral to increase FHLB advances by $1.726 billion at
December 31, 2009.
Additionally,
during 2009, Trustmark could utilize wholesale funding repurchase agreements as
a source of borrowing due to increased levels of unencumbered investment
securities. At December 31, 2009, Trustmark had approximately $245.5
million available in repurchase capacity compared to no repurchase capacity at
December 31, 2008.
Another
borrowing source is the Federal Reserve Discount Window (Discount
Window). At December 31, 2009, Trustmark had approximately $821.6
million available in collateral capacity at the Discount Window from pledges of
loans and securities, compared with $724.3 million at December 31,
2008.
During
the fourth quarter of 2008, Trustmark borrowed $200.0 million under the Federal
Reserve Bank’s new TAF program. At December 31, 2009, Trustmark had
no outstanding TAF borrowings. This temporary program was implemented to help
relieve the stress in the short-term financial markets. Under the
program, banks are allowed to bid at auction on term fed funds offered by the
Federal Reserve Bank. All TAF borrowings are required to be
collateralized by assets pledged to the Discount Window. Borrowings
under this program reduce Trustmark’s overnight borrowing capacity through the
Discount Window. At December 31, 2009, Trustmark had TAF capacity of
$821.6 million.
During
2006, TNB issued $50.0 million aggregate principal amount of Subordinated Notes
(the Notes) due December 15, 2016. At December 31, 2009, the carrying amount of
the Notes was $49.8 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 December 31, 2009, Trustmark had
$55.3 million in Eurodollar deposits outstanding.
The Board
of Directors currently has the authority to issue up to 20.0 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. Trustmark
repurchased the 215,000 shares of Senior Preferred Stock from the Treasury in
December 2009. Also, in December 2009, Trustmark issued common stock
and received net proceeds of $109.3 million to use in the repurchase of the
Senior Preferred Stock. At December 31, 2009, Trustmark has no shares
of preferred stock issued. For further information regarding
Trustmark’s repurchase of Senior Preferred Stock and the issuance of common
stock, please refer to the section Capital Resources found elsewhere in this
report.
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.
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, 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.
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, both futures contracts and
options on futures contracts, interest rate swaps, interest rate caps and
interest rate floors.
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 FASB ASC Topic 815,
“Derivatives and Hedging.” The gross, notional amount of Trustmark’s
off-balance sheet obligations under these derivative instruments totaled $267.0
million at December 31, 2009, with a valuation adjustment of positive $2.1
million, compared to $594.3 million, with a valuation adjustment of negative
$1.3 million as of December 31, 2008.
Trustmark
utilizes a portfolio of derivative instruments, such as Treasury note futures
contracts and exchange-traded option contracts, to achieve a fair value return
that offsets the changes in fair value of MSR attributable to 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
interest rates. Ineffectiveness of hedging MSR fair value is measured
by comparing total hedge cost to the change in fair value of the MSR
attributable to interest rate changes. During 2009, the impact of
implementing this strategy resulted in a net negative ineffectiveness of $22
thousand compared with a net positive ineffectiveness from hedging of $11.1
million during 2008.
Recent
Accounting Pronouncements
On July
1, 2009, the Accounting Standards Codification became FASB’s officially
recognized source of authoritative U.S. generally accepted accounting principles
(GAAP) applicable to all public and nonpublic nongovernmental entities,
superseding existing FASB, AICPA, EITF and related literature. Rules and
interpretive releases of the SEC under the authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. All other accounting
literature is considered nonauthoritative. The switch to the ASC affects the way
companies refer to U.S. GAAP in financial
statements and accounting
policies. Citing particular content in the ASC involves specifying the unique
numeric path to the content through the Topic, Subtopic, Section and Paragraph
structure.
Accounting
Standards Adopted in 2009
FASB ASC Topic 855, “Subsequent
Events.”
Accounting guidance under FASB ASC Topic 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued. FASB ASC Topic 855 defines (i) the period after the
balance sheet date during which a reporting entity’s management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (iii) the disclosures an entity should make about
events or transactions that occurred after the balance sheet date. FASB ASC
Topic 855 became effective for Trustmark’s financial statements for periods
ending after June 15, 2009 and the adoption did not have a significant impact on
Trustmark’s financial statements.
FASB ASC Topic 820, “Fair Value
Measurements and Disclosures.”
Accounting guidance under FASB ASC Topic
820 affirms that the objective of fair value when the market for an asset is not
active is the price that would be received to sell the asset in an orderly
transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset
when the market for that asset is not active. This accounting guidance requires
an entity to base its conclusion about whether a transaction was not orderly on
the weight of the evidence. This accounting guidance also amended prior guidance
to expand certain disclosure requirements. Trustmark’s adoption of the
accounting guidance under FASB ASC Topic 820 during the second quarter of 2009
did not have a significant impact on Trustmark’s financial
statements.
Further
new authoritative accounting guidance (Accounting Standards Update No. 2009-5)
under FASB ASC Topic 820 provides guidance for measuring the fair value of a
liability in circumstances in which a quoted price in an active market for the
identical liability is not available. In such instances, a reporting entity is
required to measure fair value utilizing a valuation technique that uses (i) the
quoted price of the identical liability when traded as an asset, (ii) quoted
prices for similar liabilities or similar liabilities when traded as assets, or
(iii) another valuation technique that is consistent with the existing
principles of ASC Topic 820, such as an income approach or market approach. The
new authoritative accounting guidance also clarifies that when estimating the
fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. The foregoing new
authoritative accounting guidance under FASB ASC Topic 820 was effective for
Trustmark’s financial statements beginning October 1, 2009 and did not have a
significant impact on Trustmark’s financial statements.
FASB ASC Topic 320, “Investments –
Debt and Equity Securities.”
Accounting guidance under FASB
ASC Topic 320 (i) changes existing guidance for determining whether an
impairment is other than temporary to debt securities and (ii) replaces the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b)
it is more likely than not it will not have to sell the security before recovery
of its cost basis. Under the accounting guidance of FASB ASC Topic
320, declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses to the extent the impairment is related
to credit losses. The amount of the impairment related to other factors is
recognized in other comprehensive income. Trustmark’s adoption of the
accounting guidance of FASB ASC Topic 320 during the second quarter of 2009 did
not have a significant impact on Trustmark’s financial statements.
FASB ASC Topic 825,
“Financial Instruments.”
Accounting guidance under FASB ASC
Topic 825 requires an entity to provide disclosures about the fair
value of financial instruments in interim financial statements and amends prior
guidance to require those disclosures in summarized financial statements at
interim reporting periods. Trustmark adopted the accounting guidance
of FASB ASC Topic 825 during the second quarter of 2009.
FASB ASC Topic 260, “Earnings Per
Share.”
Accounting guidance under FASB ASC Topic 260 provides 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. FASB ASC Topic 260 became effective for Trustmark
on January 1, 2009. Trustmark has determined that its outstanding
nonvested stock awards and deferred stock units are not participating
securities. Based on this determination, no change has been made to
Trustmark’s current computation for basic and diluted earnings per
share.
FASB ASC Topic 815, “Derivatives and
Hedging.”
Accounting guidance under FASB ASC Topic 815 amends
prior guidance and expands quarterly disclosure requirements about an entity’s
derivative instruments and hedging activities. FASB ASC Topic 815 became
effective for Trustmark on January 1, 2009. The required disclosures
are reported in Note 18 - Derivative Financial Instruments.
FASB ASC Topic 810,
“Consolidation.”
Accounting guidance under FASB ASC Topic 810
amended prior guidance to establish accounting and reporting
standards for noncontrolling interests in a subsidiary and for the
deconsolidation of that subsidiary. Under FASB ASC Topic 810, a
noncontrolling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as a component of equity in the consolidated financial
statements. Among other requirements, FASB ASC Topic 810 requires consolidated
net income to be reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest. It also requires disclosure, on
the face of the consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the noncontrolling interest. The
new authoritative accounting guidance under FASB ASC Topic 810 became effective
on January 1, 2009 and did not impact Trustmark’s financial
statements.
FASB ASC Topic 805, “Business
Combinations.”
On January 1, 2009, new authoritative accounting guidance
under FASB ASC Topic 805, “Business Combinations,” became applicable to
Trustmark’s accounting for business combinations closing on or after January 1,
2009. FASB ASC Topic 805 applies to all transactions and other events in which
one entity obtains control over one or more other businesses. FASB ASC Topic 805
requires an acquirer, upon initially obtaining control of another entity, to
recognize the assets, liabilities and any noncontrolling interest in the
acquiree at fair value as of the acquisition date. Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under previous accounting guidance whereby the
cost of an acquisition was allocated to the individual assets acquired and
liabilities assumed based on their estimated fair value. FASB ASC Topic 805
requires acquirers to expense acquisition related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under prior accounting guidance. Assets acquired and
liabilities assumed in a business combination that arise from contingencies are
to be recognized at fair value if fair value can be reasonably estimated. If
fair value of such an asset or liability cannot be reasonably estimated, the
asset or liability would generally be recognized in accordance with FASB ASC
Topic 450, “Contingencies.” Under FASB ASC Topic 805, the requirements of FASB
ASC Topic 420, “Exit or Disposal Cost Obligations,” would have to be met in
order to accrue for a restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a noncontractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of FASB ASC Topic
450, “Contingencies.”
FASB ASC Topic 715, “Compensation –
Retirement Benefits.”
Accounting guidance under FASB ASC
Topic 715 provides guidance related to an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. The
disclosures about plan assets required by this accounting guidance shall be
provided for fiscal years ending after December 15, 2009. The
required disclosures are reported in Note 12 - Defined Benefit and Other
Postretirement Benefits.
Accounting Standards Update No.
2009-12, “Investments in Certain Entities that Calculate Net Asset Value per
Share (or Its Equivalent).”
Effective December 31, 2009,
Trustmark adopted ASU 2009-12, relative to its mutual fund investments in its
defined benefit plan. ASU 2009-12 amends SFAS No. 157 and permits, as a
practical expedient, for the estimation of the fair value of investments in
investment companies for which the investment does not have a readily
determinable fair value using net asset value per share or its
equivalent. The adoption of ASU 2009-12 did not have a significant
impact on Trustmark’s financial statements.
Accounting
Guidance Effective After December 31, 2009
Other new
accounting guidance issued but not effective until after December 31, 2009
include the following:
SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R).”
SFAS No. 167 amends FIN 46 (Revised December
2003),
“Consolidation of
Variable Interest Entities,”
to change how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance.
SFAS No. 167 requires additional disclosures about the reporting entity’s
involvement with variable-interest entities and any significant changes in risk
exposure due to that involvement as well as its effect on the entity’s financial
statements. SFAS No. 167 will be effective January 1, 2010 and is not expected
to have a significant impact on Trustmark’s financial statements.
SFAS No. 166, “Accounting for
Transfers of Financial Assets.”
SFAS No. 166 amends ASC Topic
860, “Transfers and Servicing,” to enhance reporting about transfers of
financial assets, including securitizations, and where companies have continuing
exposure to the risks related to transferred financial assets. SFAS No. 166
eliminates the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. SFAS No. 166 also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period. SFAS No. 166 has also modified the criteria that
must be met in order for a transfer of a portion of a financial asset, such as a
loan participation, to qualify for sale accounting. SFAS No. 166 will
be effective January 1, 2010 and is not expected to have a significant impact on
Trustmark’s financial statements.
|
ITEM
7A.
|
QUANTITATIVE
AND
QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK
|
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 December 31,
2009,
it is
estimated that net interest income may decrease 3.2% 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 December 31, 2008, the results of the simulation
models using static balances indicated that net interest income would decrease
1.2% 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 December 31, 2009, it is estimated net interest
income may decrease by 0.8% compared to a 3.1% decrease at December 31,
2008. At December 31, 2009 and 2008, the impact of a 200 basis point
drop scenario was not calculated due to the historically low interest rate
environment.
The table
below summarizes the effect various rate shift scenarios would have on net
interest income at December 31, 2009 and 2008:
|
Interest
Rate Exposure Analysis
|
Estimated Annual % Change
in Net Interest Income
|
|||||||
|
2009
|
2008
|
|||||||
|
Change
in Interest Rates
|
||||||||
|
+200
basis points
|
-3.2 | % | -1.2 | % | ||||
|
+100
basis points
|
-2.2 | % | 0.0 | % | ||||
|
-100
basis points
|
-0.8 | % | -3.1 | % | ||||
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 2010 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 may not affect net interest income at risk over shorter time periods.
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 December 31, 2009, the
economic value of equity at risk for an instantaneous up 200 basis point shift
in rates produced an increase in net portfolio value of 1.1%, while an
instantaneous 100 basis point decrease in interest rates produced a decline in
net portfolio value of 4.0%. In comparison, the models indicated a
net portfolio value decrease of 4.1% as of December 31, 2008, had interest rates
moved up instantaneously 200 basis points, and a decrease of 1.5%, had an
instantaneous 100 basis points decrease in interest rates
occurred. The following table summarizes the effect that various rate
shifts would have on net portfolio value at December 31, 2009 and
2008:
|
Economic
Value - at - Risk
|
Estimated % Change
in Net Portfolio Value
|
|||||||
|
2009
|
2008
|
|||||||
|
Change
in Interest Rates
|
||||||||
|
+200
basis points
|
1.1 | % | -4.1 | % | ||||
|
+100
basis points
|
1.5 | % | -0.6 | % | ||||
|
-100
basis points
|
-4.0 | % | -1.5 | % | ||||
|
ITEM
8.
|
FINANCIAL
STATEME
NTS
AND SUPPLEMENTARY
DATA
|
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
Trustmark
Corporation:
We have
audited the accompanying consolidated balance sheets of Trustmark Corporation
and subsidiaries (the Corporation) as of December 31, 2009 and 2008, and the
related consolidated statements of income, changes in shareholders’ equity and
cash flows for each of the years in the three-year period ended December 31,
2009. These consolidated financial statements are the responsibility of the
Corporation’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Trustmark Corporation and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 1 to the consolidated financial statements, in 2008, the
Corporation changed its method of accounting for fair value measurements
effective January 1, 2008.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Corporation’s internal control over
financial reporting as of December 31, 2009, based on the criteria established
in
Internal
Control
–Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated February 25, 2010, expressed an unqualified opinion on the
effectiveness of the Corporation’s internal control over financial
reporting.
Jackson,
Mississippi
February
25, 2010
Trustmark
Corporation and Subsidiaries
Consolidated
Balance Sheets
($
in thousands except share data)
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Cash
and due from banks (noninterest-bearing)
|
$ | 213,519 | $ | 257,930 | ||||
|
Federal
funds sold and securities purchased under reverse repurchase
agreements
|
6,374 | 23,401 | ||||||
|
Securities
available for sale (at fair value)
|
1,684,396 | 1,542,841 | ||||||
|
Securities
held to maturity (fair value: $240,674-2009;
$264,039-2008)
|
232,984 | 259,629 | ||||||
|
Loans
held for sale
|
226,225 | 238,265 | ||||||
|
Loans
|
6,319,797 | 6,722,403 | ||||||
|
Less
allowance for loan losses
|
103,662 | 94,922 | ||||||
|
Net
loans
|
6,216,135 | 6,627,481 | ||||||
|
Premises
and equipment, net
|
151,161 | 156,811 | ||||||
|
Mortgage
servicing rights
|
50,513 | 42,882 | ||||||
|
Goodwill
|
291,104 | 291,104 | ||||||
|
Identifiable
intangible assets
|
19,825 | 23,821 | ||||||
|
Other
assets
|
433,782 | 326,744 | ||||||
|
Total
Assets
|
$ | 9,526,018 | $ | 9,790,909 | ||||
|
Liabilities
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest-bearing
|
$ | 1,685,187 | $ | 1,496,166 | ||||
|
Interest-bearing
|
5,503,278 | 5,327,704 | ||||||
|
Total
deposits
|
7,188,465 | 6,823,870 | ||||||
|
Federal
funds purchased and securities sold under repurchase
agreements
|
653,032 | 811,129 | ||||||
|
Short-term
borrowings
|
253,957 | 730,958 | ||||||
|
Long-term
FHLB advance
|
75,000 | - | ||||||
|
Subordinated
notes
|
49,774 | 49,741 | ||||||
|
Junior
subordinated debt securities
|
70,104 | 70,104 | ||||||
|
Other
liabilities
|
125,626 | 126,641 | ||||||
|
Total
Liabilities
|
8,415,958 | 8,612,443 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Shareholders'
Equity
|
||||||||
|
Preferred
stock - authorized 20,000,000 shares
|
||||||||
|
Series
A, no par value, (liquidation preference $1,000 per share)
|
||||||||
|
Issued
and outstanding: Zero (0) shares - 2009, 215,000 shares -
2008
|
- | 205,126 | ||||||
|
Common
stock, no par value:
|
||||||||
|
Authorized: 250,000,000
shares
|
||||||||
|
Issued
and outstanding: 63,673,839 shares - 2009; 57,324,737 shares -
2008
|
13,267 | 11,944 | ||||||
|
Capital
surplus
|
244,864 | 139,471 | ||||||
|
Retained
earnings
|
853,553 | 836,642 | ||||||
|
Accumulated
other comprehensive loss, net of tax
|
(1,624 | ) | (14,717 | ) | ||||
|
Total
Shareholders' Equity
|
1,110,060 | 1,178,466 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 9,526,018 | $ | 9,790,909 | ||||
See
notes to consolidated financial statements.
Trustmark
Corporation and Subsidiaries
Consolidated
Statements of Income
($
in thousands except per share data)
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Interest
Income
|
||||||||||||
|
Interest
and fees on loans
|
$ | 354,518 | $ | 429,681 | $ | 500,633 | ||||||
|
Interest
on securities:
|
||||||||||||
|
Taxable
|
80,715 | 46,161 | 31,784 | |||||||||
|
Tax
exempt
|
5,349 | 5,113 | 6,463 | |||||||||
|
Interest
on federal funds sold and securities purchased under reverse repurchase
agreements
|
66 | 502 | 2,147 | |||||||||
|
Other
interest income
|
1,414 | 1,822 | 2,116 | |||||||||
|
Total
Interest Income
|
442,062 | 483,279 | 543,143 | |||||||||
|
Interest
Expense
|
||||||||||||
|
Interest
on deposits
|
78,886 | 139,922 | 200,375 | |||||||||
|
Interest
on federal funds purchased and securities sold under repurchase
agreements
|
1,133 | 10,393 | 20,224 | |||||||||
|
Other
interest expense
|
7,834 | 13,804 | 21,761 | |||||||||
|
Total
Interest Expense
|
87,853 | 164,119 | 242,360 | |||||||||
|
Net
Interest Income
|
354,209 | 319,160 | 300,783 | |||||||||
|
Provision
for loan losses
|
77,112 | 76,412 | 23,784 | |||||||||
|
Net
Interest Income After Provision for Loan Losses
|
277,097 | 242,748 | 276,999 | |||||||||
|
Noninterest
Income
|
||||||||||||
|
Service
charges on deposit accounts
|
54,087 | 53,717 | 54,179 | |||||||||
|
Insurance
commissions
|
29,079 | 32,440 | 35,286 | |||||||||
|
Wealth
management
|
22,079 | 27,600 | 25,755 | |||||||||
|
General
banking - other
|
23,041 | 23,230 | 24,876 | |||||||||
|
Mortgage
banking, net
|
28,873 | 26,480 | 12,024 | |||||||||
|
Other,
net
|
5,616 | 13,286 | 10,215 | |||||||||
|
Securities
gains, net
|
5,467 | 505 | 112 | |||||||||
|
Total
Noninterest Income
|
168,242 | 177,258 | 162,447 | |||||||||
|
Noninterest
Expense
|
||||||||||||
|
Salaries
and employee benefits
|
169,252 | 171,137 | 170,722 | |||||||||
|
Services
and fees
|
40,292 | 38,379 | 37,259 | |||||||||
|
Net
occupancy - premises
|
20,051 | 19,508 | 18,517 | |||||||||
|
Equipment
expense
|
16,462 | 16,632 | 16,039 | |||||||||
|
Other
expense
|
62,202 | 38,063 | 33,912 | |||||||||
|
Total
Noninterest Expense
|
308,259 | 283,719 | 276,449 | |||||||||
|
Income
Before Income Taxes
|
137,080 | 136,287 | 162,997 | |||||||||
|
Income
taxes
|
44,033 | 43,870 | 54,402 | |||||||||
|
Net
Income
|
93,047 | 92,417 | 108,595 | |||||||||
|
Preferred
stock dividends
|
10,124 | 1,165 | - | |||||||||
|
Accretion
of discount on preferred stock
|
9,874 | 188 | - | |||||||||
|
Net
Income Available to Common Shareholders
|
$ | 73,049 | $ | 91,064 | $ | 108,595 | ||||||
|
Earnings
Per Common Share
|
||||||||||||
|
Basic
|
$ | 1.26 | $ | 1.59 | $ | 1.88 | ||||||
|
Diluted
|
$ | 1.26 | $ | 1.59 | $ | 1.88 | ||||||
See
notes to consolidated financial statements.
Trustmark
Corporation and Subsidiaries
Consolidated
Statements of Changes in Shareholders' Equity
($
in thousands except per share data)
|
Preferred Stock
|
Common Stock
|
Capital Surplus
|
Retained Earnings
|
Accumulated Other Comprehensive
Loss
|
Total
|
|||||||||||||||||||||||
|
Shares Outstanding
|
Amount
|
|||||||||||||||||||||||||||
|
Balance,
January 1, 2007
|
$ | - | 58,676,586 | $ | 12,226 | $ | 158,856 | $ | 740,870 | $ | (20,617 | ) | $ | 891,335 | ||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income per consolidated statements of income
|
- | - | - | - | 108,595 | - | 108,595 | |||||||||||||||||||||
|
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
|
Net
change in fair value of securities available for sale
|
- | - | - | - | - | 6,327 | 6,327 | |||||||||||||||||||||
|
Net
change in capital accumulation and other postretirement benefit
plans:
|
||||||||||||||||||||||||||||
|
Net
prior service credit
|
- | - | - | - | - | (234 | ) | (234 | ) | |||||||||||||||||||
|
Net
gain
|
- | - | - | - | - | 73 | 73 | |||||||||||||||||||||
|
Comprehensive
income
|
114,761 | |||||||||||||||||||||||||||
|
Cash
dividends paid ($0.89 per share)
|
- | - | - | - | (51,472 | ) | - | (51,472 | ) | |||||||||||||||||||
|
Common
stock issued, long-term incentive plan
|
- | 17,575 | 4 | 445 | - | - | 449 | |||||||||||||||||||||
|
Compensation
expense, long-term incentive plan
|
- | - | - | 3,422 | - | - | 3,422 | |||||||||||||||||||||
|
Repurchase
and retirement of common stock
|
- | (1,421,753 | ) | (297 | ) | (38,562 | ) | - | - | (38,859 | ) | |||||||||||||||||
|
Balance,
December 31, 2007
|
- | 57,272,408 | 11,933 | 124,161 | 797,993 | (14,451 | ) | 919,636 | ||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income per consolidated statements of income
|
- | - | - | - | 92,417 | - | 92,417 | |||||||||||||||||||||
|
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
|
Net
change in fair value of securities available for sale
|
- | - | - | - | - | 19,090 | 19,090 | |||||||||||||||||||||
|
Net
change in capital accumulation and other postretirement benefit
plans:
|
||||||||||||||||||||||||||||
|
Net
prior service credit
|
- | - | - | - | - | (451 | ) | (451 | ) | |||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (18,905 | ) | (18,905 | ) | |||||||||||||||||||
|
Comprehensive
income
|
92,151 | |||||||||||||||||||||||||||
|
Issuance
of preferred stock and warrant
|
205,126 | - | - | 10,062 | (188 | ) | - | 215,000 | ||||||||||||||||||||
|
Cash
dividends paid ($0.92 per share)
|
- | - | - | - | (53,022 | ) | - | (53,022 | ) | |||||||||||||||||||
|
Common
stock issued, long-term incentive plan
|
- | 52,329 | 11 | 1,312 | (558 | ) | - | 765 | ||||||||||||||||||||
|
Compensation
expense, long-term incentive plan
|
- | - | - | 3,936 | - | - | 3,936 | |||||||||||||||||||||
|
Balance,
December 31, 2008
|
205,126 | 57,324,737 | 11,944 | 139,471 | 836,642 | (14,717 | ) | 1,178,466 | ||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income per consolidated statements of income
|
- | - | - | - | 93,047 | - | 93,047 | |||||||||||||||||||||
|
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
|
Net
change in fair value of securities available for sale
|
- | - | - | - | - | 13,691 | 13,691 | |||||||||||||||||||||
|
Net
change in capital accumulation and other postretirement benefit
plans:
|
||||||||||||||||||||||||||||
|
Net
prior service credit
|
- | - | - | - | - | (1,164 | ) | (1,164 | ) | |||||||||||||||||||
|
Net
gain
|
- | - | - | - | - | 566 | 566 | |||||||||||||||||||||
|
Comprehensive
income
|
106,140 | |||||||||||||||||||||||||||
|
Common
stock offering
|
- | 6,216,216 | 1,295 | 108,001 | - | - | 109,296 | |||||||||||||||||||||
|
Repurchase
of preferred stock and warrant
|
(205,126 | ) | - | - | (10,000 | ) | (9,874 | ) | - | (225,000 | ) | |||||||||||||||||
|
Cash
dividends paid on common stock ($0.92 per share)
|
- | - | - | - | (53,295 | ) | - | (53,295 | ) | |||||||||||||||||||
|
Cash
dividends paid on preferred stock
|
- | - | - | - | (11,288 | ) | - | (11,288 | ) | |||||||||||||||||||
|
Common
stock issued, long-term incentive plan
|
- | 132,886 | 28 | 2,835 | (1,679 | ) | - | 1,184 | ||||||||||||||||||||
|
Compensation
expense, long-term incentive plan
|
- | - | - | 4,557 | - | - | 4,557 | |||||||||||||||||||||
|
Balance,
December 31, 2009
|
$ | - | 63,673,839 | $ | 13,267 | $ | 244,864 | $ | 853,553 | $ | (1,624 | ) | $ | 1,110,060 | ||||||||||||||
See
notes to consolidated financial statements.
Trustmark
Corporation and Subsidiaries
($
in thousands)
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
Activities
|
||||||||||||
|
Net
income
|
$ | 93,047 | $ | 92,417 | $ | 108,595 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Provision
for loan losses
|
77,112 | 76,412 | 23,784 | |||||||||
|
Depreciation
and amortization
|
26,489 | 26,914 | 27,763 | |||||||||
|
Net
(accretion) amortization of securities
|
(110 | ) | 1,109 | 1,552 | ||||||||
|
Securities
gains, net
|
(5,467 | ) | (505 | ) | (112 | ) | ||||||
|
Gains
on sales of loans, net
|
(21,705 | ) | (6,046 | ) | (6,797 | ) | ||||||
|
Deferred
income tax benefit
|
(4,477 | ) | (17,673 | ) | (5,826 | ) | ||||||
|
Proceeds
from sales of loans held for sale
|
1,627,971 | 1,350,017 | 1,221,409 | |||||||||
|
Purchases
and originations of loans held for sale
|
(1,553,674 | ) | (1,413,152 | ) | (1,263,460 | ) | ||||||
|
Originations
and sales of mortgage servicing rights
|
(9,590 | ) | (19,515 | ) | (16,723 | ) | ||||||
|
Net
(increase) decrease in other assets
|
(61,545 | ) | 11,039 | (28,431 | ) | |||||||
|
Net
(decrease) increase in other liabilities
|
(1,391 | ) | (27,471 | ) | 10,524 | |||||||
|
Other
operating activities, net
|
5,657 | 39,117 | 11,821 | |||||||||
|
Net
cash provided by operating activities
|
172,317 | 112,663 | 84,099 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Proceeds
from calls and maturities of securities held to maturity
|
37,217 | 30,207 | 17,212 | |||||||||
|
Proceeds
from calls and maturities of securities available for sale
|
388,781 | 230,021 | 373,532 | |||||||||
|
Proceeds
from sales of securities available for sale
|
188,460 | 157,949 | 62,170 | |||||||||
|
Purchases
of securities held to maturity
|
(10,428 | ) | (14,833 | ) | - | |||||||
|
Purchases
of securities available for sale
|
(691,195 | ) | (1,458,061 | ) | (111,069 | ) | ||||||
|
Net
decrease (increase) in federal funds sold and securities purchased under
reverse repurchase agreements
|
17,027 | (5,404 | ) | 9,262 | ||||||||
|
Net
decrease (increase) in loans
|
256,885 | 218,149 | (501,091 | ) | ||||||||
|
Purchases
of premises and equipment
|
(6,279 | ) | (16,861 | ) | (29,784 | ) | ||||||
|
Proceeds
from sales of premises and equipment
|
623 | 170 | 1,423 | |||||||||
|
Proceeds
from sales of other real estate
|
18,290 | 8,289 | 2,727 | |||||||||
|
Net
cash provided by (used in) investing activities
|
199,381 | (850,374 | ) | (175,618 | ) | |||||||
|
Financing
Activities
|
||||||||||||
|
Net
increase (decrease) in deposits
|
364,595 | (45,402 | ) | (106,892 | ) | |||||||
|
Net
(decrease) increase in federal funds purchased and securities sold under
repurchase agreements
|
(158,097 | ) | 350,366 | (9,671 | ) | |||||||
|
Net
(decrease) increase in short-term borrowings
|
(518,504 | ) | 234,951 | 198,864 | ||||||||
|
Proceeds
from long-term FHLB advances
|
75,000 | - | - | |||||||||
|
Proceeds
from issuance of preferred stock and warrant
|
- | 215,000 | - | |||||||||
|
Repurchase
of preferred stock
|
(215,000 | ) | - | - | ||||||||
|
Preferred
stock dividends
|
(11,288 | ) | - | - | ||||||||
|
Proceeds
from issuance of common stock, net
|
109,296 | - | - | |||||||||
|
Repurchase
of common stock warrant
|
(10,000 | ) | ||||||||||
|
Common
stock dividends
|
(53,295 | ) | (53,022 | ) | (51,472 | ) | ||||||
|
Common
stock issued-net, long-term incentive plan
|
593 | 567 | 439 | |||||||||
|
Excess
tax benefit from stock-based compensation arrangements
|
591 | 198 | 10 | |||||||||
|
Repurchase
and retirement of common stock
|
- | - | (38,859 | ) | ||||||||
|
Net
cash (used in) provided by financing activities
|
(416,109 | ) | 702,658 | (7,581 | ) | |||||||
|
Decrease
in cash and cash equivalents
|
(44,411 | ) | (35,053 | ) | (99,100 | ) | ||||||
|
Cash
and cash equivalents at beginning of year
|
257,930 | 292,983 | 392,083 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 213,519 | $ | 257,930 | $ | 292,983 | ||||||
See
notes to consolidated financial statements.
Business
Trustmark
Corporation (Trustmark) is a multi-bank holding company headquartered in
Jackson, Mississippi. Through its subsidiaries, Trustmark operates as
a financial services organization providing banking and financial solutions to
corporate institutions and individual customers through over 150 offices in
Florida, Mississippi, Tennessee and Texas.
Basis
of Financial Statement Presentation
The
consolidated financial statements include the accounts of 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
consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles (GAAP). The preparation of
financial statements in conformity with these accounting principles requires
Management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and income and
expense during the reporting period and the related
disclosures. Although Management’s estimates contemplate current
conditions and how they are expected to change in the future, it is reasonably
possible that in 2010 actual conditions could vary from those anticipated, which
could affect our results of operations and financial condition. The
allowance for loan losses, the valuation of other real estate, the fair value of
mortgage servicing rights, the valuation of goodwill and other identifiable
intangibles and the fair values of financial instruments are particularly
subject to change. Actual results could differ from those
estimates.
Management
has evaluated subsequent events through February 25, 2010, which is the date
that Trustmark’s financial statements were issued. No material
subsequent events have occurred since December 31, 2009, that required
recognition or disclosure in these financial statements.
Accounting
Standards Codification
The
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s
officially recognized source of authoritative U.S. GAAP applicable to all public
and nonpublic nongovernmental entities, superseding existing FASB, American
Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force
(EITF) and related literature. Rules and interpretive releases of the Securities
and Exchange Commission (SEC) under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All other accounting
literature is considered nonauthoritative. The switch to the ASC affects the way
companies refer to U.S. GAAP in financial statements and accounting policies.
Citing particular content in the ASC involves specifying the unique numeric path
to the content through the Topic, Subtopic, Section and Paragraph
structure.
Securities
Securities
are classified as either held to maturity, available for sale or
trading. Securities are classified as held to maturity and carried at
amortized cost when Management has the positive intent and the ability to hold
them until maturity. Securities to be held for indefinite periods of
time are classified as available for sale and carried at fair value, with the
unrealized holding gains and losses reported as a component of other
comprehensive income, net of tax. Securities available for sale are
used as part of Trustmark’s interest rate risk management strategy and may be
sold in response to changes in interest rates, changes in prepayment rates and
other factors. Securities held for resale in anticipation of
short-term market movements are classified as trading and are carried at fair
value, with changes in unrealized holding gains and losses included in other
interest income. Management determines the appropriate classification
of securities at the time of purchase. Trustmark currently has no securities
classified as trading.
The
amortized cost of debt securities classified as securities held to maturity or
securities available for sale is adjusted for amortization of premiums and
accretion of discounts to maturity over the estimated life of the security using
the interest method. In the case of mortgage related securities,
premium and discount are amortized to yield using the retrospective yield
method. Such amortization or accretion is included in interest on
securities. Realized gains and losses are determined using the
specific identification method and are included in noninterest income as
securities gains (losses), net.
Trustmark
reviews securities for impairment quarterly. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive
income
.
In estimating
other-than-temporary impairment losses, Management considers, among other
things, the length of time and the extent to which the fair value has been less
than cost, the financial condition and near-term prospects of the issuer and the
intent and ability of Trustmark to hold the security for a period of time
sufficient to allow for any anticipated recovery in fair value.
Loans
Held for Sale
Primarily,
all mortgage loans purchased from wholesale customers or originated in
Trustmark’s General Banking Division are considered to be held for sale. In
certain circumstances, Trustmark will retain a mortgage loan in its portfolio
based on banking relationships or certain investment
strategies. Mortgage loans held for sale in the secondary market that
are hedged using fair value hedges are carried at estimated fair value on an
aggregate basis. Substantially, all mortgage loans held for sale are hedged.
These loans are primarily first-lien mortgage loans originated or purchased by
Trustmark. Deferred loan fees and costs are reflected in the
basis of loans held for sale and, as such, impact the resulting gain or loss
when loans are sold. Adjustments to reflect fair value and realized
gains and losses upon ultimate sale of the loans are recorded in noninterest
income in mortgage banking, net.
Government
National Mortgage Association (GNMA) optional repurchase programs allow
financial institutions to buy back individual delinquent mortgage loans that
meet certain criteria from the securitized loan pool for which the institution
provides servicing. At the servicer’s option and without GNMA’s prior
authorization, the servicer may repurchase such a delinquent loan for an amount
equal to 100 percent of the remaining principal balance of the loan. This
buy-back option is considered a conditional option until the delinquency
criteria are met, at which time the option becomes unconditional. When Trustmark
is deemed to have regained effective control over these loans under the
unconditional buy-back option, the loans can no longer be reported as sold and
must be brought back onto the balance sheet as loans held for sale, regardless
of whether Trustmark intends to exercise the buy-back option. These
loans are reported as held for sale with the offsetting liability being reported
as short-term borrowings. During the two years ended December 31,
2009, Trustmark has not exercised their buy-back option on any delinquent loans
serviced for GNMA. GNMA loans eligible for repurchase had an unpaid
principal balance of $81.0 million at December 31, 2009, $39.5 million at
December 31, 2008 and $17.9 million at December 31, 2007.
Loans
Loans are
stated at the amount of unpaid principal, adjusted for the net amount of direct
costs and nonrefundable loan fees associated with lending. The net
amount of nonrefundable loan origination fees and direct costs associated with
the lending process, including commitment fees, is deferred and accreted to
interest income over the lives of the loans using a method that approximates the
interest method. Interest on loans is accrued and recorded as
interest income based on the outstanding principal balance.
A loan is
classified as nonaccrual, and the accrual of interest on such loan is
discontinued, when the contractual payment of principal or interest becomes 90
days past due or if Management has serious doubts about further collectibility
of principal or interest according to the contractual terms, even though the
loan is currently performing. A loan may remain on accrual status if
it is in the process of collection and well secured. When a loan is
placed on nonaccrual status, unpaid interest is reversed against interest
income. Interest received on nonaccrual loans is applied against
principal. Loans are restored to accrual status when the obligation
is brought current or has performed in accordance with the contractual terms for
a reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
A loan is
considered impaired when, based on current information and events, it is
probable that Trustmark will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. If a loan is impaired, a specific valuation allowance is allocated,
if necessary, so that the loan is reported net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value
of collateral if repayment is expected solely from the
collateral. Interest payments on impaired loans are typically applied
to principal unless collectibility of the principal amount is reasonably
assured, in which case interest is recognized on a cash basis. The
policy for recognizing income on impaired loans is consistent with the
nonaccrual policy. Impaired loans, or portions thereof, are charged
off when deemed uncollectible.
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 commercial developments of residential real estate are
generally charged-off or written down to the fair value of the collateral less
costs to sell, no later than when the loan becomes 180 days past
due.
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 on or before
180 days of delinquency.
Allowance
for Loan Losses
The
allowance for loan losses is established through provisions for estimated
probable loan losses charged against net income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and any
subsequent recoveries are credited to the allowance.
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 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
in other regulatory guidance. Accordingly, the methodology is based
on historical loss experience by type of loan and internal risk ratings,
homogeneous risk pools and specific loss allocations, along 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,
criticized 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 timing of future cash
flows expected to be received, and valuation adjustments on impaired loans that
may be susceptible to significant valuation changes. During the
second quarter of 2009, Trustmark refined its allowance for loan loss
methodology for commercial loans based upon current regulatory guidance from its
primary regulator. This refinement resulted in Trustmark classifying
commercial loans into thirteen separate homogenous loan types with common risk
characteristics, while taking into consideration the uniqueness of Trustmark’s
markets. In addition, Trustmark combined its quantitative historical
loan loss factors and qualitative risk factors for each of its homogenous loan
types, which allowed for better segmentation of the loan portfolio based upon
the risk characteristics that are presented. Because of these
enhancements, Trustmark reallocated loan loss reserves to loans that represent
the highest risk. These changes also resulted in approximately $8.0
million in qualitative reserves being allocated to specific portfolios during
the second quarter of 2009.
Premises
and Equipment, Net
Premises
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is charged to expense over the estimated
useful lives of the assets, which are up to thirty-nine years for buildings and
three to seven years for furniture and equipment. Leasehold
improvements are amortized over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter. In cases where
Trustmark has the right to renew the lease for additional periods, the lease
term for the purpose of calculating amortization of the capitalized cost of the
leasehold improvements is extended when Trustmark is “reasonably assured” that
it will renew the lease. Depreciation and amortization expenses are
computed using the straight-line method. Trustmark continually evaluates whether
events and circumstances have occurred that indicate that such long-lived assets
have become impaired. Measurement of any impairment of such
long-lived assets is based on the fair values of those assets. There
were no impairment losses on premises and equipment recorded during 2009, 2008
or 2007.
Mortgage
Servicing Rights
Trustmark
recognizes as assets the rights to service mortgage loans based on the estimated
fair value of the mortgage servicing rights (MSR) when loans are sold and the
associated servicing rights are retained. Trustmark also incorporates
a hedging strategy, which utilizes a portfolio of derivative instruments, such
as interest rate futures contracts and exchange-traded option contracts, to
achieve a return that would substantially offset the changes in fair value of
MSR attributable to interest rates. 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.
The fair
value of MSR is determined using discounted cash flow techniques benchmarked
against third-party valuations. 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.
Goodwill
and Identifiable Intangible Assets
Goodwill,
which represents the excess of cost over the fair value of the net assets of an
acquired business, is not amortized but tested for impairment on an annual
basis, which is October 1 for Trustmark, or more often if events or
circumstances indicate that there may be impairment.
Identifiable
intangible assets are acquired assets that lack physical substance but can be
distinguished from goodwill because of contractual or legal rights or because
the assets are capable of being sold or exchanged either on their own or in
combination with a related contract, asset or liability. Trustmark’s
identifiable intangible assets primarily relate to core deposits, insurance
customer relationships and borrower relationships. These intangibles,
which have definite useful lives, are amortized on an accelerated basis over
their estimated useful lives. In addition, these intangibles are evaluated
annually for impairment or whenever events and changes in circumstances indicate
that the carrying amount should be reevaluated. Trustmark has also
purchased banking charters in order to facilitate its entry into the states of
Florida and Texas. These identifiable intangible assets are being amortized on a
straight-line method over 20 years.
Other
Real Estate Owned
Other
real estate owned includes assets that have been acquired in satisfaction of
debt through foreclosure. Other real estate owned is recorded at the
lower of cost or estimated fair value less the estimated cost of disposition.
Fair value is based on independent appraisals and other relevant factors.
Valuation adjustments required at foreclosure are charged to the allowance for
loan losses. Subsequent to foreclosure, losses on the periodic
revaluation of the property are charged to net income as other expense. Costs of
operating and maintaining the properties as well as gains (losses) on their
disposition are included in other noninterest expenses as
incurred. Improvements made to properties are capitalized if the
expenditures are expected to be recovered upon the sale of the properties. Other
real estate owned is included in other assets in the consolidated balance sheets
and totaled $90.1 million and $38.6 million at December 31, 2009 and 2008,
respectively.
Federal
Home Loan Bank and Federal Reserve Stock
Securities
with limited marketability, such as stock in the Federal Reserve Bank (FRB) and
the Federal Home Loan Bank (FHLB), are carried at cost and totaled $38.0 million
at December 31, 2009 and $45.7 million at December 31,
2008. Trustmark’s investment in FRB and FHLB stock is included in
other assets because these equity securities do not have a readily determinable
fair value, which places them outside the scope of FASB ASC Topic 320,
“Investments – Debt and Equity Securities.” At December 31, 2009, the
fair value of Trustmark’s stock in the FHLB of Dallas gave rise to no
other-than-temporary impairment.
Insurance
Commissions
Commission
revenue is recognized as of the effective date of the insurance policy or the
date the customer is billed, whichever is later. Trustmark also
receives contingent commissions from insurance companies as additional incentive
for achieving specified premium volume goals and/or the loss experience of the
insurance placed by Trustmark. Contingent commissions from insurance
companies are recognized through the calendar year using reasonable estimates
that are continuously reviewed and revised to reflect current
experience. Trustmark maintains a reserve for commission adjustments
based on estimated policy cancellations and doubtful accounts
receivable. This reserve was not significant at December 31, 2009 or
2008.
Wealth
Management
Assets
under administration held by Trustmark in a fiduciary or agency capacity for
customers are not included in the consolidated balance
sheets. Investment management and trust income is recorded on a cash
basis, which because of the regularity of the billing cycles, approximates the
accrual method, in accordance with industry practice.
Derivative
Financial Instruments
Trustmark
maintains an overall interest rate risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned fluctuations
in earnings and cash flows caused by interest rate
volatility. Trustmark’s interest rate risk management strategy
involves modifying the repricing characteristics of certain assets and
liabilities so that changes in interest rates do not adversely affect the net
interest margin and cash flows. Under the guidelines of FASB ASC
Topic 815, “Derivatives and Hedging,” all derivative instruments are required to
be recognized as either assets or liabilities and be carried at fair value on
the balance sheet. The fair value of derivative positions outstanding
is included in other assets and/or other liabilities in the accompanying
consolidated balance sheets and in the net change in these financial statement
line items in the accompanying consolidated statements of cash flows as well as
included in noninterest income in mortgage banking, net in the accompanying
consolidated statements of income.
Derivatives
Designated as Hedging Instruments
As part
of Trustmark’s risk management strategy in the mortgage banking area, derivative
instruments such as forward sales contracts are utilized. 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 under FASB ASC
Topic 815. The ineffective portion of changes in the fair value of the forward
contracts and changes in the fair value of the loans designated as loans held
for sale are recorded in noninterest income in mortgage banking,
net.
Derivatives
not Designated as Hedging Instruments
Trustmark
utilizes a portfolio of derivative instruments, such as Treasury note futures
contracts and exchange-traded option contracts, to achieve a fair value return
that offsets the changes in fair value of MSR attributable to 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. Change in
MSR fair value represents 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 cost to the change in fair value of the MSR
attributable to interest rate changes.
Trustmark
also utilizes derivative instruments such as interest rate lock commitments in
its mortgage banking area. Rate lock commitments are residential
mortgage loan commitments with customers, which guarantee a specified interest
rate for a specified time period. 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 forward sales
contracts.
Income
Taxes
On
January 1, 2007, Trustmark adopted FASB ASC Topic 740, “Income Taxes, which
clarifies the accounting and disclosure for uncertainty in tax
positions. Under the guidance of FASB ASC Topic 740, Trustmark
accounts for deferred income taxes using the liability
method. Deferred tax assets and liabilities are based on temporary
differences between the financial statement carrying amounts and the tax basis
of Trustmark’s assets and liabilities. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be realized or settled.
Stock-Based
Compensation
Trustmark
accounts for the stock and incentive compensation under the provisions of FASB
ASC Topic 718, “Compensation – Stock Compensation.” Under this
accounting guidance, fair value is established 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.
Statements
of Cash Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash on hand
and amounts due from banks. The following table reflects specific
transaction amounts for the periods presented ($ in thousands):
|
Years Ended December 31,
|
||||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||
|
Income
taxes paid
|
$ | 60,456 | $ | 56,906 | $ | 53,883 | ||||||
|
Interest
expense paid on deposits and borrowings
|
93,402 | 176,456 | 243,562 | |||||||||
|
Noncash
transfers from loans to foreclosed properties
|
78,300 | 38,976 | 8,559 | |||||||||
Per
Share Data
Effective
January 1, 2009, Trustmark adopted new authoritative accounting guidance under
FASB ASC Topic 260, “Earnings Per Share,” which provides 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 earnings per share pursuant to the
two-class method. Trustmark has determined that its outstanding
nonvested stock awards and deferred stock units are not participating
securities. Based on this determination, no change has been made to
Trustmark’s current computation for basic and diluted 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 awards
outstanding during the period. Weighted-average antidilutive stock
awards and common stock warrants for 2009, 2008 and 2007, totaled 1.552 million,
1.659 million and 546 thousand, respectively, and accordingly, were excluded in
determining diluted earnings per share. The following table reflects
weighted-average shares used to calculate basic and diluted EPS for the periods
presented (in thousands):
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Basic
shares
|
57,834 | 57,301 | 57,709 | |||||||||
|
Dilutive
shares
|
102 | 36 | 77 | |||||||||
|
Diluted
shares
|
57,936 | 57,337 | 57,786 | |||||||||
Fair
Value Measurements
On
January 1, 2008, Trustmark adopted FASB ASC Topic 820, “Fair Value Measurement
and Disclosures,” which established a framework for measuring fair value in GAAP
and expanded disclosures about fair value measurements. The fair
value of an asset or liability is the price that would be received to sell that
asset or paid to transfer that liability in an orderly transaction occurring in
the principal market (or most advantageous market in the absence of a principal
market) for such asset or liability. Depending on the nature of the asset or
liability, Trustmark uses various valuation techniques and assumptions when
estimating fair value. Inputs to valuation techniques include the
assumptions that market participants would use in pricing an asset or liability.
FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that
gives the highest priority to quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The fair
value hierarchy is as follows:
Level 1
Inputs – Valuation is based upon quoted prices (unadjusted) in active markets
for identical assets or liabilities that Trustmark has the ability to access at
the measurement date.
Level 2
Inputs – Valuation is based upon quoted prices in active markets for similar
assets or liabilities, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that
are observable for the asset or liability such as interest rates, yield curves,
volatilities and default rates and inputs that are derived principally from or
corroborated by observable market data.
Level 3
Inputs – Unobservable inputs reflecting the reporting entity’s own determination
about the assumptions that market participants would use in pricing the asset or
liability based on the best information available.
Recent
Accounting Pronouncements
Accounting
Standards Adopted in 2009
FASB ASC Topic 855, “Subsequent
Events.”
Accounting guidance under FASB ASC Topic 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued. FASB ASC Topic 855 defines (i) the period after the
balance sheet date during which a reporting entity’s management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (iii) the disclosures an entity should make about
events or transactions that occurred after the balance sheet date. FASB ASC
Topic 855 became effective for Trustmark’s financial statements for periods
ending after June 15, 2009 and the adoption did not have a significant impact on
Trustmark’s financial statements.
FASB ASC Topic 820, “Fair Value
Measurements and Disclosures.”
Accounting guidance under FASB ASC Topic
820 affirms that the objective of fair value when the market for an asset is not
active is the price that would be received to sell the asset in an orderly
transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset
when the market for that asset is not active. This accounting guidance requires
an entity to base its conclusion about whether a transaction was not orderly on
the weight of the evidence. This accounting guidance also amended prior guidance
to expand certain disclosure requirements. Trustmark’s adoption of the
accounting guidance under FASB ASC Topic 820 during the second quarter of 2009
did not have a significant impact on Trustmark’s financial
statements.
Further
new authoritative accounting guidance (Accounting Standards Update No. 2009-5)
under FASB ASC Topic 820 provides guidance for measuring the fair value of a
liability in circumstances in which a quoted price in an active market for the
identical liability is not available. In such instances, a reporting entity is
required to measure fair value utilizing a valuation technique that uses (i) the
quoted price of the identical liability when traded as an asset, (ii) quoted
prices for similar liabilities or similar liabilities when traded as assets, or
(iii) another valuation technique that is consistent with the existing
principles of ASC Topic 820, such as an income approach or market approach. The
new authoritative accounting guidance also clarifies that when estimating the
fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. The foregoing new
authoritative accounting guidance under FASB ASC Topic 820 effective for
Trustmark’s financial statements beginning October 1, 2009 and did not have a
significant impact on Trustmark’s financial statements.
FASB ASC Topic 320, “Investments –
Debt and Equity Securities.”
Accounting guidance under FASB
ASC Topic 320 (i) changes existing guidance for determining whether an
impairment is other than temporary to debt securities and (ii) replaces the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b)
it is more likely than not it will not have to sell the security before recovery
of its cost basis. Under the accounting guidance of FASB ASC Topic
320, declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses to the extent the impairment is related
to credit losses. The amount of the impairment related to other factors is
recognized in other comprehensive income. Trustmark’s adoption of the
accounting guidance of FASB ASC Topic 320 during the second quarter of 2009 did
not have a significant impact on Trustmark’s financial statements.
FASB ASC Topic 825, “Financial
Instruments.”
Accounting guidance under FASB ASC Topic
825 requires an entity to provide disclosures about the fair value of
financial instruments in interim financial statements and amends prior guidance
to require those disclosures in summarized financial statements at interim
reporting periods. Trustmark adopted the accounting guidance of FASB
ASC Topic 825 during the second quarter of 2009.
FASB ASC Topic 260, “Earnings Per
Share.”
Accounting guidance under FASB ASC Topic 260 provides 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. FASB ASC Topic 260 became effective for Trustmark
on January 1, 2009. Trustmark has determined that its outstanding
nonvested stock awards and deferred stock units are not participating
securities. Based on this determination, no change has been made to
Trustmark’s current computation for basic and diluted earnings per
share.
FASB ASC Topic 815, “Derivatives and
Hedging.”
Accounting guidance under FASB ASC Topic 815 amends
prior guidance and expands quarterly disclosure requirements about an entity’s
derivative instruments and hedging activities. FASB ASC Topic 815 became
effective for Trustmark on January 1, 2009. The required disclosures
are reported in Note 18 - Derivative Financial Instruments.
FASB ASC Topic 810,
“Consolidation.”
Accounting guidance under FASB ASC Topic 810
amended prior guidance to establish accounting and reporting
standards for noncontrolling interests in a subsidiary and for the
deconsolidation of that subsidiary. Under FASB ASC Topic 810, a
noncontrolling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as a component of equity in the consolidated financial
statements. Among other requirements, FASB ASC Topic 810 requires consolidated
net income to be reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest. It also requires disclosure, on
the face of the consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the noncontrolling interest. The
new authoritative accounting guidance under FASB ASC Topic 810 became effective
on January 1, 2009 and did not impact Trustmark’s financial
statements.
FASB ASC Topic 805, “Business
Combinations.”
On January 1, 2009, new authoritative accounting guidance
under FASB ASC Topic 805, “Business Combinations,” became applicable to
Trustmark’s accounting for business combinations closing on or after January 1,
2009. FASB ASC Topic 805 applies to all transactions and other events in which
one entity obtains control over one or more other businesses. FASB ASC Topic 805
requires an acquirer, upon initially obtaining control of another entity, to
recognize the assets, liabilities and any noncontrolling interest in the
acquiree at fair value as of the acquisition date. Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under previous accounting guidance whereby the
cost of an acquisition was allocated to the individual assets acquired and
liabilities assumed based on their estimated fair value. FASB ASC Topic 805
requires acquirers to expense acquisition related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under prior accounting guidance. Assets acquired and
liabilities assumed in a business combination that arise from contingencies are
to be recognized at fair value if fair value can be reasonably estimated. If
fair value of such an asset or liability cannot be reasonably estimated, the
asset or liability would generally be recognized in accordance with FASB ASC
Topic 450, “Contingencies.” Under FASB ASC Topic 805, the requirements of FASB
ASC Topic 420, “Exit or Disposal Cost Obligations,” would have to be met in
order to accrue for a restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a noncontractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of FASB ASC Topic
450, “Contingencies.”
FASB ASC Topic 715, “Compensation –
Retirement Benefits.”
Accounting guidance under FASB ASC
Topic 715 provide guidance related to an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. The
disclosures about plan assets required by this accounting guidance shall be
provided for fiscal years ending after December 15, 2009. The
required disclosures are reported in Note 12 - Defined Benefit and Other
Postretirement Benefits.
Accounting Standards Update No.
2009-12, “Investments in Certain Entities that Calculate Net Asset Value per
Share (or Its
Equivalent).”
Effective December 31, 2009, Trustmark adopted
ASU 2009-12, relative to its mutual fund investments in its defined benefit
plan. ASU 2009-12 amends SFAS No. 157 and permits, as a practical expedient, for
the estimation of the fair value of investments in investment companies for
which the investment does not have a readily determinable fair value using net
asset value per share or its equivalent. The adoption of ASU 2009-12
did not have a significant impact on Trustmark’s financial
statements.
Accounting
Guidance Effective After December 31, 2009
Other new
accounting guidance issued but not effective until after December 31, 2009
include the following:
SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R).”
SFAS No. 167 amends FIN 46 (Revised December
2003),
“Consolidation of
Variable Interest Entities,”
to change how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance.
SFAS No. 167 requires additional disclosures about the reporting entity’s
involvement with variable-interest entities and any significant changes in risk
exposure due to that involvement as well as its effect on the entity’s financial
statements. SFAS No. 167 will be effective January 1, 2010 and is not expected
to have a significant impact on Trustmark’s financial statements.
SFAS No. 166,
“Accounting for Transfers of Financial Assets.”
SFAS No. 166 amends ASC Topic 860,
“Transfers and Servicing,” to enhance reporting about transfers of financial
assets, including securitizations, and where companies have continuing exposure
to the risks related to transferred financial assets. SFAS No. 166 eliminates
the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. SFAS No. 166 also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period. SFAS No. 166 has also modified the criteria that
must be met in order for a transfer of a portion of a financial asset, such as a
loan participation, to qualify for sale accounting. SFAS No. 166 will
be effective January 1, 2010 and is not expected to have a significant impact on
Trustmark’s financial statements
.
Trustmark
is required to maintain average reserve balances with the Federal Reserve Bank
based on a percentage of deposits. The average amounts of those
reserves for the years ended December 31, 2009 and 2008, were $14.9 million and
$4.8 million, respectively.
The
following table is a summary of the amortized cost and estimated fair value of
securities available for sale and held to maturity at December 31, 2009 and
2008, follows ($ in thousands):
|
Securities Available for
Sale
|
Securities Held to Maturity
|
|||||||||||||||||||||||||||||||
|
December 31, 2009
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized (Losses)
|
Estimated Fair Value
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized (Losses)
|
Estimated Fair Value
|
||||||||||||||||||||||||
|
U.S.
Government agency obligations
|
||||||||||||||||||||||||||||||||
|
Issued
by U.S. Government agencies
|
$ | 20 | $ | - | $ | - | $ | 20 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
|
Issued
by U.S. Government sponsored agencies
|
48,685 | - | (768 | ) | 47,917 | - | - | - | - | |||||||||||||||||||||||
|
Obligations
of states and political subdivisions
|
115,118 | 2,758 | (368 | ) | 117,508 | 74,643 | 2,551 | (211 | ) | 76,983 | ||||||||||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||||||||||
|
Residential
mortgage pass-through securities
|
||||||||||||||||||||||||||||||||
|
Guaranteed
by GNMA
|
11,765 | 462 | (35 | ) | 12,192 | 7,044 | 10 | (65 | ) | 6,989 | ||||||||||||||||||||||
|
Issued
by FNMA and FHLMC
|
49,510 | 366 | (597 | ) | 49,279 | - | - | - | - | |||||||||||||||||||||||
|
Other
residential mortgage-backed securities
|
||||||||||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
1,333,983 | 48,650 | (77 | ) | 1,382,556 | 148,226 | 5,448 | - | 153,674 | |||||||||||||||||||||||
|
Commercial
mortgage-backed securities
|
||||||||||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
67,294 | 1,506 | (65 | ) | 68,735 | 3,071 | - | (43 | ) | 3,028 | ||||||||||||||||||||||
|
Corporate
debt securities
|
6,087 | 102 | - | 6,189 | - | - | - | - | ||||||||||||||||||||||||
|
Total
|
$ | 1,632,462 | $ | 53,844 | $ | (1,910 | ) | $ | 1,684,396 | $ | 232,984 | $ | 8,009 | $ | (319 | ) | $ | 240,674 | ||||||||||||||
|
December 31, 2008
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury securities
|
$ | 6,502 | $ | 23 | $ | - | $ | 6,525 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
|
U.S.
Government agency obligations
|
||||||||||||||||||||||||||||||||
|
Issued
by U.S. Government agencies
|
27 | - | - | 27 | - | - | - | - | ||||||||||||||||||||||||
|
Issued
by U.S. Government sponsored agencies
|
24,821 | 546 | - | 25,367 | - | - | - | - | ||||||||||||||||||||||||
|
Obligations
of states and political subdivisions
|
98,323 | 932 | (602 | ) | 98,653 | 102,901 | 2,764 | (524 | ) | 105,141 | ||||||||||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||||||||||
|
Residential
mortgage pass-through securities
|
||||||||||||||||||||||||||||||||
|
Guaranteed
by GNMA
|
8,476 | 272 | (22 | ) | 8,726 | - | - | - | - | |||||||||||||||||||||||
|
Issued
by FNMA and FHLMC
|
18,519 | 667 | - | 19,186 | - | - | - | - | ||||||||||||||||||||||||
|
Other
residential mortgage-backed securities
|
||||||||||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
1,337,113 | 27,876 | (1 | ) | 1,364,988 | 156,728 | 2,171 | (1 | ) | 158,898 | ||||||||||||||||||||||
|
Commercial
mortgage-backed securities
|
||||||||||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
11,041 | 458 | - | 11,499 | - | - | - | - | ||||||||||||||||||||||||
|
Corporate
debt securities
|
8,254 | - | (384 | ) | 7,870 | - | - | - | - | |||||||||||||||||||||||
|
Total
|
$ | 1,513,076 | $ | 30,774 | $ | (1,009 | ) | $ | 1,542,841 | $ | 259,629 | $ | 4,935 | $ | (525 | ) | $ | 264,039 | ||||||||||||||
Temporarily
Impaired Securities
The table
below includes securities with gross unrealized losses segregated by length of
impairment ($ in thousands):
|
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
|
December 31, 2009
|
Estimated Fair Value
|
Gross Unrealized (Losses)
|
Estimated Fair Value
|
Gross Unrealized (Losses)
|
Estimated Fair Value
|
Gross Unrealized (Losses)
|
||||||||||||||||||
|
U.S.
Government agency obligations
|
||||||||||||||||||||||||
|
Issued
by U.S. Government sponsored agencies
|
$ | 47,917 | $ | (768 | ) | $ | - | $ | - | $ | 47,917 | $ | (768 | ) | ||||||||||
|
Obligations
of states and political subdivisions
|
18,694 | (280 | ) | 6,476 | (299 | ) | 25,170 | (579 | ) | |||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||
|
Residential
mortgage pass-through securities
|
||||||||||||||||||||||||
|
Guaranteed
by GNMA
|
8,461 | (100 | ) | - | - | 8,461 | (100 | ) | ||||||||||||||||
|
Issued
by FNMA and FHLMC
|
42,255 | (597 | ) | - | - | 42,255 | (597 | ) | ||||||||||||||||
|
Other
residential mortgage-backed securities
|
||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
40,109 | (77 | ) | - | - | 40,109 | (77 | ) | ||||||||||||||||
|
Commercial
mortgage-backed securities
|
||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
26,514 | (108 | ) | - | - | 26,514 | (108 | ) | ||||||||||||||||
|
Total
|
$ | 183,950 | $ | (1,930 | ) | $ | 6,476 | $ | (299 | ) | $ | 190,426 | $ | (2,229 | ) | |||||||||
|
December 31, 2008
|
||||||||||||||||||||||||
|
Obligations
of states and political subdivisions
|
$ | 10,522 | $ | (675 | ) | $ | 4,057 | $ | (451 | ) | $ | 14,579 | $ | (1,126 | ) | |||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||
|
Residential
mortgage pass-through securities
|
||||||||||||||||||||||||
|
Guaranteed
by GNMA
|
819 | (22 | ) | - | - | 819 | (22 | ) | ||||||||||||||||
|
Other
residential mortgage-backed securities
|
||||||||||||||||||||||||
|
Issued
or guaranteed by FNMA, FHLMC or GNMA
|
8 | (1 | ) | 64 | (1 | ) | 72 | (2 | ) | |||||||||||||||
|
Corporate
debt securities
|
7,870 | (384 | ) | - | - | 7,870 | (384 | ) | ||||||||||||||||
|
Total
|
$ | 19,219 | $ | (1,082 | ) | $ | 4,121 | $ | (452 | ) | $ | 23,340 | $ | (1,534 | ) | |||||||||
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses to the extent the impairment is related to credit losses. The
amount of the impairment related to other factors is recognized in other
comprehensive income. In estimating other-than-temporary impairment losses,
Management considers, among other things, the length of time and the extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer and the intent and ability of Trustmark to
hold the security for a period of time sufficient to allow for any anticipated
recovery in fair value. The unrealized losses shown above are
primarily due to increases in market rates over the yields available at the time
of purchase of the underlying securities and not credit
quality. Because Trustmark does not intend to sell these securities
and it is more likely than not that Trustmark will not be required to sell the
investments before recovery of their amortized cost bases, which may be
maturity, Trustmark does not consider these investments to be
other-than-temporarily impaired at December 31, 2009.
Security
Gains and Losses
Gains and
losses as a result of calls and disposition of securities were as follows ($ in
thousands):
|
Years Ended December 31,
|
||||||||||||
|
Available for
Sale
|
2009
|
2008
|
2007
|
|||||||||
|
Proceeds
from sales of securities
|
$ | 188,460 | $ | 157,949 | $ | 62,170 | ||||||
|
Gross
realized gains
|
5,379 | 487 | 23 | |||||||||
|
Gross
realized (losses)
|
(11 | ) | (84 | ) | (4 | ) | ||||||
|
Held to
Maturity
|
||||||||||||
|
Proceeds
from calls of securities
|
$ | 9,303 | $ | 7,087 | $ | 8,221 | ||||||
|
Gross
realized gains
|
99 | 102 | 93 | |||||||||
Realized
gains and losses are determined using the specific identification method and are
included in noninterest income as securities gains, net.
Securities
Pledged
Securities
with a carrying value of $1.6 billion and $1.7 billion at December 31, 2009 and
2008, respectively, were pledged to collateralize public deposits and securities
sold under repurchase agreements and for other purposes as permitted by
law. Of the amount pledged at December 31, 2009, $9.0 million was
pledged to the Discount Window to provide additional contingency funding
capacity. At year-end, these securities were not required to
collateralize any borrowings from the FRB.
Contractual
Maturities
The
amortized cost and estimated fair value of securities available for sale and
held to maturity at December 31, 2009, by contractual maturity, are shown below
($ in thousands). Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
|
Securities Available for
Sale
|
Securities Held to Maturity
|
|||||||||||||||
|
Amortized Cost
|
Estimated Fair Value
|
Amortized Cost
|
Estimated Fair Value
|
|||||||||||||
|
Due
in one year or less
|
$ | 10,418 | $ | 10,559 | $ | 5,173 | $ | 5,199 | ||||||||
|
Due
after one year through five years
|
29,130 | 30,226 | 25,459 | 26,185 | ||||||||||||
|
Due
after five years through ten years
|
106,364 | 106,541 | 30,134 | 31,247 | ||||||||||||
|
Due
after ten years
|
23,998 | 24,308 | 13,877 | 14,352 | ||||||||||||
| 169,910 | 171,634 | 74,643 | 76,983 | |||||||||||||
|
Mortgage-backed
securities
|
1,462,552 | 1,512,762 | 158,341 | 163,691 | ||||||||||||
|
Total
|
$ | 1,632,462 | $ | 1,684,396 | $ | 232,984 | $ | 240,674 | ||||||||
At
December 31, 2009 and 2008, loans consisted of the following ($ in
thousands):
|
2009
|
2008
|
|||||||
|
Real
estate loans:
|
||||||||
|
Construction,
land development and other land loans
|
$ | 830,069 | $ | 1,028,788 | ||||
|
Secured
by 1- 4 family residential properties
|
1,650,743 | 1,524,061 | ||||||
|
Secured
by nonfarm, nonresidential properties
|
1,467,307 | 1,422,658 | ||||||
|
Other
|
197,421 | 186,915 | ||||||
|
Loans
to finance agricultural production and other loans to
farmers
|
23,005 | 18,641 | ||||||
|
Commercial
and industrial loans
|
1,126,676 | 1,305,938 | ||||||
|
Consumer
loans
|
606,315 | 895,046 | ||||||
|
Obligations
of states and political subdivisions
|
326,162 | 270,599 | ||||||
|
Other
loans
|
92,099 | 69,757 | ||||||
|
Loans
|
6,319,797 | 6,722,403 | ||||||
|
Less
allowance for loan losses
|
103,662 | 94,922 | ||||||
|
Net
loans
|
$ | 6,216,135 | $ | 6,627,481 | ||||
Trustmark
does not have any loan concentrations other than those reflected in the
preceding table, which exceed 10% of total loans. At December 31,
2009, Trustmark's geographic loan distribution was concentrated primarily in its
Florida, Mississippi, Tennessee and Texas markets. A substantial
portion of construction, land development and other land loans are secured by
real estate in markets in which Trustmark is located. Accordingly,
the ultimate collectability of a substantial portion of these loans and the
recovery of a substantial portion of the carrying amount of other real estate
owned, are susceptible to changes in market conditions in these
areas.
Changes
in the allowance for loan losses were as follows ($ in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
at January 1,
|
$ | 94,922 | $ | 79,851 | $ | 72,098 | ||||||
|
Loans
charged-off
|
(80,711 | ) | (71,767 | ) | (26,790 | ) | ||||||
|
Recoveries
|
12,339 | 10,426 | 10,759 | |||||||||
|
Net
charge-offs
|
(68,372 | ) | (61,341 | ) | (16,031 | ) | ||||||
|
Provision
for loan losses
|
77,112 | 76,412 | 23,784 | |||||||||
|
Balance
at December 31,
|
$ | 103,662 | $ | 94,922 | $ | 79,851 | ||||||
At
December 31, 2009 and 2008, the carrying amounts of nonaccrual loans, which are
considered for impairment analysis were $141.2 million and $114.0 million,
respectively. When a loan is deemed impaired, the full difference between the
carrying amount of the loan and the most likely estimate of the asset’s fair
value less cost to sell, is charged-off. At December 31, 2009 and
2008, specifically evaluated impaired loans totaled $74.2 million and $56.9
million, respectively. The average
carrying
amounts
of specifically evaluated impaired loans for 2009, 2008 and 2007 were $55.2
million, $33.6 million and $8.6 million, respectively. For 2009, specific
charge-offs related to impaired loans totaled $29.1 million while the provisions
charged to net income totaled $20.7 million
.
For 2008, specific
charge-offs related to impaired loans totaled $31.6 million while the provisions
charged to net income totaled $21.0 million. For 2007, specific charge-offs
related to impaired loans and provisions charged to net income were $3.5 million
and $2.0 million, respectively.
At
December 31, 2009 and 2008, nonaccrual loans, not specifically impaired and
written down to fair value less cost to sell, totaled $67.0 million and $57.1
million, respectively. In addition, these nonaccrual loans had
allocated allowance for loan losses of $10.0 million and $12.0 million at the
end of the respective periods. No material interest income was recognized in the
income statement on impaired or nonaccrual loans for each of the years in the
three-year period ended December 31, 2009.
Loans
past due 90 days or more totaled $55.6 million and $23.2 million at December 31,
2009 and 2008, respectively. Included in these amounts are $46.7 million and
$18.1 million, respectively, of serviced loans eligible for repurchase, which
are fully guaranteed by GNMA. GNMA optional repurchase programs allow
financial institutions to buy back individual delinquent mortgage loans that
meet certain criteria from the securitized loan pool for which the institution
provides servicing. At the servicer's option and without GNMA's prior
authorization, the servicer may repurchase such a delinquent loan for an amount
equal to 100 percent of the remaining principal balance of the loan. This
buy-back option is considered a conditional option until the delinquency
criteria are met, at which time the option becomes unconditional. When Trustmark
is deemed to have regained effective control over these loans under the
unconditional buy-back option, the loans can no longer be reported as sold and
must be brought back onto the balance sheet as loans held for sale, regardless
of whether Trustmark intends to exercise the buy-back option. These
loans are reported as held for sale with the offsetting liability being reported
as short-term borrowings. During the two years ended December 31,
2009, Trustmark has not exercised their buy-back option on any delinquent loans
serviced for GNMA.
Trustmark
makes loans in the normal course of business to certain executive officers and
directors, including their immediate families and companies in which they are
principal owners. Such loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
the normal risk of collectability at the time of the transaction. At
December 31, 2009 and 2008, total loans to these borrowers were $72.2 million
and $136.9 million, respectively. During 2009, $116.3 million of new
loan advances were made, while repayments were $141.9 million, as well as
decreases from changes in executive officers and directors of $39.2
million.
At
December 31, 2009 and 2008, premises and equipment are summarized as follows ($
in thousands):
|
2009
|
2008
|
|||||||
|
Land
|
$ | 39,698 | $ | 39,712 | ||||
|
Buildings
and leasehold improvements
|
151,393 | 148,932 | ||||||
|
Furniture
and equipment
|
141,173 | 138,549 | ||||||
|
Total
cost of premises and equipment
|
332,264 | 327,193 | ||||||
|
Less
accumulated depreciation and amortization
|
181,103 | 170,382 | ||||||
|
Premises
and equipment, net
|
$ | 151,161 | $ | 156,811 | ||||
Mortgage
Servicing Rights
The
activity in MSR is detailed in the table below ($ in thousands):
|
2009
|
2008
|
|||||||
|
Balance
at beginning of period
|
$ | 42,882 | $ | 67,192 | ||||
|
Origination
of servicing assets
|
24,591 | 23,038 | ||||||
|
Disposals
of mortgage loans sold serviced released
|
(5,367 | ) | (3,523 | ) | ||||
|
Sale
of MSR
|
(9,633 | ) | - | |||||
|
Change
in fair value:
|
||||||||
|
Due
to market changes
|
6,606 | (34,838 | ) | |||||
|
Due
to runoff
|
(8,566 | ) | (8,987 | ) | ||||
|
Balance
at end of period
|
$ | 50,513 | $ | 42,882 | ||||
In the
determination of the fair value of MSR at the date of securitization, certain
key economic assumptions are made. At December 31, 2009, the fair
value of MSR included an assumed average prepayment speed of 15.86 CPR and an
average discount rate of 10.59%. By way of example, an increase in
either the prepayment speed or discount rate assumption will result in a
decrease in the fair value of the MSR, while a decrease in either assumption
will result in an increase in the fair value of the MSR. In recent
years, there have been significant market-driven fluctuations in loan prepayment
speeds and discount rates. These fluctuations can be rapid and may
continue to be significant. Therefore, estimating prepayment speed
and/or discount rates within ranges that market participants would use in
determining the fair value of MSR requires significant management
judgment.
On
October 30, 2009, Trustmark completed the sale of approximately $1.0 billion in
mortgages serviced for others, which reduced Trustmark’s MSR by approximately
$9.6 million. The terms of the sale are subject to adjustments for
loan prepayments and loans past due over sixty days, which Trustmark considers
to be immaterial. As part of the sale, Trustmark entered into a
sub-servicing agreement with Regions Financial Corporation (Regions) until the
transfer dates of February 15, 2010 (Freddie Mac portion) and February 28, 2010
(Fannie Mae portion). The sub-servicing agreement provided that
Regions would only earn the service fees while Trustmark would earn a reasonable
servicing fee as well as all other fees associated with the loans until the
transfer dates. The effect of this transaction did not have a
material impact on Trustmark's results of operations.
Mortgage
Loans Sold
During
2009 and 2008, Trustmark sold $1.6 billion and $1.3 billion of residential
mortgage loans. Pretax gains on these sales were recorded in mortgage banking
noninterest income and totaled $20.8 million in 2009, $6.0 million in 2008 and
$5.4 million in 2007. Trustmark receives annual servicing fee income
approximating 0.35% of the outstanding balance of the underlying
loans. Trustmark's total mortgage loans serviced for others totaled
$4.2 billion at December 31, 2009, excluding the sale of $1.0 billion in
mortgages serviced for others discussed above, compared with $5.0 billion at
December 31, 2008. The investors and the securitization trusts have
no recourse to the assets of Trustmark for failure of debtors to pay when
due.
Goodwill
The
changes in the carrying amount of goodwill by segment for the years ended
December 31, 2009, 2008 and 2007, are as follows ($ in thousands):
|
General Banking
|
Insurance
|
Total
|
||||||||||
|
Balance
as of January 1, 2007
|
$ | 245,922 | $ | 44,441 | $ | 290,363 | ||||||
|
Purchase
accounting adjustments
|
814 | - | 814 | |||||||||
|
Balance
as of December 31, 2007
|
246,736 | 44,441 | 291,177 | |||||||||
|
Purchase
accounting adjustments
|
- | (73 | ) | (73 | ) | |||||||
|
Balance
as of December 31, 2008
|
246,736 | 44,368 | 291,104 | |||||||||
|
Purchase
accounting adjustments
|
- | - | - | |||||||||
|
Balance
as of December 31, 2009
|
$ | 246,736 | $ | 44,368 | $ | 291,104 | ||||||
Trustmark's
General Banking segment delivers a full range of banking services to consumer,
corporate, small and middle-market businesses through its extensive branch
network. The Insurance segment includes Trustmark National Bank's
(TNB) wholly-owned retail insurance subsidiaries that offer a diverse mix of
insurance products and services. Trustmark performed an impairment
test of goodwill of reporting units in both the General Banking and Insurance
segments during 2009, 2008 and 2007, which indicated that no impairment charge
was required. At December 31, 2009, Trustmark also performed an
additional impairment analysis on reporting units in both the General Banking
and Insurance segments due to market conditions and concluded that no impairment
charge was required. However, as a result of pressure from a generally soft
insurance market, the spread between the Insurance segment's fair value and book
value has narrowed. A continuing period of falling prices and
suppressed demand for the products of the Insurance segment may result in
impairment of goodwill in the future.
Identifiable
Intangible Assets
At
December 31, 2009 and 2008, identifiable intangible assets consisted of the
following ($ in thousands):
|
2009
|
2008
|
|||||||||||||||||||||||
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Carrying Amount
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Carrying Amount
|
|||||||||||||||||||
|
Core
deposit intangibles
|
$ | 44,408 | $ | 31,284 | $ | 13,124 | $ | 44,408 | $ | 28,506 | $ | 15,902 | ||||||||||||
|
Insurance
intangibles
|
11,693 | 6,385 | 5,308 | 11,693 | 5,295 | 6,398 | ||||||||||||||||||
|
Banking
charters
|
1,325 | 413 | 912 | 1,325 | 347 | 978 | ||||||||||||||||||
|
Borrower
relationship intangible
|
690 | 209 | 481 | 690 | 147 | 543 | ||||||||||||||||||
|
Total
|
$ | 58,116 | $ | 38,291 | $ | 19,825 | $ | 58,116 | $ | 34,295 | $ | 23,821 | ||||||||||||
In 2009,
2008 and 2007, Trustmark recorded $4.0 million, $4.3 million and $4.9 million,
respectively, of amortization of identifiable intangible
assets. Trustmark estimates that amortization expense for
identifiable intangible assets will be $3.5 million in 2010, $3.1 million in
2011, $2.7 million in 2012, $2.4 million in 2013 and $2.0 million in
2014. Fully amortized intangibles are excluded from the table
above. Trustmark continually evaluates whether events and
circumstances have occurred that indicate that identifiable intangible assets
have become impaired. Measurement of any impairment of such
identifiable intangible assets is based on the fair values of those
assets. There were no impairment losses on identifiable intangible
assets recorded during 2009, 2008 or 2007.
The
following table illustrates the carrying amounts and remaining weighted-average
amortization periods of identifiable intangible assets ($ in
thousands):
|
2009
|
||||||||
|
Net
Carrying Amount
|
Remaining Weighted-
Average Amortization
Period in Years
|
|||||||
|
Core
deposit intangibles
|
$ | 13,124 | 9.1 | |||||
|
Insurance
intangibles
|
5,308 | 8.9 | ||||||
|
Banking
charters
|
912 | 13.7 | ||||||
|
Borrower
relationship intangible
|
481 | 7.7 | ||||||
|
Total
|
$ | 19,825 | 9.2 | |||||
Other
real estate owned is recorded at the lower of cost or estimated fair value less
the estimated cost of disposition. Fair value is based on independent appraisals
and other relevant factors. Valuation adjustments required at foreclosure are
charged to the allowance for loan losses.
For the
years ended December 31, 2009, 2008 and 2007, changes and (losses) gains, net on
other real estate were as follows ($ in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
at beginning of period
|
$ | 38,566 | $ | 8,348 | $ | 2,509 | ||||||
|
Additions
|
78,300 | 38,955 | 8,558 | |||||||||
|
Disposals
|
(19,332 | ) | (8,435 | ) | (2,692 | ) | ||||||
|
Writedowns
|
(7,439 | ) | (302 | ) | (27 | ) | ||||||
|
Balance
at end of period
|
$ | 90,095 | $ | 38,566 | $ | 8,348 | ||||||
|
(Losses)
gains, net on the sale of other real estate included in other
expenses
|
$ | (1,042 | ) | $ | (146 | ) | $ | 34 | ||||
At
December 31, 2009 and 2008, other real estate by type of property consisted of
the following ($ in thousands):
|
2009
|
2008
|
|||||||
|
Construction,
land development and other land loans
|
$ | 60,276 | $ | 28,824 | ||||
|
1-4
family residential properties
|
11,001 | 8,443 | ||||||
|
Nonfarm,
nonresidential properties
|
7,285 | 1,220 | ||||||
|
Other
real estate loans
|
11,533 | 79 | ||||||
|
Total
other real estate
|
$ | 90,095 | $ | 38,566 | ||||
At
December 31, 2009 and 2008, other real estate by geographic location consisted
of the following ($ in thousands):
|
2009
|
2008
|
|||||||
|
Florida
|
$ | 45,927 | $ | 21,265 | ||||
|
Mississippi
(1)
|
22,373 | 6,113 | ||||||
|
Tennessee
(2)
|
10,105 | 8,862 | ||||||
|
Texas
|
11,690 | 2,326 | ||||||
|
Total
other real estate
|
$ | 90,095 | $ | 38,566 | ||||
(1)
- Mississippi includes Central and Southern Mississippi Region
(2)
- Tennessee includes Memphis, Tennessee and Northern Mississippi
Region
At
December 31, 2009 and 2008, deposits consisted of the following ($ in
thousands):
|
2009
|
2008
|
|||||||
|
Noninterest-bearing
demand deposits
|
$ | 1,685,187 | $ | 1,496,166 | ||||
|
Interest-bearing
demand
|
1,261,181 | 1,128,426 | ||||||
|
Savings
|
1,821,366 | 1,658,255 | ||||||
|
Time
|
2,420,731 | 2,541,023 | ||||||
|
Total
|
$ | 7,188,465 | $ | 6,823,870 | ||||
Interest
expense on deposits by type consisted of the following for 2009, 2008, and 2007
($ in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Interest-bearing
demand
|
9,515 | 20,742 | 39,217 | |||||||||
|
Savings
|
10,613 | 23,032 | 38,977 | |||||||||
|
Time
|
58,758 | 96,148 | 122,181 | |||||||||
|
Total
|
$ | 78,886 | $ | 139,922 | $ | 200,375 | ||||||
The
maturities on outstanding time deposits of $100,000 or more at December 31, 2009
and 2008 are as follows ($ in thousands):
|
2009
|
2008
|
|||||||
|
3
months or less
|
$ | 384,767 | $ | 436,500 | ||||
|
Over
3 months through 6 months
|
245,624 | 243,691 | ||||||
|
Over
6 months through 12 months
|
264,158 | 307,841 | ||||||
|
Over
12 months
|
128,678 | 95,124 | ||||||
|
Total
|
$ | 1,023,227 | $ | 1,083,156 | ||||
The
maturities of interest-bearing deposits at December 31, 2009, are as follows ($
in thousands):
|
2010
|
$ | 2,079,683 | ||
|
2011
|
272,810 | |||
|
2012
|
41,903 | |||
|
2013
|
10,283 | |||
|
2014
and thereafter
|
16,052 | |||
|
Total
time deposits
|
2,420,731 | |||
|
Interest-bearing
deposits with no stated maturity
|
3,082,547 | |||
|
Total
interest-bearing deposits
|
$ | 5,503,278 |
Short-Term
Borrowings
At
December 31, 2009 and 2008, short-term borrowings consisted of the following ($
in thousands):
|
2009
|
2008
|
|||||||
|
FHLB
advances
|
$ | 125,000 | $ | 450,000 | ||||
|
TAF
borrowings
|
- | 200,000 | ||||||
|
Serviced
GNMA loans eligible for repurchase
|
81,042 | 39,539 | ||||||
|
Treasury
tax and loan note option account
|
22,451 | 17,078 | ||||||
|
Other
|
25,464 | 24,341 | ||||||
|
Total
short-term borrowings
|
$ | 253,957 | $ | 730,958 | ||||
Trustmark
has received advances from the FHLB, which are classified as short-term and are
collateralized by a blanket lien on Trustmark’s single-family, multi-family,
home equity and commercial mortgage loans. These advances have a
weighted-average remaining maturity of 11 days with a weighted-average cost of
0.10%. All advances have fixed rates and range from $50.0 million to
$75.0 million with interest rates ranging from 0.10% to
0.11%. Interest expense on short-term FHLB advances totaled $243
thousand in 2009, $4.7 million in 2008 and $9.6 million in 2007. At December 31,
2009, Trustmark had $1.7 billion available in additional borrowing capacity from
the FHLB.
Trustmark
has also utilized the Term Auction Facility (TAF) program established by the
Board of Governors of the Federal Reserve System (Federal Reserve) as an
alternative source of short-term borrowings for banks. The TAF was
designed to address pressures in short-term funding markets. Under the TAF, the
Federal Reserve auctions term funds to depository institutions with maturities
of 28 or 84 days. All depository institutions that are eligible to borrow under
the primary credit program are eligible to participate in TAF auctions. At
December 31, 2009, Trustmark had no TAF borrowings compared to $200 million
outstanding at December 31, 2008. Interest expense on TAF borrowings totaled
$586 thousand during 2009 compared with $46 thousand in 2008. All TAF credit is
fully collateralized; however, the aggregate sum of all outstanding advances for
which the remaining term to maturity is greater than 28 days shall not exceed
75% of the collateral value of the collateral available to secure such
advances. At December 31, 2009, Trustmark had additional TAF capacity
of $821.6 million. Effective January 14, 2010, the Federal Reserve
will no longer lend for terms greater than 28 days for both primary borrowing
through the discount window as well as the TAF program.
Trustmark
participates in the Treasury Investment Program through its involvement as a
treasury tax and loan note option depository. Note option
depositories hold onto tax-based deposits in an open-ended interest-bearing note
until the Treasury withdraws or “calls” the funds. As a note option depository,
Trustmark derives two major benefits from this program. First, the
interest rate that the Treasury charges is 25 basis points below the Federal
Funds rate. Secondly, involvement with this program provides
Trustmark with a ready source of liquidity. Trustmark retains the use
of customers’ tax deposits as the primary source of funds under this program but
also participates in the direct investment program, which represents cash
balances in excess of those needed by the Treasury for current expenditures and
financing activity. Trustmark has an established pre-approved limit
of $50 million in funds they will hold in the direct investment program, which
requires a pledge of collateral up to the pre-established limit.
Long-Term
FHLB Advances
To
complement the short-term advances received from the FHLB, which were discussed
in the section above, Trustmark also has received one long-term advance of $75.0
million. This advance reprices on a monthly basis and is set to
mature on April 20, 2011, a remaining maturity of 1.3 years. The
weighted average cost during 2009 was 0.69% while interest expense on this
advance totaled $494 thousand in 2009. Trustmark had no long-term
FHLB advances outstanding during 2008 and 2007.
Subordinated
Notes Payable
During
2006, TNB issued $50.0 million aggregate principal amount of Subordinated Notes
(the Notes) due December 15, 2016. At December 31, 2009, the carrying
amount of the Notes was $49.8 million. The Notes have not been, and
are not required to be, registered with the Securities and Exchange Commission
under the Securities Act of 1933 (Securities Act), as amended. 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. The Notes bear interest at the rate of 5.673% per
annum from December 13, 2006, until the principal of the Notes has been paid in
full. Interest on the Notes is payable semi-annually in arrears on
June 15 and December 15 of each year, commencing June 15, 2007, and through the
date of maturity. 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.
On August
18, 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, are redeemable at Trustmark’s option
beginning after five years and bear interest at a variable rate per annum equal
to the three-month LIBOR plus 1.72%. 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 $61.9 million in aggregate principal amount of Trustmark’s junior
subordinated debentures. The net proceeds to Trustmark from the sale
of the Notes to the Trust were used to finance its merger with Republic
Bancshares of Texas, Inc.
The
debentures were issued pursuant to a Junior Subordinated Indenture, dated August
18, 2006, between Trustmark, as issuer, and Wilmington Trust Company, as
trustee. Like the trust preferred securities, the debentures bear
interest at a variable rate per annum equal to the three-month LIBOR plus 1.72%
and mature on September 30, 2036. The debentures may be redeemed at
Trustmark’s option at anytime on or after September 30, 2011 or at anytime upon
certain events, such as a change in the regulatory capital treatment of the
debentures, the Trust being deemed an investment company or the occurrence of
certain adverse tax events. The interest payments by Trustmark will
be used to pay the quarterly distributions payable by the Trust to the holder of
the trust preferred securities. However, so long as no event of
default has occurred under the debentures, Trustmark may defer interest payments
on the debentures (in which case the Trust will also defer distributions
otherwise due on the trust preferred securities) for up to 20 consecutive
quarters.
The
debentures are subordinated to the prior payment of any other indebtedness of
Trustmark that, by its terms, is not similarly subordinated. The
trust preferred securities are recorded as a long-term liability on Trustmark’s
balance sheet; however, for regulatory purposes the trust preferred securities
are treated as Tier 1 capital under rulings of the Federal Reserve Board,
Trustmark’s primary federal regulatory agency.
Trustmark
also entered into a Guarantee Agreement, dated August 18, 2006, pursuant to
which it has agreed to guarantee the payment by the Trust of distributions on
the trust preferred securities and the payment of principal of the trust
preferred securities when due, either at maturity or on redemption, but only if
and to the extent that the Trust fails to pay distributions on or principal of
the trust preferred securities after having received interest payments or
principal payments on the Notes from Trustmark for the purpose of paying those
distributions or the principal amount of the trust preferred
securities.
In
addition, pursuant to the acquisition of Republic Bancshares of Texas, Inc., on
August 25, 2006, Trustmark assumed the liability for $8.2 million in junior
subordinated debt securities issued to Republic Bancshares Capital Trust I
(Republic Trust), also a Delaware trust. Republic Trust used the
proceeds from the issuance of $8.0 million in trust preferred securities to
acquire the junior subordinated debt securities. Both the trust
preferred securities and the junior subordinated debt securities mature on
January 7, 2033, and were callable at the option of Trustmark, in whole or in
part, on January 7, 2008. Both the trust preferred securities and
junior subordinated debt securities bear interest at a variable rate per annum
equal to the three-month LIBOR plus 3.35%. Under applicable
regulatory guidelines, these trust preferred securities qualify as Tier 1
capital.
As
defined in applicable accounting standards, both Trustmark Preferred Capital
Trust I and Republic Bancshares Capital Trust I, 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.
At
December 31, 2009, and December 31, 2008, total combined assets for the Trust
and Republic Trust totaled $70.1 million resulting from their investment in
subordinated debentures issued by Trustmark. Combined liabilities and
shareholder’s equity also totaled $70.1 million, resulting from the issuance of
trust preferred securities in the amount of $68.0 million, as well as $2.1
million in common securities issued to Trustmark. During 2009,
combined net income equaled $60.0 thousand resulting from interest income from
junior subordinated debt securities issued by Trustmark to the Trust and
Republic Trust compared with $116.4 thousand during 2008. Dividends
issued to Trustmark during 2009 totaled $ 60.0 thousand compared to $116.4
thousand during 2008.
The
income tax provision included in the statements of income is as follows ($ in
thousands):
|
Current
|
2009
|
2008
|
2007
|
|||||||||
|
Federal
|
$ | 42,117 | $ | 52,891 | $ | 51,729 | ||||||
|
State
|
6,393 | 8,652 | 8,499 | |||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(3,892 | ) | (15,360 | ) | (5,067 | ) | ||||||
|
State
|
(585 | ) | (2,313 | ) | (759 | ) | ||||||
|
Income
tax provision
|
$ | 44,033 | $ | 43,870 | $ | 54,402 | ||||||
The
income tax provision differs from the amount computed by applying the statutory
federal income tax rate of 35% to income before income taxes as a result of the
following ($ in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Income
tax computed at statutory tax rate
|
$ | 47,978 | $ | 47,700 | $ | 57,049 | ||||||
|
Tax
exempt interest
|
(5,066 | ) | (4,791 | ) | (5,027 | ) | ||||||
|
Nondeductible
interest expense
|
270 | 457 | 679 | |||||||||
|
State
income taxes, net
|
3,775 | 4,120 | 5,031 | |||||||||
|
Income
tax credits
|
(3,396 | ) | (3,372 | ) | (2,185 | ) | ||||||
|
Other
|
472 | (244 | ) | (1,145 | ) | |||||||
|
Income
tax provision
|
$ | 44,033 | $ | 43,870 | $ | 54,402 | ||||||
Temporary
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities gave rise to the following net deferred tax assets at
December 31, 2009 and 2008, which are included in other assets ($ in
thousands):
|
Deferred
tax assets
|
2009
|
2008
|
||||||
|
Allowance
for loan losses
|
$ | 39,651 | $ | 36,308 | ||||
|
Pension
and other postretirement benefit plans
|
24,045 | 23,003 | ||||||
|
Other
real estate
|
13,797 | 6,976 | ||||||
|
Stock-based
compensation
|
5,892 | 4,612 | ||||||
|
Deferred
compensation
|
4,046 | 3,501 | ||||||
|
Mortgage
servicing rights
|
- | 2,180 | ||||||
|
Other
|
5,378 | 6,297 | ||||||
|
Gross
deferred tax asset
|
92,809 | 82,877 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Unrealized
gains on securities available for sale
|
19,865 | 11,385 | ||||||
|
Goodwill
and other identifiable intangibles
|
15,258 | 15,217 | ||||||
|
Premises
and equipment
|
13,094 | 12,220 | ||||||
|
Securities
|
5,013 | 5,042 | ||||||
|
Mortgage
servicing rights
|
4,139 | - | ||||||
|
Other
|
2,665 | 2,565 | ||||||
|
Gross
deferred tax liability
|
60,034 | 46,429 | ||||||
|
Net
deferred tax asset
|
$ | 32,775 | $ | 36,448 | ||||
Trustmark
has evaluated the need for a valuation allowance and, based on the weight of the
available evidence, has determined that it is more likely than not that all
deferred tax assets will be realized.
The
following table provides a summary of the changes during the 2009 calendar year
in the amount of unrecognized tax benefits that are included in other
liabilities in the consolidated balance sheet ($ in thousands):
|
Balance
at January 1, 2009
|
$ | 1,549 | ||
|
Increases
due to tax positions taken during the current year
|
423 | |||
|
Increases
due to tax positions taken during the prior year
|
146 | |||
|
Decreases
due to tax positions taken during a prior year
|
(296 | ) | ||
|
Decreases
due to the lapse of applicable statute of limitations during the current
year
|
(226 | ) | ||
|
Balance
at December 31, 2009
|
$ | 1,596 | ||
|
Accrued
interest, net of federal benefit, at December 31, 2009
|
$ | 215 | ||
|
Unrecognized
tax benefits that would impact the effective tax rate,if recognized, at
December 31, 2009
|
$ | 1,193 |
Interest
and penalties related to unrecognized tax benefits, if any, are recorded in
income tax expense. With limited exception, Trustmark is no longer
subject to U.S. federal, state and local audits by tax authorities for 2003 and
earlier tax years. Trustmark does not anticipate a significant change
to the total amount of unrecognized tax benefits within the next twelve
months.
Capital
Accumulation 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 vest upon three years of service. In an effort to control
expenses, the Board voted to freeze plan benefits effective May 15,
2009. Individuals will not earn additional benefits, except for
interest as required by the IRS regulations, after the effective
date. Associates will retain their previously earned pension
benefits. During the second quarter of 2009, Trustmark recorded a
curtailment gain of $1.9 million as a result of the freeze in plan benefits due
to recognition of the prior service credits previously included in accumulated
other comprehensive loss.
The
following tables present information regarding the plan's benefit obligation,
plan assets, funded status of the plan, amounts recognized in accumulated other
comprehensive loss, net periodic benefit cost and other statistical disclosures
($ in thousands):
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Change
in benefit obligation
|
||||||||
|
Benefit
obligation, beginning of year
|
$ | 87,408 | $ | 84,868 | ||||
|
Service
cost
|
392 | 1,645 | ||||||
|
Interest
cost
|
4,837 | 4,936 | ||||||
|
Actuarial
loss
|
5,787 | 1,163 | ||||||
|
Benefits
paid
|
(5,255 | ) | (5,427 | ) | ||||
|
Prior
service cost due to amendment
|
- | 223 | ||||||
|
Curtailment
gain
|
(1,460 | ) | - | |||||
|
Benefit
obligation, end of year
|
$ | 91,709 | $ | 87,408 | ||||
|
Change
in plan assets
|
||||||||
|
Fair
value of plan assets, beginning of year
|
$ | 66,908 | $ | 79,402 | ||||
|
Actual
return on plan assets
|
10,522 | (24,567 | ) | |||||
|
Employer
contributions
|
- | 17,500 | ||||||
|
Benefit
payments
|
(5,255 | ) | (5,427 | ) | ||||
|
Fair
value of plan assets, end of year
|
$ | 72,175 | $ | 66,908 | ||||
|
Funded
status at end of year - net liability
|
$ | (19,534 | ) | $ | (20,500 | ) | ||
|
Amounts
recognized in accumulated other comprehensive loss
|
||||||||
|
Net
loss
|
$ | 43,368 | $ | 46,400 | ||||
|
Prior
service credits
|
- | (2,015 | ) | |||||
|
Amounts
recognized
|
$ | 43,368 | $ | 44,385 | ||||
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
periodic benefit cost
|
||||||||||||
|
Service
cost
|
$ | 392 | $ | 1,645 | $ | 1,306 | ||||||
|
Interest
cost
|
4,837 | 4,936 | 4,697 | |||||||||
|
Expected
return on plan assets
|
(6,036 | ) | (5,593 | ) | (5,290 | ) | ||||||
|
Amortization
of prior service credits
|
(127 | ) | (510 | ) | (510 | ) | ||||||
|
Curtailment
gain
|
(1,887 | ) | - | - | ||||||||
|
Recognized
net actuarial loss
|
2,872 | 1,859 | 2,254 | |||||||||
|
Net
periodic benefit cost
|
$ | 51 | $ | 2,337 | $ | 2,457 | ||||||
|
Other
changes in plan assets and benefit obligation recognized in other
comprehensive loss, before taxes
|
||||||||||||
|
Net
(gain) loss
|
$ | (3,032 | ) | $ | 29,464 | $ | (1,973 | ) | ||||
|
Prior
service credits
|
- | 223 | - | |||||||||
|
Amortization
of prior service credits
|
2,015 | 510 | 510 | |||||||||
|
Total
recognized in other comprehensive loss
|
$ | (1,017 | ) | $ | 30,197 | $ | (1,463 | ) | ||||
|
Total
recognized in net periodic benefit cost and other comprehensive
loss
|
$ | (966 | ) | $ | 32,534 | $ | 994 | |||||
|
Weighted-average
assumptions as of end of year
|
||||||||||||
|
Discount
rate for benefit obligation
|
5.50 | % | 6.00 | % | 6.00 | % | ||||||
|
Discount
rate for net periodic benefit cost
|
6.00 | % | 6.00 | % | 6.00 | % | ||||||
|
Expected
long-term return on plan assets
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate
of compensation increase
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
Plan
Assets
Trustmark's
capital accumulation plan weighted-average asset allocations at December 31,
2009 and 2008, by asset category are as follows:
|
2009
|
2008
|
|||||||
|
Money
market fund and certificate of deposit
|
4.2 | % | 39.9 | % | ||||
|
Fixed
income mutual funds
|
25.0 | % | - | |||||
|
Equity
mutual funds
|
64.0 | % | 53.7 | % | ||||
|
Fixed
income hedge fund
|
6.8 | % | 6.4 | % | ||||
|
Total
|
100.0 | % | 100.0 | % | ||||
The
strategic objective of the plan focuses on capital growth with moderate
income. The plan is managed on a total return basis with the return
objective set as a reasonable actuarial rate of return on plan assets net of
investment management fees. Moderate risk is assumed given the
average age of plan participants and the need to meet the required rate of
return. Equity and fixed income mutual funds are utilized to allow
for capital appreciation while fully diversifying the portfolio with more
conservative fixed income investments. The target asset allocation
range for the portfolio is 0-10% Cash and Cash Equivalents, 10-30% Fixed Income,
30-55% Domestic Equity, 10-30% International Equity and 0-20% Other
Investments. Changes in allocations are a result of tactical asset
allocation decisions and fall within the aforementioned percentage range for
each major asset class. At December 31, 2008, the plan held a
short-term certificate of deposit, which was the result of a $17.5 million
company contribution made in late December. During the first quarter
of 2009, this balance was redistributed among other investments according to
policy guidelines.
Trustmark
selects the expected long-term rate-of-return-on-assets assumption in
consultation with its investment advisors and actuary. This rate is
intended to reflect the average rate of earnings expected to be earned on the
funds invested or to be invested to provide plan benefits. Historical
performance is reviewed, especially with respect to real rates of return (net of
inflation), for the major asset classes held or anticipated to be held by the
trust and for the trust itself. Undue weight is not given to recent
experience that may not continue over the measurement period, with higher
significance placed on current forecasts of future long-term economic
conditions.
Because
assets are held in a qualified trust, anticipated returns are not reduced for
taxes. Further, solely for this purpose, the plan is assumed to
continue in force and not terminate during the period in which assets are
invested. However, consideration is given to the potential impact of
current and future investment policy, cash flow into and out of the trust and
expenses (both investment and non-investment) typically paid from plan assets
(to the extent such expenses are not explicitly estimated within periodic
cost).
Fair
Value Measurements
At this
time, Trustmark presents no fair values that are derived through internal
modeling. Should positions requiring fair valuation arise that are
not relevant to existing methodologies, Trustmark will make every reasonable
effort to obtain market participant assumptions, or independent
evaluation.
The
following table sets forth by level, within the fair value hierarchy, the plan’s
assets measured at fair value at December 31, 2009 and 2008 ($ in
thousands):
|
December 31, 2009
|
||||||||||||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
Money
market fund
|
$ | 3,034 | $ | - | $ | 3,034 | $ | - | ||||||||
|
Fixed
income mutual funds
|
18,030 | 18,030 | - | - | ||||||||||||
|
Equity
mutual funds
|
46,181 | 46,181 | - | - | ||||||||||||
|
Fixed
income hedge fund
|
4,930 | - | - | 4,930 | ||||||||||||
|
Total
assets at fair value
|
$ | 72,175 | $ | 64,211 | $ | 3,034 | $ | 4,930 | ||||||||
|
December 31, 2008
|
||||||||||||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
Money
market fund and certificate of deposit
|
$ | 26,690 | $ | - | $ | 26,690 | $ | - | ||||||||
|
Equity
mutual funds
|
35,919 | 35,919 | - | - | ||||||||||||
|
Fixed
income hedge fund
|
4,299 | - | - | 4,299 | ||||||||||||
|
Total
assets at fair value
|
$ | 66,908 | $ | 35,919 | $ | 26,690 | $ | 4,299 | ||||||||
The
following table sets forth a summary of changes in fair value of the plan’s
Level 3 assets for the years ended December 31, 2009 and 2008 ($ in
thousands):
|
Fixed Income Hedge Fund
|
||||
|
Balance,
January 1, 2008
|
$ | 6,005 | ||
|
Unrealized
losses relating to instruments still held at reporting
date
|
(1,706 | ) | ||
|
Balance,
December 31, 2008
|
4,299 | |||
|
Unrealized
gains relating to instruments still held at reporting date
|
631 | |||
|
Balance,
December 31, 2009
|
$ | 4,930 | ||
There
have been no changes in methodologies used at December 31, 2009. The
methodology and significant assumptions used in estimating the fair values
presented above are as follows:
|
|
●
|
Money
market fund and certificate of deposit approximates fair value due to its
immediate maturity.
|
|
|
●
|
Fixed
income hedge fund is valued in accordance with the valuation provided by
the general partner of the underlying
partnership.
|
The
preceding methods described may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair
values. Furthermore, although the plan believes its valuation methods
are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different fair value measurement at the
reporting date.
Contributions
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. For 2009, Trustmark’s minimum required
contribution was zero. For 2008, the minimum required contribution
was zero; however, due to a sharp decline in the value of pension assets,
Trustmark made a voluntary contribution to the plan in the amount of $17.5
million in the fourth quarter. The actual amount of the contribution
will be determined based on the plan's funded status and return on plan assets
as of the measurement date, which is December 31.
Estimated
Future Benefit Payments and Other Disclosures
The
following plan benefit payments, which reflect expected future service, are
expected to be paid ($ in thousands):
|
Year
|
Amount
|
|||
|
2010
|
$ | 10,179 | ||
|
2011
|
8,382 | |||
|
2012
|
8,380 | |||
|
2013
|
7,107 | |||
|
2014
|
6,675 | |||
|
2015-2019
|
31,460 | |||
Amounts
in accumulated other comprehensive loss expected to be recognized as components
of net periodic benefit cost during 2010 include a net loss of $3.6 million. No
amounts related to transition assets or liabilities are expected to be
recognized and no plan assets are expected to be returned during
2010.
Supplemental
Retirement Plan
Trustmark
maintains a nonqualified supplemental retirement plan covering directors that
elect to defer fees, key executive officers and senior officers. The
plan provides for defined death benefits and/or retirement benefits based on a
participant's covered salary. Trustmark has acquired life insurance
contracts on the participants covered under the plan, which may be used to fund
future payments under the plan. The measurement date for the plan is
December 31. The following tables present information regarding the plan's
benefit obligation, plan assets, funded status of the plan, amounts recognized
in accumulated other comprehensive loss, net periodic benefit cost and other
statistical disclosures ($ in thousands):
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Change
in benefit obligation
|
||||||||
|
Benefit
obligation, beginning of year
|
$ | 37,761 | $ | 34,482 | ||||
|
Service
cost
|
913 | 1,167 | ||||||
|
Interest
cost
|
2,209 | 2,091 | ||||||
|
Actuarial
loss
|
2,352 | 1,398 | ||||||
|
Benefits
paid
|
(1,657 | ) | (1,523 | ) | ||||
|
Prior
service cost due to amendment
|
20 | 146 | ||||||
|
Benefit
obligation, end of year
|
$ | 41,598 | $ | 37,761 | ||||
|
Change
in plan assets
|
||||||||
|
Fair
value of plan assets, beginning of year
|
$ | - | $ | - | ||||
|
Actual
return on plan assets
|
- | - | ||||||
|
Employer
contributions
|
1,657 | 1,523 | ||||||
|
Benefit
payments
|
(1,657 | ) | (1,523 | ) | ||||
|
Fair
value of plan assets, end of year
|
$ | - | $ | - | ||||
|
Funded
status at end of year - net liability
|
$ | (41,598 | ) | $ | (37,761 | ) | ||
|
Amounts
recognized in accumulated other comprehensive loss
|
||||||||
|
Net
loss
|
$ | 9,618 | $ | 7,504 | ||||
|
Prior
service cost
|
1,579 | 1,708 | ||||||
|
Amounts
recognized
|
$ | 11,197 | $ | 9,212 | ||||
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
periodic benefit cost
|
||||||||||||
|
Service
cost
|
$ | 913 | $ | 1,167 | $ | 1,296 | ||||||
|
Interest
cost
|
2,209 | 2,091 | 1,815 | |||||||||
|
Amortization
of prior service cost
|
150 | 148 | 139 | |||||||||
|
Recognized
net actuarial loss
|
237 | 246 | 94 | |||||||||
|
Net
periodic benefit cost
|
$ | 3,509 | $ | 3,652 | $ | 3,344 | ||||||
|
Other
changes in plan assets and benefit obligation recognized in other
comprehensive loss, before taxes
|
||||||||||||
|
Net
loss
|
$ | 2,115 | $ | 1,152 | $ | 1,855 | ||||||
|
Prior
service cost
|
20 | 146 | 8 | |||||||||
|
Amortization
of prior service cost
|
(150 | ) | (148 | ) | (139 | ) | ||||||
|
Total
recognized in other comprehensive loss
|
$ | 1,985 | $ | 1,150 | $ | 1,724 | ||||||
|
Total recognized
in net periodic benefit cost and other comprehensive loss
|
$ | 5,494 | $ | 4,802 | $ | 5,068 | ||||||
|
Weighted-average
assumptions as of end of year
|
||||||||||||
|
Discount
rate for benefit obligation
|
5.50 | % | 6.00 | % | 6.00 | % | ||||||
|
Discount
rate for net periodic benefit cost
|
6.00 | % | 6.00 | % | 6.00 | % | ||||||
Estimated Supplemental Retirement Plan Payments and Other
Disclosures
The
following supplemental retirement plan benefit payments are expected to be paid
in the following years ($ in thousands):
|
Year
|
Amount
|
|||
|
2010
|
$ | 2,162 | ||
|
2011
|
2,268 | |||
|
2012
|
2,375 | |||
|
2013
|
2,602 | |||
|
2014
|
2,716 | |||
|
2015
- 2019
|
15,742 | |||
Amounts
in accumulated other comprehensive loss expected to be recognized as components
of net periodic benefit cost during 2010 include a net loss of $362 thousand and
prior service cost of $148 thousand. No amounts related to transition
assets or liabilities are expected to be recognized during 2010.
Other
Benefit Plans
Defined
Contribution Plan
Trustmark
provides associates with a self-directed 401(k) retirement plan that allows
associates to contribute a percentage of base pay, within limits provided by the
Internal Revenue Code and accompanying regulations, into the
plan. Trustmark's contributions to this plan were $5.2 million in
2009, $5.2 million in 2008 and $5.3 million in 2007.
Trustmark
has granted and currently has outstanding, stock and incentive compensation
awards subject to the provisions of the 1997 Long Term Incentive Plan (the 1997
Plan) and the 2005 Stock and Incentive Compensation Plan (the 2005
Plan). New awards have not been issued under the 1997 Plan since it
was replaced by the 2005 Plan.
The 2005
Plan is designed to provide flexibility to Trustmark regarding its ability to
motivate, attract and retain the services of key associates and
directors. The 2005 Plan allows Trustmark to make grants of
nonqualified stock options, incentive stock options, stock appreciation rights,
restricted stock, restricted stock units and performance units to key associates
and directors. At December 31, 2009, the maximum number of shares of
Trustmark’s common stock available for issuance under the 2005 Plan is 5,399,373
shares.
Stock
Option Grants
Stock
option awards under the 2005 Plan are granted with an exercise price equal to
the market price of Trustmark’s stock on the date of grant. Stock
options granted under the 2005 Plan vest 20% per year and have a contractual
term of seven years. Stock option awards, which were granted under
the 1997 Plan, had an exercise price equal to the market price of Trustmark’s
stock on the date of grant, vested equally over four years with a contractual
ten-year term. Compensation expense for stock options granted under
these plans is estimated using the fair value of each option granted using the
Black-Scholes option-pricing model and is recognized on the straight-line method
over the requisite service period. Stock option-based compensation
expense for these plans totaled $674 thousand in 2009, $858 thousand in 2008 and
$1.2 million in 2007. At December 31, 2009, Trustmark had $553
thousand in total compensation expense not yet recognized for nonvested stock
option awards. This unrecognized compensation expense is expected to
be recognized over a weighted-average life of 1.1 years. As reflected
in the tables below, no stock options have been granted since 2006, when
Trustmark began granting restricted stock awards.
The
following table summarizes Trustmark’s stock option activity for 2009, 2008, and
2007:
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Options
|
Shares
|
Average
Option
Price
|
Shares
|
Average
Option
Price
|
Shares
|
Average
Option
Price
|
||||||||||||||||||
|
Outstanding,
beginning of year
|
1,796,174 | $ | 25.57 | 1,954,360 | $ | 25.42 | 1,996,035 | $ | 25.46 | |||||||||||||||
|
Granted
|
- | - | - | - | - | - | ||||||||||||||||||
|
Exercised
|
(154,500 | ) | 19.35 | (28,150 | ) | 21.92 | (17,575 | ) | 24.97 | |||||||||||||||
|
Expired
|
(98,749 | ) | 23.75 | (113,736 | ) | 23.35 | (4,200 | ) | 25.91 | |||||||||||||||
|
Forfeited
|
(11,000 | ) | 30.71 | (16,300 | ) | 30.15 | (19,900 | ) | 29.86 | |||||||||||||||
|
Outstanding,
end of year
|
1,531,925 | 26.27 | 1,796,174 | 25.57 | 1,954,360 | 25.42 | ||||||||||||||||||
|
Exercisable,
end of year
|
1,392,355 | 25.87 | 1,545,174 | 24.82 | 1,504,305 | 24.18 | ||||||||||||||||||
|
Aggregate
Intrinsic Value
|
||||||||||||||||||||||||
|
Outstanding,
end of year
|
$ | 424,029 | $ | 597,450 | $ | 2,951,605 | ||||||||||||||||||
|
Exercisable,
end of year
|
$ | 424,029 | $ | 597,450 | $ | 2,951,605 | ||||||||||||||||||
The total
intrinsic value of options exercised was $426 thousand in 2009, $204 thousand in
2008 and $66 thousand in 2007. The following table presents
information on stock options by ranges of exercise prices at December 31,
2009:
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||||||
|
Range
of
Exercise Prices
|
Outstanding
December 31,
2009
|
Weighted-
Average
Remaining
Years
To Expiration
|
Weighted-
Average
Exercise
Price
|
Exercisable
December 31,
2009
|
Weighted-
Average
Remaining
Years
To Expiration
|
Weighted-
Average
Exercise
Price
|
||||||||||||||||||||
| $ | 16.17 - $19.41 | 55,850 | 0.4 | $ | 18.06 | 55,850 | 0.4 | $ | 18.06 | |||||||||||||||||
| $ | 19.41 - $22.64 | 202,725 | 1.4 | 21.68 | 202,725 | 1.4 | 21.68 | |||||||||||||||||||
| $ | 22.64 - $25.88 | 454,900 | 2.8 | 24.76 | 454,900 | 2.8 | 24.76 | |||||||||||||||||||
| $ | 25.88 - $29.11 | 582,700 | 3.4 | 27.73 | 530,860 | 3.5 | 27.67 | |||||||||||||||||||
| $ | 29.11 - $32.35 | 235,750 | 3.3 | 31.48 | 148,020 | 3.4 | 31.45 | |||||||||||||||||||
| 1,531,925 | 2.8 | 26.27 | 1,392,355 | 2.9 | 25.87 | |||||||||||||||||||||
Restricted
Stock Grants
Performance
Awards
Trustmark’s
performance awards are granted to Trustmark’s executive and senior management
team, as well as Trustmark’s Board of Directors. Performance awards granted vest
based on performance goals of return on average tangible equity (ROATE) or
return on average equity (ROAE) and total shareholder return (TSR) compared to a
defined peer group. Awards based on TSR are valued utilizing a Monte Carlo
simulation to estimate fair value of the awards at the grant date, while ROATE
and ROAE awards are valued utilizing the fair value of Trustmark’s stock at the
grant date based on the estimated number of shares expected to vest. The
restriction period for performance awards covers a three-year vesting
period. These awards are recognized on the straight-line method over
the requisite service period. These awards provide for excess shares,
if performance measures exceed 100%. Any excess shares granted are
restricted for an additional three-year vesting period. The
restricted share agreement provides for voting rights and dividend
privileges.
Trustmark
recorded compensation expense for performance awards of $1.8 million during
2009, $2.3 million during 2008 and $1.9 million during 2007. At December 31,
2009, Trustmark had $2.0 million in total compensation expense not yet
recognized for nonvested performance awards. This unrecognized
compensation expense is expected to be recognized over a weighted-average life
of 1.7 years. The following table summarizes Trustmark’s performance award
activity during years ended December 31, 2009, 2008 and 2007:
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
|||||||||||||||||||
|
Nonvested
shares, beginning of year
|
212,464 | $ | 27.60 | 162,325 | $ | 28.77 | 89,075 | $ | 28.27 | |||||||||||||||
|
Granted
|
79,631 | 17.75 | 76,464 | 20.99 | 75,250 | 30.13 | ||||||||||||||||||
|
Released
from restriction
|
(62,038 | ) | 26.39 | (26,325 | ) | 28.28 | - | - | ||||||||||||||||
|
Forfeited
|
(830 | ) | 24.74 | - | - | (2,000 | ) | 28.90 | ||||||||||||||||
|
Nonvested
shares, end of year
|
229,227 | 25.52 | 212,464 | 27.60 | 162,325 | 28.77 | ||||||||||||||||||
Time-Vested
Awards
Trustmark’s
time-vested awards are granted in both employee recruitment and retention and
are restricted for thirty-six months from the award
dates. Time-vested awards are valued utilizing the fair value of
Trustmark’s stock at the grant date. These awards are recognized on
the straight-line method over the requisite service period. Trustmark
recorded compensation expense for time-vested stock awards of $2.1 million
during 2009, $755 thousand during 2008 and $264 thousand during 2007. At
December 31, 2009, Trustmark had $4.6 million in total compensation expense not
yet recognized for nonvested time-vested awards. This unrecognized
compensation expense is expected to be recognized over a weighted-average life
of 3.4 years. The following table summarizes Trustmark’s time-vested award
activity during years ended December 31, 2009, 2008 and 2007:
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
|||||||||||||||||||
|
Nonvested
shares, beginning of year
|
139,943 | $ | 27.58 | 50,219 | $ | 30.38 | 61,035 | $ | 31.96 | |||||||||||||||
|
Granted
|
187,196 | 19.36 | 100,368 | 20.94 | 37,500 | 29.03 | ||||||||||||||||||
|
Released
from restriction
|
(29,516 | ) | 28.56 | (200 | ) | 26.38 | - | - | ||||||||||||||||
|
Forfeited
|
(5,624 | ) | 24.72 | (10,444 | ) | 28.14 | (48,316 | ) | 30.54 | |||||||||||||||
|
Nonvested
shares, end of year
|
291,999 | 25.50 | 139,943 | 27.58 | 50,219 | 30.38 | ||||||||||||||||||
Performance-Based
Restricted Stock Unit Award
On
January 27, 2009, Trustmark’s Chairman and CEO was granted a cash-settled
performance-based restricted stock unit award (the RSU award) for 23,123 units,
with each unit having the value of one share of Trustmark’s common
stock. This award was granted in connection with an employment
agreement dated November 20, 2008 that provides for in lieu of receiving an
equity compensation award in 2010 or 2011, the 2009 equity compensation award to
be twice the amount of a normal award, with one-half of the award being
performance-based and one-half service-based. The RSU award was
granted outside of the 2005 Plan in lieu of granting shares of performance-based
restricted stock that would exceed the annual limit permitted to be granted
under the 2005 Plan, in order to satisfy the equity compensation provisions of
the employment agreement.
The RSU
award may be settled only in cash and vests only if both performance-based and
service-based requirements are met. The performance-based vesting
requires performance goals to be achieved within a two-year performance period
commencing January 1, 2009 and ending December 31, 2010. The
performance-based vesting of the RSU award is based on the achievement of target
percentages related to ROATE (50%), with vesting up to and including 100%, and
TSR (50%), with vesting up to and including 100%, compared to Trustmark’s
defined peer group. If a greater than 100% vesting level with respect
to the ROATE and TSR targets is achieved in the aggregate (with the maximum
being 200%), an additional award of service-based restricted stock units (Excess
Units) will be granted within the first 2½ months after the performance period
ends. The number of Excess Units granted will equal the number of
units awarded initially (Original Units) multiplied by the vesting percentage
exceeding 100%. In addition to the performance-based vesting requirements, the
RSU award’s service-based vesting provisions require continued employment with
Trustmark through May 10, 2011, which is the expected date of Trustmark’s annual
meeting in 2011, for the Original Units and the Excess Units to vest. Dividend
equivalents on the Original Units will be credited from the award date and will
vest and be paid only when and to the extent the Original Units vest. Dividend
equivalents on the Excess Units will be credited from the date Trustmark grants
the Excess Units, and will vest and be paid only when and to the extent the
Excess Units vest.
Trustmark
recorded compensation expense for the RSU award of $376 thousand during 2009
based on the share price of $22.54 at December 31, 2009. At December
31, 2009, Trustmark had $782 thousand in total compensation expense not yet
recognized for the nonvested portion of the RSU award. The
unrecognized compensation expense is expected to be recognized over the
remaining vesting period of 1.3 years.
Lending
Related
Trustmark
makes commitments to extend credit and issues standby and commercial letters of
credit (letters of credit) in the normal course of business in order to fulfill
the financing needs of its customers. The carrying amount of
commitments to extend credit and letters of credit approximates the fair value
of such financial instruments. These amounts are not material to
Trustmark’s financial statements.
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. Because many of these commitments
are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The exposure to
credit loss in the event of nonperformance by the other party to the commitments
to extend credit is represented by the contract amount of those
instruments. 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 both December 31, 2009 and 2008, Trustmark had
commitments to extend credit of $1.7 billion.
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 December 31,
2009 and 2008, Trustmark’s maximum exposure to credit loss in the event of
nonperformance by the other party for letters of credit was $187.5 million and
$170.4 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 December 31, 2009, the fair
value of collateral held was $53.7 million.
Lease
Commitments
Trustmark
currently has operating lease commitments for banking premises and equipment,
which expire from 2010 to 2028. It is expected that certain leases
will be renewed, or equipment replaced, as leases expire. Rental
expense totaled $6.4 million in 2009, $6.3 million in 2008 and $5.7 million in
2007. At December 31, 2009, future minimum rental commitments under
noncancellable operating leases are as follows ($ in thousands):
|
Year
|
Amount
|
|||
|
2010
|
$ | 4,192 | ||
|
2011
|
3,082 | |||
|
2012
|
2,216 | |||
|
2013
|
1,485 | |||
|
2014
|
980 | |||
|
Thereafter
|
6,289 | |||
|
Total
|
$ | 18,244 | ||
Legal
Proceedings
Trustmark’s
wholly-owned subsidiary, TNB, has been named as a defendant in a purported class
action complaint that was filed on August 23, 2009 in the District Court of
Harris County, Texas, by Peggy Roif Rotstain, Guthrie Abbott, Catherine Burnell,
Steven Queyrouze, Jaime Alexis Arroyo Bornstein and Juan C. Olano, on behalf of
themselves and all others similarly situated, naming TNB and four other
financial institutions unaffiliated with the Company as defendants. The
complaint seeks to recover (i) alleged fraudulent transfers from each of the
defendants in the amount of fees received by each defendant from entities
controlled by R. Allen Stanford (collectively, the “Stanford Financial Group”)
and (ii) damages allegedly attributable to alleged conspiracies by one or more
of the defendants with the Stanford Financial Group to commit fraud and/or aid
and abet fraud arising from the facts set forth in pending federal criminal
indictments and civil complaints against Mr. Stanford, other individuals and the
Stanford Financial Group. Plaintiffs have demanded a jury trial. In November
2009, the lawsuit was removed to federal court by certain defendants and then
transferred by the United States Panel on Multidistrict Litigation to federal
court in the Northern District of Texas (Dallas) where multiple Stanford related
matters are being consolidated for pre-trial proceedings.
TNB’s
relationship with the Stanford Financial Group began as a result of Trustmark’s
acquisition of a Houston-based bank in August 2006, and consisted of
correspondent banking and other traditional banking services in the ordinary
course of business. The lawsuit is in its preliminary stage and has been
previously reported in the press. Trustmark believes that the lawsuit is
entirely without merit and intends to defend vigorously against it.
Trustmark
and its subsidiaries are also parties to other 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.
Common
Stock Offering
On
December 7, 2009, Trustmark completed a public offering of 6,216,216 shares of
its common stock, including 810,810 shares issued pursuant to the exercise of
the underwriters’ over-allotment option, at a price of $18.50 per share.
Trustmark received net proceeds of approximately $109.3 million after deducting
underwriting discounts, commissions and estimated offering
expenses. Proceeds from this offering were used in the redemption of
the Senior Preferred Stock discussed below.
Preferred
Stock and Warrant
Issued
On
November 21, 2008, Trustmark issued 215,000 shares of Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, (Senior Preferred Stock) to the U.S.
Treasury (Treasury) in a private placement transaction as part of the Troubled
Assets Relief Program Capital Purchase Program (TARP CPP), a voluntary
initiative for healthy U.S. financial institutions. As part of its participation
in the TARP CPP, Trustmark also issued to the Treasury a ten-year warrant (the
Warrant) to purchase up to 1,647,931 shares of Trustmark’s common stock, at an
initial exercise price of $19.57 per share, subject to customary anti-dilution
adjustments.
The
Senior Preferred Stock and the Warrant were initially recorded at an allocated
value of the total cash proceeds of $215.0 million in the same proportion as the
aggregate estimated fair value of the two securities. Trustmark
retained a widely recognized third party to advise on to the value of the Senior
Preferred Stock and the Warrant.
The fair
value of the Senior Preferred Stock was estimated by a discounted cash flow
method, assuming that Trustmark would not raise new capital in either the debt
or equity markets. The cash flows were discounted using a yield curve
that ranged from 5.85% to 10.42%, and averaged approximately
8.75%. Under this method, the Senior Preferred had an estimated fair
value of $182.6 million as of the valuation date of November 21,
2008.
Trustmark’s
advisor’s model analyzed the value of the warrant using a Cox-Ross-Rubenstein
Binomial Option Pricing Model. Model assumptions included the stated
terms of the issue, and current and/or historical market data for the
assumptions of volatility, interest rates, and dividend yield. Under
this approach, the model reached a recommended value of the Warrant that was
estimated to be $9.0 million as of the valuation date.
In total,
the Senior Preferred Stock and Warrant fair values were estimated at $191.6
million, at the valuation date. Trustmark reviewed the model and the
recommended valuations and determined that they represented a fair valuation of
the Senior Preferred Stock and the Warrant. At the same proportion as
the relative fair values, Trustmark allocated the $215.0 million cash proceeds
between the Senior Preferred Stock and the Warrant. Specifically,
$204.9 million was allocated to the Senior Preferred Stock and recorded as
Preferred Stock and $10.1 million was allocated to the Warrant and recorded in
Capital Surplus.
The
Senior Preferred Stock was recorded at a discount to its face value of $215.0
million. Until the Senior Preferred Stock was repurchased, the
discount was being accreted monthly on a constant yield method to the dividend
reset date of February 15, 2014.
Repurchased
On
December 9, 2009, Trustmark completed the repurchase of its 215,000 shares of
Senior Preferred Stock from the Treasury at a purchase price of $215.0 million
plus a final accrued dividend of $716.7 thousand. The repurchase of
the Senior Preferred Stock resulted in a one-time, non-cash charge $8.2 million
to net income available to common shareholders in Trustmark’s fourth quarter
financial statements for the unaccreted discount recorded at the date of
issuance of the Senior Preferred Stock. In addition, on December 30,
2009, Trustmark repurchased in full from the Treasury, the Warrant to purchase
1,647,931 shares of Trustmark’s common stock, which was issued to the Treasury
pursuant to the TARP CPP. The purchase price paid by Trustmark to the
Treasury for the Warrant was its fair value of $10.0 million.
Regulatory
Capital
Trustmark
and TNB are subject to minimum capital requirements, which are administered by
various federal regulatory agencies. These capital requirements, as
defined by federal guidelines, involve quantitative and qualitative measures of
assets, liabilities and certain off-balance sheet
instruments. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional, discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements of Trustmark and TNB. As of December 31, 2009,
Trustmark and TNB have exceeded all of the minimum capital standards for the
parent company and its primary banking subsidiary as established by regulatory
requirements. In addition, TNB has met applicable regulatory
guidelines to be considered well-capitalized at December 31, 2009. To
be categorized in this manner, TNB must maintain minimum total risk-based, Tier
1 risk-based and Tier 1 leverage ratios as set forth in the accompanying
table. There are no significant conditions or events that have
occurred since December 31, 2009, which Management believes have affected TNB's
present classification.
Trustmark's
and TNB's actual regulatory capital amounts and ratios are presented in the
table below ($ in thousands):
|
Actual Regulatory Capital
|
Minimum Regulatory Capital
Required
|
Minimum Regulatory Provision to be
Well-Capitalized
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
At
December 31, 2009:
|
||||||||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 1,008,980 | 14.58 | % | $ | 553,504 | 8.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
967,224 | 14.16 | % | 546,344 | 8.00 | % | $ | 682,930 | 10.00 | % | ||||||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 872,509 | 12.61 | % | $ | 276,752 | 4.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
834,056 | 12.21 | % | 273,172 | 4.00 | % | $ | 409,758 | 6.00 | % | ||||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 872,509 | 9.74 | % | $ | 268,868 | 3.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
834,056 | 9.45 | % | 264,817 | 3.00 | % | $ | 441,361 | 5.00 | % | ||||||||||||||
|
At
December 31, 2008:
|
||||||||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 1,090,335 | 14.95 | % | $ | 583,571 | 8.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
1,045,769 | 14.52 | % | 576,082 | 8.00 | % | $ | 720,102 | 10.00 | % | ||||||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 949,365 | 13.01 | % | $ | 291,785 | 4.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
909,370 | 12.63 | % | 288,041 | 4.00 | % | $ | 432,061 | 6.00 | % | ||||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||||||||
|
Trustmark
Corporation
|
$ | 949,365 | 10.42 | % | $ | 273,353 | 3.00 | % | n/a | n/a | ||||||||||||||
|
Trustmark
National Bank
|
909,370 | 10.13 | % | 269,197 | 3.00 | % | $ | 448,662 | 5.00 | % | ||||||||||||||
Dividends
on Common Stock
Dividends
paid by Trustmark are substantially funded from dividends received from
TNB. Approval by TNB's regulators is required if the total of all
dividends declared in any calendar year exceeds the total of its net income for
that year combined with its retained net income of the preceding two
years. TNB will have available in 2010 approximately $57.2 million
plus its net income for that year to pay as dividends.
Common
Stock Repurchase Program
Trustmark
did not repurchase any common shares during 2009 or 2008 and currently has no
authorization from the Board of Directors to repurchase its common
stock. During 2007, Trustmark repurchased approximately 1.4 million
shares of its common stock.
Accumulated
Other Comprehensive Loss
The
following table presents the components of accumulated other comprehensive loss
and the related tax effects allocated to each component for the years ended
December 31, 2009, 2008 and 2007 ($ in thousands):
|
Before-Tax Amount
|
Tax Effect
|
Accumulated Other Comprehensive
Loss
|
||||||||||
|
Balance,
January 1, 2007
|
$ | (33,355 | ) | $ | 12,738 | $ | (20,617 | ) | ||||
|
Unrealized
gains on available for sale securities:
|
||||||||||||
|
Unrealized
holding gains arising during period
|
10,358 | (3,962 | ) | 6,396 | ||||||||
|
Less:
adjustment for net gains realized in net income
|
(112 | ) | 43 | (69 | ) | |||||||
|
Pension
and other postretirement benefit plans:
|
||||||||||||
|
Net
prior service credits arising during the period
|
(379 | ) | 145 | (234 | ) | |||||||
|
Net
gain arising during the period
|
118 | (45 | ) | 73 | ||||||||
|
Balance,
December 31, 2007
|
(23,370 | ) | 8,919 | (14,451 | ) | |||||||
|
Unrealized
gains on available for sale securities:
|
||||||||||||
|
Unrealized
holding gains arising during period
|
31,420 | (12,018 | ) | 19,402 | ||||||||
|
Less:
adjustment for net gains realized in net income
|
(505 | ) | 193 | (312 | ) | |||||||
|
Pension
and other postretirement benefit plans:
|
||||||||||||
|
Net
prior service credits arising during the period
|
(730 | ) | 279 | (451 | ) | |||||||
|
Net
loss arising during the period
|
(30,615 | ) | 11,710 | (18,905 | ) | |||||||
|
Balance,
December 31, 2008
|
(23,800 | ) | 9,083 | (14,717 | ) | |||||||
|
Unrealized
gains on available for sale securities:
|
||||||||||||
|
Unrealized
holding gains arising during period
|
27,639 | (10,572 | ) | 17,067 | ||||||||
|
Less:
adjustment for net gains realized in net income
|
(5,467 | ) | 2,091 | (3,376 | ) | |||||||
|
Pension
and other postretirement benefit plans:
|
||||||||||||
|
Net
prior service credits arising during the period
|
(1,885 | ) | 721 | (1,164 | ) | |||||||
|
Net
gain arising during the period
|
917 | (351 | ) | 566 | ||||||||
|
Balance,
December 31, 2009
|
$ | (2,596 | ) | $ | 972 | $ | (1,624 | ) | ||||
Other
noninterest expense consisted of the following for 2009, 2008, and 2007 ($ in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
FDIC
assessment expense
|
$ | 15,808 | $ | 3,471 | $ | 829 | ||||||
|
ORE/Foreclosure
expense
|
12,814 | 2,380 | 582 | |||||||||
|
Other
expense
|
33,580 | 32,212 | 32,501 | |||||||||
|
Total
other expense
|
$ | 62,202 | $ | 38,063 | $ | 33,912 | ||||||
Financial
Instruments Measured at Fair Value
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 maintains internal processes
that regularly test valuations for anomalies.
Trustmark
utilizes an independent pricing service to advise it on the carrying value of
the securities available for sale portfolio. As part of Trustmark’s
procedures, the price provided from the service is evaluated for reasonableness
given market changes. When a questionable price exists, Trustmark
investigates further to determine if the price is valid. If needed,
other market participants may be utilized to determine the correct fair
value. Trustmark has also reviewed and confirmed its determinations
in thorough discussions with the pricing source regarding their methods of price
discovery.
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
estimates 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.
Financial
Assets and Liabilities
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of December 31, 2009 and 2008, segregated
by the level of valuation inputs with the fair value hierarchy utilized to
measure fair value ($ in thousands):
|
December 31, 2009
|
||||||||||||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
U.S.
Government agency obligations
|
$ | 47,937 | $ | - | $ | 47,937 | $ | - | ||||||||
|
Obligations
of states and political subdivisions
|
117,508 | - | 117,508 | - | ||||||||||||
|
Mortgage-backed
securities
|
1,512,762 | - | 1,512,762 | - | ||||||||||||
|
Corporate
debt securities
|
6,189 | - | 6,189 | - | ||||||||||||
|
Securities
available for sale
|
1,684,396 | - | 1,684,396 | - | ||||||||||||
|
Loans
held for sale
|
226,225 | - | 226,225 | - | ||||||||||||
|
Mortgage
servicing rights
|
50,513 | - | - | 50,513 | ||||||||||||
|
Other
assets - derivatives
|
(3,622 | ) | (3,561 | ) | - | (61 | ) | |||||||||
|
Other
liabilities - derivatives
|
(1,221 | ) | 935 | (2,156 | ) | - | ||||||||||
|
December 31, 2008
|
||||||||||||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
U.S.
Treasury securities
|
$ | 6,525 | $ | 6,525 | $ | - | $ | - | ||||||||
|
U.S.
Government agency obligations
|
25,394 | - | 25,394 | - | ||||||||||||
|
Obligations
of states and political subdivisions
|
98,653 | - | 98,653 | - | ||||||||||||
|
Mortgage-backed
securities
|
1,404,399 | - | 1,404,399 | - | ||||||||||||
|
Corporate
debt securities
|
7,870 | - | 7,870 | - | ||||||||||||
|
Securities
available for sale
|
1,542,841 | 6,525 | 1,536,316 | - | ||||||||||||
|
Loans
held for sale
|
238,265 | - | 238,265 | - | ||||||||||||
|
Mortgage
servicing rights
|
42,882 | - | - | 42,882 | ||||||||||||
|
Other
assets - derivatives
|
12,504 | 11,071 | - | 1,433 | ||||||||||||
|
Other
liabilities - derivatives
|
7,367 | 4,635 | 2,732 | - | ||||||||||||
The
changes in Level 3 assets measured at fair value on a recurring basis for the
years ended December 31, 2009 and 2008 are summarized as follows ($ in
thousands):
|
MSR
|
Other Assets - Derivatives
|
|||||||
|
Balance,
January 1, 2008
|
$ | 67,192 | $ | 198 | ||||
|
Total
net (losses) gains included in net income
|
(43,825 | ) | 3,629 | |||||
|
Purchases,
sales, issuances and settlements, net
|
19,515 | (2,394 | ) | |||||
|
Balance,
December 31, 2008
|
42,882 | 1,433 | ||||||
|
Total
net gains included in net income
|
9,590 | 5,751 | ||||||
|
Purchases,
sales, issuances and settlements, net
|
(1,959 | ) | (7,245 | ) | ||||
|
Balance,
December 31, 2009
|
$ | 50,513 | $ | (61 | ) | |||
|
The
amount of total gains (losses) for the period included in earnings that
are attributable
to
the change in unrealized gains or losses still held at December 31,
2009
|
$ | 6,606 | $ | (986 | ) | |||
Trustmark
may be required, from time to time, to measure certain assets at fair value on a
nonrecurring basis in accordance with U.S. GAAP. Assets at December 31, 2009,
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. 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 December
31, 2009, Trustmark had outstanding balances of $74.2 million in impaired loans
that were specifically identified for evaluation and written down to fair value
of the underlying collateral less cost to sell 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.
Nonfinancial
Assets and Liabilities
Certain
nonfinancial assets measured at fair value on a nonrecurring basis include
foreclosed assets (upon initial recognition or subsequent impairment),
nonfinancial assets and nonfinancial liabilities measured at fair value in the
second step of a goodwill impairment test, and intangible assets and other
nonfinancial long-lived assets measured at fair value for impairment
assessment.
During
2009, certain foreclosed assets, upon initial recognition, were remeasured and
reported at fair value through a charge-off to the allowance for loan losses
based upon the fair value of the foreclosed asset. The fair value of a
foreclosed asset, upon initial recognition, is estimated using Level 3 inputs
based on adjusted observable market data. Foreclosed assets measured
at fair value upon initial recognition totaled $78.3 million (utilizing Level 3
valuation inputs) during 2009. In connection with the measurement and initial
recognition of the foregoing foreclosed assets, Trustmark recognized charge-offs
of the allowance for possible loan losses totaling $13.6 million. Other than
foreclosed assets measured at fair value upon initial recognition, $25.6 million
of foreclosed assets were remeasured during 2009, requiring write-downs of $7.4
million to reach their current fair values.
Fair
Value of Financial Instruments
The
carrying amounts and estimated fair values of financial instruments at December
31, 2009 and 2008, are as follows ($ in thousands):
|
2009
|
2008
|
|||||||||||||||
|
Carrying Value
|
Estimated Fair Value
|
Carrying Value
|
Estimated Fair Value
|
|||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Cash
and short-term investments
|
$ | 219,893 | $ | 219,893 | $ | 281,331 | $ | 281,331 | ||||||||
|
Securities
available for sale
|
1,684,396 | 1,684,396 | 1,542,841 | 1,542,841 | ||||||||||||
|
Securities
held to maturity
|
232,984 | 240,674 | 259,629 | 264,039 | ||||||||||||
|
Loans
held for sale
|
226,225 | 226,225 | 238,265 | 238,265 | ||||||||||||
|
Net
loans
|
6,216,135 | 6,269,054 | 6,627,481 | 6,718,049 | ||||||||||||
|
Other
assets - derivatives
|
(3,622 | ) | (3,622 | ) | 12,504 | 12,504 | ||||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Deposits
|
7,188,465 | 7,198,796 | 6,823,870 | 6,831,950 | ||||||||||||
|
Short-term
liabilities
|
906,989 | 906,989 | 1,542,087 | 1,542,087 | ||||||||||||
|
Long-term
FHLB advances
|
75,000 | 75,000 | - | - | ||||||||||||
|
Subordinated
notes
|
49,774 | 48,661 | 49,741 | 39,765 | ||||||||||||
|
Junior
subordinated debt securities
|
70,104 | 32,536 | 70,104 | 24,969 | ||||||||||||
|
Other
liabilities - derivatives
|
(1,221 | ) | (1,221 | ) | 7,367 | 7,367 | ||||||||||
The
methodology and significant assumptions used in estimating the fair values
presented above are as follows:
In cases
where quoted market prices are not available, fair values are generally based on
estimates using present value techniques. Trustmark’s premise in present value
techniques is to represent the fair values on a basis of replacement value of
the existing instrument given observed market rates on the measurement date.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates for those assets or liabilities cannot be
necessarily substantiated by comparison to independent markets and, in many
cases, may not be realizable in immediate settlement of the
instruments. The estimated fair value of financial instruments with
immediate and shorter-term maturities (generally 90 days or less) is assumed to
be the same as the recorded book value. All nonfinancial instruments,
by definition, have been excluded from these disclosure
requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of Trustmark.
Cash
and Short-Term Investments
The
carrying amounts for cash and due from banks and short-term investments (federal
funds sold and securities purchased under reverse repurchase agreements)
approximate fair values due to their immediate and shorter-term
maturities.
Securities
Estimated
fair values for securities available for sale and securities held to maturity
are based on quoted market prices where available. If quoted market prices are
not available, estimated fair values are based on quoted market prices of
comparable instruments.
Loans
Held for Sale
The fair
value of loans held for sale is based on independent quoted market prices, where
available, or the prices for other mortgage whole loans with similar
characteristics.
Net
Loans
The fair
values of net loans are estimated for portfolios of loans with similar financial
characteristics. For variable rate loans that reprice frequently with
no significant change in credit risk, fair values are based on carrying values.
The fair values of certain mortgage loans, such as 1-4 family residential
properties, are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The fair values of other types of loans are estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The processes for estimating the fair value of
net loans described above does not represent an exit price under FASB ASC Topic
820 and such an exit price could potentially produce a different fair value
estimate at December 31, 2009.
Deposits
The fair
values of deposits with no stated maturity, such as noninterest-bearing demand
deposits, NOW accounts, MMDA products and savings accounts are, by definition,
equal to the amount payable on demand, which is the carrying value. Fair values
for certificates of deposit are based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
Other
Assets and Other Liabilities – Derivatives
The fair
value of derivatives used to hedge MSR (futures and exchange-traded written and
purchased options) is based on quoted prices from a recognized
exchange. The fair value of interest rate lock commitments utilizes a
valuation model, which recognizes the full fair value of the ultimate loan
adjusted for estimated fallout and estimated cost assumptions a market
participant would use to convert the lock into a loan in addition to expected
net future cash flows related to loan servicing activities. Forward
sales contracts are derivative instruments whose fair value is determined based
on independent quoted market prices, where available, or the prices for other
mortgage whole loans with similar characteristics.
Short-Term
Liabilities
The
carrying amounts for federal funds purchased, securities sold under repurchase
agreements and other borrowings approximate their fair values.
Long-Term
FHLB Advance
The
carrying amount for the long-term FHLB advance approximates its fair value due
to its variable interest rate.
Subordinated
Notes
Fair
value equals quoted market prices, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
subordinated notes.
Junior
Subordinated Debt Securities
Fair
value equals quoted market prices, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar junior
subordinated debt securities.
Off-Balance
Sheet Instruments
The fair
values of loan commitments and letters of credit approximate the fees currently
charged for similar agreements or the estimated cost to terminate or otherwise
settle similar obligations. The fees associated with these financial
instruments, or the estimated cost to terminate, as applicable, are
immaterial.
Trustmark
maintains an overall interest rate risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned fluctuations
in earnings and cash flows caused by interest rate
volatility. Trustmark’s interest rate risk management strategy
involves modifying the repricing characteristics of certain assets and
liabilities so that changes in interest rates do not adversely affect the net
interest margin and cash flows. Under the guidelines of FASB ASC
Topic 815, “Derivatives and Hedging,” all derivative instruments are required to
be recognized as either assets or liabilities and be carried at fair value on
the balance sheet. The fair value of derivative positions outstanding
is included in other assets and/or other liabilities in the accompanying
consolidated balance sheets and in the net change in these financial statement
line items in the accompanying consolidated statements of cash flows as well as
included in noninterest income in mortgage banking, net in the accompanying
consolidated statements of income.
Derivatives
Designated as Hedging Instruments
As part
of Trustmark’s risk management strategy in the mortgage banking area, derivative
instruments such as forward sales contracts are utilized. 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 of these
transactions that qualify as fair value hedges under FASB ASC Topic 815, the
ineffective portion of changes in the fair value of the forward contracts and
changes in the fair value of the loans designated as loans held for sale are
recorded in noninterest income in mortgage banking, net. Trustmark’s off-balance
sheet obligations under these derivative instruments totaled $188.1 million at
December 31, 2009, with a positive valuation adjustment of $2.2 million,
compared to $350.0 million, with a negative valuation adjustment of $2.7 million
as of December 31, 2008.
Derivatives
not Designated as Hedging Instruments
Trustmark
utilizes a portfolio of derivative instruments, such as Treasury note futures
contracts and exchange-traded option contracts, to achieve a fair value return
that offsets the changes in fair value of MSR attributable to 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
interest rates. Ineffectiveness of hedging MSR fair value is measured
by comparing total hedge cost to the change in fair value of the MSR
attributable to interest rate changes. The impact of implementing
this strategy resulted in a net negative ineffectiveness of $22 thousand for the
year ended December 31, 2009 and a net positive ineffectiveness of $11.1 million
for the year ended December 31, 2008.
Trustmark
also utilizes derivative instruments such as interest rate lock commitments in
its mortgage banking area. Rate lock commitments are residential
mortgage loan commitments with customers, which guarantee a specified interest
rate for a specified time period. 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 forward sales
contracts. Trustmark’s off-balance sheet obligations under these
derivative instruments totaled $78.9 million at December 31, 2009, with a
negative valuation adjustment of $61 thousand, compared to $244.3 million, with
a positive valuation adjustment of $1.4 million as of December 31,
2008.
Tabular
Disclosures
The
following tables disclose the fair value of derivative instruments in
Trustmark’s balance sheets as of December 31, 2009 as well as the effect of
these derivative instruments on Trustmark’s results of operations for year ended
December 31, 2009:
Fair
Value of Derivative Instruments
($
in thousands)
|
Fair
Value at
December 31, 2009
|
||||
|
Derivatives
in net hedging relationships
|
||||
|
Interest
rate contracts:
|
||||
|
Forward
contracts included in other liabilities
|
$ | (2,156 | ) | |
|
Derivatives
not designated as hedging instruments
|
||||
|
Interest
rate contracts:
|
||||
|
Futures
contracts included in other assets
|
$ | (3,873 | ) | |
|
Exchange
traded purchased options included in other assets
|
312 | |||
|
OTC
written options (rate locks) included in other assets
|
(61 | ) | ||
|
Exchange
traded written options included in other liabilities
|
935 | |||
The
Effect of Derivative Instruments on the Results of Operations
($
in thousands)
|
Years ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Derivatives
in net hedging relationships
|
||||||||||||
|
Amount
of gain (loss) recognized in mortgage banking, net
|
$ | 4,888 | $ | (1,847 | ) | $ | (1,080 | ) | ||||
|
Derivatives
not designated as hedging instruments
|
||||||||||||
|
Amount
of (loss) gain recognized in mortgage banking, net
|
$ | (8,122 | ) | $ | 47,221 | $ | 11,019 | |||||
Trustmark’s
management reporting structure includes three segments: General Banking, Wealth
Management and Insurance. General Banking is primarily responsible
for all traditional banking products and services, including loans and
deposits. Beginning in 2009, Management began making its strategic
decisions about General Banking as a segment that also included the former
Administration segment. The decision to include the previously
separate Administration segment within General Banking was based on the fact
that the operations of the primary component of the Administration segment,
Treasury, are solely dependent on the existence of the General Banking
operations. The decision to include the previously separate
Administration segment within General Banking was also based on the fact that
the vast majority of the resources in the other components of Administration
(which comprise Executive Administration, Corporate Finance, and Human
Resources) have historically primarily supported the General Banking segment.
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. In addition, Wealth Management provides life insurance and
risk management services through TRMK Risk Management, Incorporated, a wholly
owned subsidiary of 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 coverage.
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 General Banking segment, which contains the management team responsible for
determining the bank's funding and interest rate risk
strategies.
The
following table discloses financial information by reportable segment for the
periods ended December 31, 2009, 2008 and 2007. All financial
information presented for 2008 and 2007 has been restated to reflect the
combination of the former Administration segment with the General Banking
segment.
Segment
Information
($
in thousands)
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
General Banking
|
||||||||||||
|
Net
interest income
|
$ | 349,790 | $ | 314,860 | $ | 296,761 | ||||||
|
Provision
for loan losses
|
77,052 | 76,435 | 23,780 | |||||||||
|
Noninterest
income
|
116,335 | 116,141 | 100,440 | |||||||||
|
Noninterest
expense
|
265,648 | 238,646 | 232,316 | |||||||||
|
Income
before income taxes
|
123,425 | 115,920 | 141,105 | |||||||||
|
Income
taxes
|
39,112 | 36,449 | 46,268 | |||||||||
|
General
banking net income
|
$ | 84,313 | $ | 79,471 | $ | 94,837 | ||||||
|
Selected
Financial Information
|
||||||||||||
|
Average
assets
|
$ | 9,406,775 | $ | 9,012,458 | $ | 8,733,634 | ||||||
|
Depreciation
and amortization
|
$ | 25,727 | $ | 26,150 | $ | 26,973 | ||||||
|
Wealth Management
|
||||||||||||
|
Net
interest income
|
$ | 4,123 | $ | 4,076 | $ | 4,025 | ||||||
|
Provision
for loan losses
|
60 | (23 | ) | 4 | ||||||||
|
Noninterest
income
|
22,808 | 28,573 | 26,433 | |||||||||
|
Noninterest
expense
|
19,928 | 20,940 | 19,848 | |||||||||
|
Income
before income taxes
|
6,943 | 11,732 | 10,606 | |||||||||
|
Income
taxes
|
2,457 | 4,163 | 3,756 | |||||||||
|
Wealth
management net income
|
$ | 4,486 | $ | 7,569 | $ | 6,850 | ||||||
|
Selected
Financial Information
|
||||||||||||
|
Average
assets
|
$ | 95,916 | $ | 98,240 | $ | 90,533 | ||||||
|
Depreciation
and amortization
|
$ | 295 | $ | 331 | $ | 383 | ||||||
|
Insurance
|
||||||||||||
|
Net
interest income (expense)
|
$ | 296 | $ | 224 | $ | (3 | ) | |||||
|
Provision
for loan losses
|
- | - | - | |||||||||
|
Noninterest
income
|
29,099 | 32,544 | 35,574 | |||||||||
|
Noninterest
expense
|
22,683 | 24,133 | 24,285 | |||||||||
|
Income
before income taxes
|
6,712 | 8,635 | 11,286 | |||||||||
|
Income
taxes
|
2,464 | 3,258 | 4,378 | |||||||||
|
Insurance
net income
|
$ | 4,248 | $ | 5,377 | $ | 6,908 | ||||||
|
Selected
Financial Information
|
||||||||||||
|
Average
assets
|
$ | 17,751 | $ | 20,489 | $ | 21,670 | ||||||
|
Depreciation
and amortization
|
$ | 467 | $ | 433 | $ | 407 | ||||||
|
Consolidated
|
||||||||||||
|
Net
interest income
|
$ | 354,209 | $ | 319,160 | $ | 300,783 | ||||||
|
Provision
for loan losses
|
77,112 | 76,412 | 23,784 | |||||||||
|
Noninterest
income
|
168,242 | 177,258 | 162,447 | |||||||||
|
Noninterest
expense
|
308,259 | 283,719 | 276,449 | |||||||||
|
Income
before income taxes
|
137,080 | 136,287 | 162,997 | |||||||||
|
Income
taxes
|
44,033 | 43,870 | 54,402 | |||||||||
|
Consolidated
net income
|
$ | 93,047 | $ | 92,417 | $ | 108,595 | ||||||
|
Selected
Financial Information
|
||||||||||||
|
Average
assets
|
$ | 9,520,442 | $ | 9,131,187 | $ | 8,845,837 | ||||||
|
Depreciation
and amortization
|
$ | 26,489 | $ | 26,914 | $ | 27,763 | ||||||
($
in thousands)
|
Condensed
Balance Sheets
|
December 31,
|
|||||||
|
Assets:
|
2009
|
2008
|
||||||
|
Investment
in banks
|
$ | 1,157,768 | $ | 1,225,505 | ||||
|
Other
assets
|
23,719 | 23,633 | ||||||
|
Total
Assets
|
$ | 1,181,487 | $ | 1,249,138 | ||||
|
Liabilities
and Shareholders' Equity:
|
||||||||
|
Accrued
expense
|
$ | 1,323 | $ | 568 | ||||
|
Junior
subordinated debt securities
|
70,104 | 70,104 | ||||||
|
Shareholders'
equity
|
1,110,060 | 1,178,466 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 1,181,487 | $ | 1,249,138 | ||||
|
Condensed
Statements of Income
|
Years Ended December 31,
|
|||||||||||
|
Revenue:
|
2009
|
2008
|
2007
|
|||||||||
|
Dividends
received from banks
|
$ | 64,807 | $ | 65,558 | $ | 96,228 | ||||||
|
Earnings
of subsidiaries over distributions
|
29,606 | 29,468 | 15,922 | |||||||||
|
Other
income
|
95 | 241 | 326 | |||||||||
|
Total
Revenue
|
94,508 | 95,267 | 112,476 | |||||||||
|
Expense:
|
||||||||||||
|
Interest
expense
|
- | 181 | 444 | |||||||||
|
Other
expense
|
1,461 | 2,669 | 3,437 | |||||||||
|
Total
Expense
|
1,461 | 2,850 | 3,881 | |||||||||
|
Net
Income
|
93,047 | 92,417 | 108,595 | |||||||||
|
Preferred
stock dividends
|
10,124 | 1,165 | - | |||||||||
|
Accretion
of discount on preferred stock
|
9,874 | 188 | - | |||||||||
|
Net
Income Available to Common Shareholders
|
$ | 73,049 | $ | 91,064 | $ | 108,595 | ||||||
|
Condensed
Statements of Cash Flows
|
Years Ended December 31,
|
|||||||||||
|
Operating
Activities:
|
2009
|
2008
|
2007
|
|||||||||
|
Net
income
|
$ | 93,047 | $ | 92,417 | $ | 108,595 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Increase
in investment in subsidiaries
|
(29,606 | ) | (29,468 | ) | (15,922 | ) | ||||||
|
Other
|
1,075 | 342 | (583 | ) | ||||||||
|
Net
cash provided by operating activities
|
64,516 | 63,291 | 92,090 | |||||||||
|
Investing
Activities:
|
||||||||||||
|
Payment
for investments in subsidiaries
|
- | (205,000 | ) | - | ||||||||
|
Repayment
for investments in subsidiaries
|
115,000 | - | - | |||||||||
|
Proceeds
from maturities of securities available for sale
|
1,500 | 4,002 | 3,172 | |||||||||
|
Purchases
of securities available for sale
|
- | (1,531 | ) | (7,167 | ) | |||||||
|
Proceeds
from sale of other assets
|
- | - | 3,550 | |||||||||
|
Net
cash provided by (used in) investing activities
|
116,500 | (202,529 | ) | (445 | ) | |||||||
|
Financing
Activities:
|
||||||||||||
|
Proceeds
from line of credit
|
- | - | 17,000 | |||||||||
|
Repayments
of line of credit
|
- | (7,000 | ) | (21,000 | ) | |||||||
|
Proceeds
from issuance of common stock, net
|
109,296 | - | - | |||||||||
|
Proceeds
from issuance of preferred stock and warrant
|
- | 215,000 | - | |||||||||
|
Repurchase
of preferred stock and warrant
|
(225,000 | ) | - | - | ||||||||
|
Cash
dividends paid on common stock
|
(53,295 | ) | (53,022 | ) | (51,472 | ) | ||||||
|
Cash
dividends paid on preferred stock
|
(11,288 | ) | - | - | ||||||||
|
Other
common stock transactions, net
|
1,184 | 765 | (38,410 | ) | ||||||||
|
Net
cash (used in) provided by financing activities
|
(179,103 | ) | 155,743 | (93,882 | ) | |||||||
|
Increase
(decrease) in cash and cash equivalents
|
1,913 | 16,505 | (2,237 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
19,478 | 2,973 | 5,210 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 21,391 | $ | 19,478 | $ | 2,973 | ||||||
Trustmark
(parent company only) paid income taxes of approximately $60.5 million in 2009,
$56.9 million in 2008 and $53.9 million in 2007. Interest paid was $0 during
2009, $220 thousand during 2008 and $511 thousand for 2007.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE
|
There has
been no change of accountants within the two-year period prior to December 31,
2009.
|
ITEM
9A.
|
CONTROLS
AND PROC
EDU
RES
|
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Annual Report on Form 10-K, an evaluation was
carried out by Trustmark’s management, with the participation of its Chief
Executive Officer and Treasurer and Principal Financial Officer (Principal
Financial Officer), of the effectiveness of Trustmark’s disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Principal
Financial Officer concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report. No changes were
made to Trustmark’s internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal
quarter that materially affected, or are reasonably likely to materially affect,
Trustmark’s internal control over financial reporting.
Management
Report on Internal Control over Financial Reporting
The
management of Trustmark Corporation (Trustmark) is responsible for establishing
and maintaining adequate internal control over financial
reporting. Trustmark’s internal control over financial reporting was
designed under the supervision of the Chief Executive Officer and Treasurer
(Principal Financial Officer) to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of published financial
statements in accordance with U.S. GAAP.
Management
assessed the effectiveness of internal control over financial reporting as of
December 31, 2009. In making this assessment, it used the criteria set forth by
the
Committee of
Sponsoring Organizations of the Treadway Commission (COSO)
in
Internal Control – Integrated
Framework.
Based on our assessment,
we believe that, as of December 31, 2009, Trustmark’s internal control over
financial reporting was effective based on those criteria.
The
effectiveness of Trustmark’s internal control over financial reporting as of
December 31, 2009 was audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report appearing on the following
page.
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
Trustmark
Corporation:
We have
audited Trustmark Corporation and subsidiaries’ (the Corporation) internal
control over financial reporting as of December 31, 2009, based on criteria
established in
Internal
Control – Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
The Corporation’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying
Management Report on Internal
Control over Financial Reporting
. Our responsibility is to express an
opinion on the Corporation’s internal control over financial reporting based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Trustmark Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in
Internal Control
–
Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Trustmark
Corporation and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income, changes in shareholders’ equity and cash
flows for each of the years in the three-year period ended December 31, 2009,
and our report dated February 25, 2010, expressed an unqualified opinion on
those consolidated financial statements.
Jackson,
Mississippi
February
25, 2010
|
ITEM
9B.
|
OTHER
INF
ORMATION
|
None
|
ITEM
10.
|
DIRECTORS,
EXECUT
IV
E OFFICERS AND CORPORATE
GOVERNANCE
|
Certain
information regarding executive officers is included under the section captioned
“Executive Officers of the Registrant” in Part I, Item 1, elsewhere in this
Annual Report on Form 10-K. Other information required by this Item is
incorporated herein by reference to Trustmark’s Proxy Statement (Schedule 14A)
for its 2010 Annual Meeting of Shareholders to be filed with the SEC within 120
days of Trustmark’s fiscal year-end.
|
ITEM
11.
|
EXECUTIVE
CO
MP
ENSATION
|
The
information required by this Item is incorporated herein by reference to
Trustmark’s Proxy Statement (Schedule 14A) for its 2010 Annual Meeting of
Shareholders to be filed with the SEC within 120 days of Trustmark’s fiscal
year-end.
|
ITEM
12.
|
SECURITY
OWNER
SHI
P OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The
information required by this Item is incorporated herein by reference to
Trustmark’s Proxy Statement (Schedule 14A) for its 2010 Annual Meeting of
Shareholders to be filed with the SEC within 120 days of Trustmark’s fiscal
year-end.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND
RELA
TED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this Item is incorporated herein by reference to
Trustmark’s Proxy Statement (Schedule 14A) for its 2010 Annual Meeting of
Shareholders to be filed with the SEC within 120 days of Trustmark’s fiscal
year-end.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTING F
EES
AND
SERVICES
|
The
information required by this Item is incorporated herein by reference to
Trustmark’s Proxy Statement (Schedule 14A) for its 2010 Annual Meeting of
Shareholders to be filed with the SEC within 120 days of Trustmark’s fiscal
year-end.
|
ITEM.
15.
|
EXHIBITS,
FINANCIAL STATEMENT
SCHEDULES
|
A-1. Financial
Statements
The
reports of KPMG LLP, independent registered public accounting firm, and the
following consolidated financial statements of Trustmark Corporation and
subsidiaries are included in the Registrant’s 2009 Annual Report to Shareholders
and are incorporated into Part II, Item 8 herein by reference:
Consolidated
Balance Sheets as of December 31, 2009 and 2008
Consolidated
Statements of Income for the Years Ended December 31, 2009, 2008 and
2007
Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended December 31,
2009, 2008 and 2007
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
Notes to
Consolidated Financial Statements (Notes 1 through 20)
A-2. Financial
Statement Schedules
The
schedules to the consolidated financial statements set forth by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
A-3. Exhibits
The
exhibits to this Annual Report on Form 10-K listed below have been included only
with the copy of this report filed with the Securities and Exchange
Commission. Copies of individual exhibits will be furnished to
shareholders upon written request to Trustmark and payment of a reasonable
fee.
EXHIBIT
INDEX
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2-a
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Agreement
and Plan of Reorganization by and among Trustmark Corporation and Republic
Bancshares of Texas, Inc. Filed April 17, 2006, as Exhibit 2.1
to Trustmark’s Form 8-K Current Report, incorporated herein by
reference.
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|
2-b
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First
Amendment to Agreement and Plan of Reorganization by and among Trustmark
Corporation and Republic Bancshares of Texas, Inc. Filed May 17, 2006 as
Exhibit 2.1A to Trustmark’s Form 8-K Current Report, incorporated herein
by reference.
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|
3-a
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Articles
of Incorporation of Trustmark, as amended to April 9,
2002. Incorporated herein by reference to Exhibit 3-a to
Trustmark’s Form 10-K Annual Report for the year ended
December 31, 2002, filed on March 21,
2003.
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|
3-b
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Amended
and Restated Bylaws of Trustmark. Incorporated herein by reference to
Exhibit 3.2 to Trustmark’s Form 8-K Current Report filed on November 25,
2008.
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|
3-c
|
Certificate
of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series
A, attached to the Articles of Amendment of Trustmark. Incorporated herein
by reference to Exhibit 3.1 to Trustmark’s Form 8-K Current Report filed
on November 25, 2008.
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|
4-a
|
Amended
and Restated Trust Agreement among Trustmark Corporation, Wilmington Trust
Company and the Administrative Trustees regarding Trustmark Preferred
Capital Trust I. Filed August 21, 2006, as Exhibit 4.1 to
Trustmark’s Form 8-K Current Report, incorporated herein by
reference.
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|
4-b
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Junior
Subordinated Indenture between Trustmark Corporation and Wilmington Trust
Company. Filed August 21, 2006, as Exhibit 4.2 to Trustmark’s
Form 8-K Current Report, incorporated herein by
reference.
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4-c
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Guarantee
Agreement between Trustmark Corporation and Wilmington Trust
Company. Filed August 21, 2006, as Exhibit 4.3 to Trustmark’s
Form 8-K Current Report, incorporated herein by
reference.
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4-d
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Fiscal
and Paying Agency Agreement between Trustmark National Bank and The Bank
of New York Trust Company, N.A. regarding Subordinated Notes due December
15, 2016. Filed December 13, 2006, as Exhibit 4.1 to
Trustmark’s Form 8-K Current Report, incorporated herein by
reference.
|
|
4-e
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Warrant
to Purchase 1,647,931 Shares of Common Stock of Trustmark. Incorporated
herein by reference to Exhibit 4.1 to Trustmark’s Form 8-K Current Report
filed on November 25, 2008.
|
|
4-f
|
Form
of Preferred Stock Certificate. Incorporated herein by
reference to Exhibit 4.2 to Trustmark’s Form 8-K Current Report filed on
November 25, 2008.
|
|
4-g
|
Letter
Agreement including Securities Purchase Agreement between Trustmark and
the United States Department of Treasury. Incorporated herein
by reference to Exhibit 10.1 to Trustmark’s Form 8-K Current Report filed
on November 25, 2008.
|
|
10-a
|
Deferred
Compensation Plan for Executive Officers (Executive Deferral Plan-Group 2)
of Trustmark National Bank, as amended. Filed as Exhibit 10-a
to Trustmark’s Form 10-K Annual Report for the year ended December 31,
2007, incorporated herein by
reference.
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|
10-b
|
Deferred
Compensation Plan for Directors of First National Financial Corporation
acquired October 7, 1994. Filed as Exhibit 10-c to Trustmark’s
Form 10-K Annual Report for the year ended December 31, 1994, incorporated
herein by reference.
|
|
10-c
|
Life
Insurance Plan for Executive Officers of First National Financial
Corporation acquired October 7, 1994. Filed as Exhibit 10-d to
Trustmark’s Form 10-K Annual Report for the year ended December 31, 1994,
incorporated herein by reference.
|
|
10-d
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Long
Term Incentive Plan for key employees of Trustmark Corporation and its
subsidiaries approved March 11, 1997. Filed as Exhibit 10-e to
Trustmark’s Form 10-K Annual Report for the year ended December 31, 1996,
incorporated herein by
reference.
|
|
10-e
|
Deferred
Compensation Plan for Directors (Directors’ Deferred Fee Plan) of
Trustmark National Bank, as amended. Filed as Exhibit 10-e to
Trustmark’s Form 10-K Annual Report for the year ended December 31, 2007,
incorporated herein by reference.
|
|
10-f
|
Deferred
Compensation Plan for Executives (Executive Deferral Plan-Group 1) of
Trustmark National Bank, as amended. Filed as Exhibit 10-f to
Trustmark’s Form 10-K Annual Report for the year ended December 31, 2007,
incorporated herein by reference.
|
|
10-g
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Trustmark
Corporation Deferred Compensation Plan (Master Plan Document), as amended.
Filed as Exhibit 10-g to Trustmark’s Form 10-K Annual Report for the year
ended December 31, 2007, incorporated herein by
reference.
|
|
10-h
|
Amended
and Restated Employment Agreement between Trustmark Corporation and
Richard G. Hickson, dated as of November 20, 2008. Filed as Exhibit 10.3
to Trustmark’s Form 8-K Current Report filed on November 25, 2008,
incorporated herein by reference.
|
|
10-i
|
Amended
and Restated Change in Control Agreement between Trustmark Corporation and
Gerard R. Host dated October 23, 2007. Filed as Exhibit 10-i to
Trustmark’s Form 10-K Annual Report for the year ended December 31, 2007,
incorporated herein by reference.
|
|
10-j
|
Amended
and Restated Change in Control Agreement between Trustmark Corporation and
Harry M. Walker dated October 23, 2007. Filed as Exhibit 10-j
to Trustmark’s Form 10-K Annual Report for the year ended December 31,
2007, incorporated herein by
reference.
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|
10-k
|
2005
Stock and Incentive Compensation Plan approved May 10,
2005. Filed as Exhibit 10-a to Trustmark’s Form 10-Q Quarterly
Report for the quarter ended March 31, 2005, incorporated by
reference.
|
|
10-l
|
Form
of Restricted Stock Agreement (under the 2005 Stock and Incentive
Compensation Plan). Filed May 16, 2005, as Exhibit 10-b to
Trustmark’s Form 8-K Current Report, incorporated herein by
reference.
|
|
10-m
|
Form
of Non-Qualified Stock Option Agreement for Director (under the 2005 Stock
and Incentive Compensation Plan). Filed May 16, 2005, as
Exhibit 10-c to Trustmark’s Form 8-K Current Report, incorporated herein
by reference.
|
|
10-n
|
Form
of Non-Qualified Stock Option Agreement for Associate (under the 2005
Stock and Incentive Compensation Plan). Filed May 16,
2005, as Exhibit 10-d to Trustmark’s Form 8-K Current Report, incorporated
herein by reference.
|
|
10-o
|
Termination
Amendment to the Second Amended Trustmark Corporation 1997 Long Term
Incentive Plan. Filed May 16, 2005, as Exhibit 10-e to
Trustmark’s Form 8-K Current Report, incorporated herein by
reference.
|
|
10-p
|
Revised
Form of Restricted Stock Agreement (under the 2005 Stock and Incentive
Compensation Plan). Filed February 26, 2009, as Exhibit 10-p to
Trustmark’s Annual Report on Form 10-K, incorporated herein by
reference.
|
|
10-q
|
Revised
Form of Time-Based Restricted Stock Agreement for Executive (under the
2005 Stock and Incentive Compensation Plan). Filed February 26, 2009, as
Exhibit 10-q to Trustmark’s Annual Report on Form 10-K, incorporated
herein by reference.
|
|
10-r
|
First
Amendment to Trustmark Corporation Deferred Compensation Plan (Master Plan
Document). Filed November 7, 2008, as Exhibit 10-r to
Trustmark’s Form 10-Q Quarterly Report for the quarter ended September 30,
2008, incorporated herein by
reference.
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|
10-s
|
Letter
Agreement including Securities Purchase Agreement between Trustmark and
the United States Department of Treasury. Incorporated herein
by reference to Exhibit 10.1 to Trustmark’s Form 8-K Current Report filed
on November 25, 2008.
|
|
10-t
|
Form
of Waiver executed by Trustmark Senior Executive
Officers. Incorporated herein by reference to Exhibit 10.2 to
Trustmark’s Form 8-K Current Report filed November 25,
2008.
|
|
10-u
|
Omnibus
Benefit Plan Amendment dated November 21, 2008. Incorporated
herein by reference to Exhibit 10.4 to Trustmark’s Form 8-K Current Report
filed November 25, 2008.
|
|
10-v
|
Cash-Settled
Performance-Based Restricted Stock Unit Award Agreement between Trustmark
and Rickard G. Hickson dated January 27, 2009. Filed February
26, 2009, as Exhibit 10-v to Trustmark’s Annual Report on Form 10-K,
incorporated herein by reference.
|
|
10-w
|
Form
of Bonus Restricted Stock Agreement for Executive (under the 2005 Stock
and Incentive Compensation Plan). Incorporated herein by reference to
Exhibit 10.w to Trustmark’s Form 8-K Current Report filed April 6,
2009.
|
|
10-x
|
Form
of Time-Based TARP-Compliant Restricted Stock Agreement for Executive
(under the 2005 Stock and Incentive Compensation Plan). Filed November 9,
2009, as Exhibit 10-x to Trustmark’s Form 10-Q Quarterly Report for the
quarter ended September 30, 2009 and incorporated herein by
reference.
|
|
10-y
|
Form
of Performance-Based TARP-Compliant Restricted Stock Agreement for
Executive (under the 2005 Stock and Incentive Compensation
Plan.). Filed November 9, 2009, as Exhibit 10-y to Trustmark’s
Form 10-Q Quarterly Report for the quarter ended September 30, 2009 and
incorporated herein by reference.
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List
of Subsidiaries.
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Consent
of KPMG LLP.
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Certification
by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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Certification
by Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
Certification
by Principal Financial Officer pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
EESA
§111(b)(4) Certification of Chief Executive Officer for First Fiscal
Year.
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|
EESA
§111(b)(4) Certification of Principal Financial Officer for First Fiscal
Year.
|
All other
exhibits are omitted, as they are inapplicable or not required by the related
instructions.
SIG
NATURES
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TRUSTMARK
CORPORATION
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BY:
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/s/ Richard G. Hickson
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BY:
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/s/ Louis E. Greer
|
|
|
Richard
G. Hickson
|
|
Louis
E. Greer
|
|
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Chairman
of the Board, President
|
|
Treasurer and
Principal
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&
Chief Executive Officer
|
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Financial
Officer
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DATE:
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February
25, 2010
|
DATE:
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February
25, 2010
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
|
DATE: February
25, 2010
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BY:
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/s/ Adolphus B. Baker
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Adolphus
B. Baker, Director
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DATE: February
25, 2010
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BY:
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/s/ Fred E. Carl, Jr.
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|
Fred
E. Carl, Jr., Director
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||
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DATE: February
25, 2010
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BY:
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/s/ William C. Deviney,
Jr.
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William
C. Deviney, Jr., Director
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DATE: February
25, 2010
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BY:
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/s/ Daniel A. Grafton
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Daniel
A. Grafton, Director
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DATE: February
25, 2010
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BY:
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/s/ Richard G. Hickson
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Richard
G. Hickson, Chairman, President,
|
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|
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Chief
Executive Officer and Director
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DATE: February
25, 2010
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BY:
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/s/
David H. Hoster II
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David
H. Hoster II, Director
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DATE: February
25, 2010
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BY:
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/s/
John M. McCullouch
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John
M. McCullouch, Director
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DATE: February
25, 2010
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BY:
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/s/ Richard H. Puckett
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Richard
H. Puckett, Director
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DATE: February
25, 2010
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BY:
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/s/ R. Michael
Summerford
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R.
Michael Summerford, Director
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DATE: February
25, 2010
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BY:
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/s/ Leroy G. Walker
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Leroy
G.Walker, Director
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DATE: February
25, 2010
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BY:
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/s/ Kenneth W. Williams
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Kenneth
W. Williams, Director
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DATE: February
25, 2010
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BY:
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/s/ William G. Yates III
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William
G. Yates III, Director
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116
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk F Ac TorsItem 1B. Un Res Olved Staff CommentsItem 2. Proper Ti EsItem 3. Legal Pro Cee DingsItem 4. Submi Ssion Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For The Registrant S Comm on Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Finan Cia L DataItem 7. Managem Ent S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Stateme Nts and Supplementary DataNote 1 Significant Accounting PoliciesNote 2 Cash and Due From BanksNote 3 Securities Available For Sale and Held To MaturityNote 4 Loans and Allowance For Loan LossesNote 5 Premises and Equipment, NetNote 6 Mortgage BankingNote 7 Goodwill and Identifiable Intangible AssetsNote 8 Other Real EstateNote 9 DepositsNote 10 - BorrowingsNote 11 Income TaxesNote 12 Defined Benefit and Other Postretirement BenefitsNote 13 Stock and Incentive Compensation PlansNote 14 Commitments and ContingenciesNote 15 Shareholders' EquityNote 16 Other Noninterest ExpenseNote 17 Fair ValueNote 18 Derivative Financial InstrumentsNote 19 Segment InformationNote 20 Parent Company Only Financial InformationItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and Proc Edu ResItem 9B. Other Inf OrmationPart IIIItem 10. Directors, Execut IV E Officers and Corporate GovernanceItem 11. Executive Co Mp EnsationItem 12. Security Owner Shi P Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Rela Ted Transactions, and Director IndependenceItem 14. Principal Accounting F Ees and ServicesPart IV