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Section 1: 10-Q (10-Q)

trmk-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number 000-03683

Trustmark Corporation

(Exact name of registrant as specified in its charter)

 

Mississippi

 

64-0471500

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

248 East Capitol Street, Jackson, Mississippi

 

39201

(Address of principal executive offices)

 

(Zip Code)

 

(601) 208-5111

(Registrant’s telephone number, including area code)

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 31, 2018, there were 67,088,861 shares outstanding of the registrant’s common stock (no par value).

 

 

 

 


 

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q 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 “Risk Factors” in Trustmark’s filings with the Securities and Exchange Commission 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 potential market impacts of efforts by the Federal Reserve Board to reduce the size of its balance sheet, conditions in the housing and real estate markets in the regions in which Trustmark operates and the extent and duration of the current volatility in the credit and financial markets as well as crude oil prices, 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, including the potential impact of issues relating to the European financial system and monetary and other governmental actions designed to address credit, securities, and/or commodity 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, greater than expected costs or difficulties related to the integration of acquisitions or new products and lines of business, cyber-attacks and other breaches which could affect our information system security, natural disasters, environmental 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.

 

 

2


 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Trustmark Corporation and Subsidiaries

Consolidated Balance Sheets

($ in thousands)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks (noninterest-bearing)

 

$

432,471

 

 

$

335,768

 

Federal funds sold and securities purchased under reverse repurchase agreements

 

 

1,000

 

 

 

615

 

Securities available for sale (at fair value)

 

 

1,864,633

 

 

 

2,238,635

 

Securities held to maturity (fair value: $907,317-2018; $1,046,247-2017)

 

 

943,883

 

 

 

1,056,486

 

Loans held for sale (LHFS)

 

 

182,664

 

 

 

180,512

 

Loans held for investment (LHFI)

 

 

8,747,030

 

 

 

8,569,967

 

Less allowance for loan losses, LHFI

 

 

88,874

 

 

 

76,733

 

Net LHFI

 

 

8,658,156

 

 

 

8,493,234

 

Acquired loans

 

 

132,615

 

 

 

261,517

 

Less allowance for loan losses, acquired loans

 

 

1,714

 

 

 

4,079

 

Net acquired loans

 

 

130,901

 

 

 

257,438

 

Net LHFI and acquired loans

 

 

8,789,057

 

 

 

8,750,672

 

Premises and equipment, net

 

 

178,739

 

 

 

179,339

 

Mortgage servicing rights

 

 

101,374

 

 

 

84,269

 

Goodwill

 

 

379,627

 

 

 

379,627

 

Identifiable intangible assets, net

 

 

12,391

 

 

 

16,360

 

Other real estate

 

 

36,475

 

 

 

43,228

 

Other assets

 

 

517,498

 

 

 

532,442

 

Total Assets

 

$

13,439,812

 

 

$

13,797,953

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

2,786,539

 

 

$

2,978,074

 

Interest-bearing

 

 

8,170,371

 

 

 

7,599,438

 

Total deposits

 

 

10,956,910

 

 

 

10,577,512

 

Federal funds purchased and securities sold under repurchase agreements

 

 

486,865

 

 

 

469,827

 

Short-term borrowings

 

 

190,023

 

 

 

971,049

 

Long-term Federal Home Loan Bank (FHLB) advances

 

 

896

 

 

 

946

 

Junior subordinated debt securities

 

 

61,856

 

 

 

61,856

 

Other liabilities

 

 

143,658

 

 

 

145,062

 

Total Liabilities

 

 

11,840,208

 

 

 

12,226,252

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Common stock, no par value:

 

 

 

 

 

 

 

 

Authorized:  250,000,000 shares

Issued and outstanding:  67,621,369 shares - 2018; 67,746,094 shares - 2017

 

 

14,089

 

 

 

14,115

 

Capital surplus

 

 

362,868

 

 

 

369,124

 

Retained earnings

 

 

1,302,593

 

 

 

1,228,187

 

Accumulated other comprehensive loss, net of tax

 

 

(79,946

)

 

 

(39,725

)

Total Shareholders' Equity

 

 

1,599,604

 

 

 

1,571,701

 

Total Liabilities and Shareholders' Equity

 

$

13,439,812

 

 

$

13,797,953

 

 

See notes to consolidated financial statements.

 

3


 

Trustmark Corporation and Subsidiaries

Consolidated Statements of Income

($ in thousands except per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on LHFS & LHFI

 

$

102,980

 

 

$

89,112

 

 

$

291,362

 

 

$

253,507

 

Interest and fees on acquired loans

 

 

4,033

 

 

 

6,625

 

 

 

13,932

 

 

 

18,077

 

Interest on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

16,186

 

 

 

19,291

 

 

 

50,586

 

 

 

57,865

 

Tax exempt

 

 

518

 

 

 

717

 

 

 

1,748

 

 

 

2,328

 

Interest on federal funds sold and securities purchased under reverse

   repurchase agreements

 

 

3

 

 

 

14

 

 

 

10

 

 

 

26

 

Other interest income

 

 

1,050

 

 

 

355

 

 

 

3,038

 

 

 

993

 

Total Interest Income

 

 

124,770

 

 

 

116,114

 

 

 

360,676

 

 

 

332,796

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

14,972

 

 

 

6,381

 

 

 

36,602

 

 

 

15,433

 

Interest on federal funds purchased and securities sold under repurchase

   agreements

 

 

1,348

 

 

 

1,301

 

 

 

3,260

 

 

 

3,036

 

Other interest expense

 

 

1,467

 

 

 

4,520

 

 

 

6,574

 

 

 

10,821

 

Total Interest Expense

 

 

17,787

 

 

 

12,202

 

 

 

46,436

 

 

 

29,290

 

Net Interest Income

 

 

106,983

 

 

 

103,912

 

 

 

314,240

 

 

 

303,506

 

Provision for loan losses, LHFI

 

 

8,673

 

 

 

3,672

 

 

 

15,801

 

 

 

9,355

 

Provision for loan losses, acquired loans

 

 

(467

)

 

 

(1,653

)

 

 

(758

)

 

 

(5,822

)

Net Interest Income After Provision for Loan Losses

 

 

98,777

 

 

 

101,893

 

 

 

299,197

 

 

 

299,973

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

11,075

 

 

 

11,223

 

 

 

32,579

 

 

 

32,810

 

Bank card and other fees

 

 

7,459

 

 

 

7,150

 

 

 

21,155

 

 

 

21,020

 

Mortgage banking, net

 

 

8,647

 

 

 

4,425

 

 

 

28,958

 

 

 

23,618

 

Insurance commissions

 

 

10,765

 

 

 

10,398

 

 

 

30,919

 

 

 

29,355

 

Wealth management

 

 

7,789

 

 

 

7,530

 

 

 

22,834

 

 

 

22,617

 

Other, net

 

 

1,358

 

 

 

3,740

 

 

 

4,832

 

 

 

11,268

 

Security gains (losses), net

 

 

 

 

 

14

 

 

 

 

 

 

15

 

Total Noninterest Income

 

 

47,093

 

 

 

44,480

 

 

 

141,277

 

 

 

140,703

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

60,847

 

 

 

57,871

 

 

 

179,297

 

 

 

170,445

 

Defined benefit plan termination

 

 

 

 

 

 

 

 

 

 

 

17,644

 

Services and fees

 

 

16,404

 

 

 

15,133

 

 

 

48,472

 

 

 

45,474

 

Net occupancy - premises

 

 

6,910

 

 

 

6,702

 

 

 

19,962

 

 

 

19,150

 

Equipment expense

 

 

6,200

 

 

 

6,297

 

 

 

18,501

 

 

 

18,457

 

Other real estate expense, net

 

 

1,168

 

 

 

864

 

 

 

1,941

 

 

 

3,006

 

FDIC assessment expense

 

 

1,999

 

 

 

2,816

 

 

 

7,532

 

 

 

8,142

 

Other expense

 

 

11,695

 

 

 

13,403

 

 

 

35,783

 

 

 

44,900

 

Total Noninterest Expense

 

 

105,223

 

 

 

103,086

 

 

 

311,488

 

 

 

327,218

 

Income Before Income Taxes

 

 

40,647

 

 

 

43,287

 

 

 

128,986

 

 

 

113,458

 

Income taxes

 

 

4,394

 

 

 

8,708

 

 

 

16,090

 

 

 

23,596

 

Net Income

 

$

36,253

 

 

$

34,579

 

 

$

112,896

 

 

$

89,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.54

 

 

$

0.51

 

 

$

1.67

 

 

$

1.33

 

Diluted

 

$

0.54

 

 

$

0.51

 

 

$

1.67

 

 

$

1.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends Per Share

 

$

0.23

 

 

$

0.23

 

 

$

0.69

 

 

$

0.69

 

 

See notes to consolidated financial statements.

 

 

4


 

Trustmark Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

($ in thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income per consolidated statements of income

 

$

36,253

 

 

$

34,579

 

 

$

112,896

 

 

$

89,862

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on available for sale securities and

   transferred securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) arising during the

   period

 

 

(7,246

)

 

 

(331

)

 

 

(35,231

)

 

 

3,912

 

Less: adjustment for net (gains) losses realized in net

   income

 

 

 

 

 

(8

)

 

 

 

 

 

(9

)

Change in net unrealized holding loss on securities

   transferred to held to maturity

 

 

730

 

 

 

698

 

 

 

2,182

 

 

 

2,193

 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in prior service costs

 

 

47

 

 

 

39

 

 

 

140

 

 

 

116

 

Recognized net loss due to lump sum settlement

 

 

31

 

 

 

 

 

 

92

 

 

 

 

Change in net actuarial loss

 

 

271

 

 

 

219

 

 

 

819

 

 

 

1,187

 

Recognized net loss due to defined benefit plan termination

 

 

 

 

 

 

 

 

 

 

 

10,492

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in the accumulated gain (loss) on effective cash

   flow hedge derivatives

 

 

39

 

 

 

33

 

 

 

458

 

 

 

(61

)

Less: adjustment for (gain) loss realized in net income

 

 

(79

)

 

 

34

 

 

 

(157

)

 

 

143

 

Other comprehensive income (loss), net of tax

 

 

(6,207

)

 

 

684

 

 

 

(31,697

)

 

 

17,973

 

Comprehensive income

 

$

30,046

 

 

$

35,263

 

 

$

81,199

 

 

$

107,835

 

 

See notes to consolidated financial statements.

 

 

5


 

Trustmark Corporation and Subsidiaries

Consolidated Condensed Statements of Changes in Shareholders' Equity

($ in thousands)

(Unaudited)

 

 

 

2018

 

 

2017

 

Balance, January 1,

 

$

1,571,701

 

 

$

1,520,208

 

Net income per consolidated statements of income

 

 

112,896

 

 

 

89,862

 

Other comprehensive income (loss), net of tax

 

 

(31,697

)

 

 

17,973

 

Common stock dividends paid

 

 

(47,014

)

 

 

(47,099

)

Shares withheld to pay taxes, long-term incentive plan

 

 

(1,427

)

 

 

(1,659

)

Repurchase and retirement of common stock

 

 

(7,877

)

 

 

 

Compensation expense, long-term incentive plan

 

 

3,022

 

 

 

3,250

 

Balance, September 30,

 

$

1,599,604

 

 

$

1,582,535

 

 

See notes to consolidated financial statements.

 

 

6


 

Trustmark Corporation and Subsidiaries

Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Operating Activities

 

 

 

 

 

 

 

 

Net income per consolidated statements of income

 

$

112,896

 

 

$

89,862

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses, net

 

 

15,043

 

 

 

3,533

 

Depreciation and amortization

 

 

29,512

 

 

 

28,781

 

Net amortization of securities

 

 

7,197

 

 

 

8,084

 

Securities (gains) losses, net

 

 

 

 

 

(15

)

Gains on sales of loans, net

 

 

(16,409

)

 

 

(13,633

)

Deferred income tax provision

 

 

5,612

 

 

 

4,800

 

Proceeds from sales of loans held for sale

 

 

836,971

 

 

 

885,520

 

Purchases and originations of loans held for sale

 

 

(823,134

)

 

 

(895,992

)

Originations of mortgage servicing rights

 

 

(12,248

)

 

 

(11,630

)

Earnings on bank-owned life insurance

 

 

(3,994

)

 

 

(3,753

)

Net change in other assets

 

 

521

 

 

 

29,599

 

Net change in other liabilities

 

 

14

 

 

 

4,205

 

Other operating activities, net

 

 

(10,268

)

 

 

6,280

 

Net cash provided by operating activities

 

 

141,713

 

 

 

135,641

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Proceeds from maturities, prepayments and calls of securities held to maturity

 

 

114,531

 

 

 

128,515

 

Proceeds from maturities, prepayments and calls of securities available for sale

 

 

334,852

 

 

 

351,817

 

Proceeds from sales of securities available for sale

 

 

 

 

 

27,682

 

Purchases of securities held to maturity

 

 

 

 

 

(69,989

)

Purchases of securities available for sale

 

 

(14,040

)

 

 

(338,532

)

Net proceeds from bank-owned life insurance

 

 

1,843

 

 

 

3,630

 

Net change in federal funds sold and securities purchased

   under reverse repurchase agreements

 

 

(385

)

 

 

4,185

 

Net change in member bank stock

 

 

26,970

 

 

 

739

 

Net change in loans

 

 

(63,796

)

 

 

(457,292

)

Purchases of premises and equipment

 

 

(10,870

)

 

 

(10,963

)

Proceeds from sales of premises and equipment

 

 

651

 

 

 

7,792

 

Proceeds from sales of other real estate

 

 

16,490

 

 

 

20,301

 

Purchases of software

 

 

(10,701

)

 

 

(3,492

)

Investments in tax credit and other partnerships

 

 

(17

)

 

 

(5,213

)

Net cash used in business acquisition

 

 

 

 

 

(19,775

)

Net cash provided by (used in) investing activities

 

 

395,528

 

 

 

(360,595

)

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Net change in deposits

 

 

379,398

 

 

 

9,572

 

Net change in federal funds purchased and securities sold under repurchase agreements

 

 

17,038

 

 

 

5,786

 

Net change in short-term borrowings

 

 

(780,606

)

 

 

283,820

 

Payments on long-term FHLB advances

 

 

(50

)

 

 

(49

)

Redemption of junior subordinated debt securities

 

 

 

 

 

(3,000

)

Common stock dividends

 

 

(47,014

)

 

 

(47,099

)

Repurchase and retirement of common stock

 

 

(7,877

)

 

 

 

Shares withheld to pay taxes, long-term incentive plan

 

 

(1,427

)

 

 

(1,659

)

Net cash provided by (used in) financing activities

 

 

(440,538

)

 

 

247,371

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

96,703

 

 

 

22,417

 

Cash and cash equivalents at beginning of period

 

 

335,768

 

 

 

327,706

 

Cash and cash equivalents at end of period

 

$

432,471

 

 

$

350,123

 

 

See notes to consolidated financial statements.

 

7


 

Trustmark Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 – Business, Basis of Financial Statement Presentation and Principles of Consolidation

Trustmark Corporation (Trustmark) is a 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 198 offices at September 30, 2018 in Alabama, Florida, Mississippi, Tennessee and Texas.  

 

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.  Certain reclassifications have been made to prior period amounts to conform to the current period presentation.  

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements, and notes thereto, included in Trustmark’s 2017 Annual Report on Form 10-K.

Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.  In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of these consolidated financial statements have been included.   The 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 periods 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 2018 actual conditions could vary from those anticipated, which could affect Trustmark’s financial condition and results of operations.  Actual results could differ from those estimates.

Subsequent Events

On October 10, 2018, Hurricane Michael struck the Florida Panhandle causing significant damages.  As of September 30, 2018, Trustmark had 1,787 loans with a balance of $239.7 million and exposure of $282.1 million in the Federal Emergency Management Agency (FEMA) designated disaster areas which includes 12 counties in Florida and 20 counties in Georgia.  Immediately following the storm, Trustmark initiated a process to identify all customers in the FEMA disaster areas.  Efforts are now ongoing to contact those borrowers to offer assistance as well as to establish reasonable estimates of uninsured damage and to adequately assess potential risk to Trustmark.  Management continues to evaluate the impact of Hurricane Michael and is unable to provide a reasonable estimate of the financial impact on Trustmark’s consolidated financial statements at this time.

Note 2 – Business Combinations

On April 7, 2017, Trustmark completed its merger with RB Bancorporation (Reliance), the holding company for Reliance Bank, which had seven offices serving the Huntsville, Alabama metropolitan service area (MSA).  Reliance Bank was merged into Trustmark National Bank simultaneously with the merger of Trustmark and Reliance. Under the terms of the Merger Agreement dated November 14, 2016, Trustmark paid $22.00 in cash for each share of Reliance common stock outstanding, which represented payment to Reliance common shareholders of approximately $23.7 million.  In addition, Trustmark paid off Reliance Preferred Stock of $1.1 million bringing the total consideration paid to $24.8 million.

The merger with Reliance was consistent with Trustmark’s strategic plan to selectively expand the Trustmark franchise and enhance the Trustmark franchise in north Alabama.

This merger was accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, “Business Combinations.”  Accordingly, the assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the merger date.

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The statement of assets purchased and liabilities assumed in the Reliance merger is presented below at their estimated fair values as of the merger date of April 7, 2017 ($ in thousands):

 

Assets:

 

 

 

 

Cash and due from banks

 

$

5,013

 

Federal funds sold and securities purchased under reverse repurchase agreements

 

 

6,900

 

Securities

 

 

54,843

 

Acquired loans

 

 

117,447

 

Premises and equipment, net

 

 

3,700

 

Identifiable intangible assets

 

 

1,850

 

Other real estate

 

 

475

 

Other assets

 

 

6,037

 

Total assets

 

 

196,265

 

 

 

 

 

 

Liabilities:

 

 

 

 

Deposits

 

 

166,158

 

Other borrowings

 

 

17,469

 

Other liabilities

 

 

1,322

 

Total liabilities

 

 

184,949

 

 

 

 

 

 

Net identifiable assets acquired at fair value

 

 

11,316

 

Goodwill

 

 

13,471

 

Total consideration paid

 

$

24,787

 

The excess of the consideration paid over the estimated fair value of the net assets acquired was $13.5 million, which was recorded as goodwill under FASB ASC Topic 805.  The identifiable intangible assets acquired represent the core deposit intangible at fair value at the merger date.  The core deposit intangible is being amortized on an accelerated basis over the estimated useful life, currently expected to be approximately ten years.

Loans acquired from Reliance were evaluated under a fair value process.  Loans with evidence of deterioration in credit quality and for which it was probable at acquisition that Trustmark would not be able to collect all contractually required payments are referred to as acquired impaired loans and accounted for in accordance with FASB ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.”  See Note 5 – Acquired Loans for additional information on acquired loans.

The operations of Reliance are included in Trustmark’s operating results from April 7, 2017 and did not have a material impact on Trustmark’s results of operations.  During the second quarter of 2017, Trustmark included merger transaction expenses in other noninterest expense totaling $3.2 million (change in control expense of $1.3 million; professional fees, contract termination and other expenses of $1.9 million).

Fair Value of Acquired Financial Instruments

For financial instruments measured at fair value, Trustmark utilized inputs within Level 2 of the fair value hierarchy to determine the fair value of securities available for sale (included in securities above), time deposits (included in deposits above) and FHLB advances (included in other borrowings above).  Level 3 inputs were used to determine the fair value of acquired loans, identifiable intangible assets and other real estate.  The methodology and significant assumptions used in estimating the fair values of these financial assets and liabilities are as follows:

Securities Available for Sale

Estimated fair values for securities available for sale 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.

Acquired Loans

Fair value of acquired loans is determined using a discounted cash flow model based on assumptions regarding the amount and timing of principal and interest payments, estimated prepayments, estimated default rates, estimated loss severity in the event of default and current market rates.

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Identifiable Intangible Assets

The fair value assigned to the identifiable intangible assets, in this case the core deposit intangible, represents the future economic benefits of the potential cost savings from acquiring core deposits in the merger compared to the cost of obtaining alternative funding from market sources.

Other Real Estate

Other real estate was initially recorded at its estimated fair value on the merger date based on independent appraisals less estimated selling costs.

Time Deposits

Time deposits were valued by projecting expected cash flows into the future based on each account’s contracted rate and then determining the present value of those expected cash flows using current rates for deposits with similar maturities.

FHLB Advances

FHLB advances were valued by projecting expected cash flows into the future based on each advance’s contracted rate and then determining the present value of those expected cash flows using current rates for advances with similar maturities.

Please refer to Note 17 – Fair Value for more information on Trustmark’s classification of financial instruments based on valuation inputs within the fair value hierarchy.

 

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Note 3 – Securities Available for Sale and Held to Maturity

The following tables are a summary of the amortized cost and estimated fair value of securities available for sale and held to maturity at September 30, 2018 and December 31, 2017 ($ in thousands):

 

 

 

Securities Available for Sale

 

 

Securities Held to Maturity

 

September 30, 2018

 

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

 

$

33,511

 

 

$

126

 

 

$

(1,266

)

 

$

32,371

 

 

$

3,725

 

 

$

26

 

 

$

 

 

$

3,751

 

Obligations of states and political

   subdivisions

 

 

57,127

 

 

 

201

 

 

 

(64

)

 

 

57,264

 

 

 

42,623

 

 

 

173

 

 

 

(156

)

 

 

42,640

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage pass-through

   securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed by GNMA

 

 

68,844

 

 

 

118

 

 

 

(3,115

)

 

 

65,847

 

 

 

12,316

 

 

 

33

 

 

 

(389

)

 

 

11,960

 

Issued by FNMA and FHLMC

 

 

713,673

 

 

 

125

 

 

 

(29,324

)

 

 

684,474

 

 

 

119,040

 

 

 

3

 

 

 

(4,652

)

 

 

114,391

 

Other residential mortgage-backed

   securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued or guaranteed by FNMA,

   FHLMC or GNMA

 

 

872,699

 

 

 

86

 

 

 

(32,712

)

 

 

840,073

 

 

 

600,635

 

 

 

 

 

 

(27,473

)

 

 

573,162

 

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued or guaranteed by FNMA,

   FHLMC or GNMA

 

 

189,248

 

 

 

154

 

 

 

(4,798

)

 

 

184,604

 

 

 

165,544

 

 

 

41

 

 

 

(4,172

)

 

 

161,413

 

Total

 

$

1,935,102

 

 

$

810

 

 

$

(71,279