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, 2021

☐	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<br>incorporation or organization)	(I.R.S. Employer<br>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)

Securities registered Pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	TRMK	Nasdaq Global Select Market

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 29, 2021, there were 62,450,372 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,” “project,” “potential,” “seek,” “continue,” “could,” “would,” “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 (SEC) 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. Furthermore, many of these risks and uncertainties are currently amplified by and may continue to be amplified by or may, in the future, be amplified by, the novel coronavirus (COVID-19) pandemic, and also by the effectiveness of varying governmental responses in ameliorating the impact of the pandemic on our customers and the economies where they operate.

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, an increase in unemployment levels and slowdowns in economic growth, our ability to manage the impact of the COVID-19 pandemic on our markets and our customers, as well as the effectiveness of actions of federal, state and local governments and agencies (including the Board of Governors of the Federal Reserve System (FRB)) to mitigate its spread and economic impact, local, state and national economic and market conditions, 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, levels of and volatility in 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 related 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, pandemics or other health crises, acts of war or terrorism, and other risks described in our filings with the SEC.

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.

ITEM 1. FINANCIAL STATEMENTS

Trustmark Corporation and Subsidiaries

Consolidated Balance Sheets

($ in thousands)


			December 31, 2020
Assets
Cash and due from banks	2,175,058		$	1,952,504
Federal funds sold and securities purchased under reverse repurchase agreements	—			50
Securities available for sale, at fair value (amortized cost: 3,053,294 - 2021 1,959,773 - 2020; allowance for credit losses: 0)	3,057,605			1,991,815
Securities held to maturity, net of allowance for credit losses of 0 (fair value: 411,132 - 2021; 563,115 - 2020)	394,905			538,072
Paycheck Protection Program (PPP) loans	46,486			610,134
Loans held for sale (LHFS)	335,339			446,951
Loans held for investment (LHFI)	10,174,899			9,824,524
Less allowance for credit losses (ACL), LHFI	104,073			117,306
Net LHFI	10,070,826			9,707,218
Premises and equipment, net	201,937			194,278
Mortgage servicing rights	84,101			66,464
Goodwill	384,237			385,270
Identifiable intangible assets, net	5,621			7,390
Other real estate, net	6,213			11,651
Operating lease right-of-use assets	34,689			30,901
Other assets	567,627			609,142
Total Assets	17,364,644		$	16,551,840
Liabilities
Deposits:
Noninterest-bearing	4,987,885		$	4,349,010
Interest-bearing	9,934,954			9,699,754
Total deposits	14,922,839			14,048,764
Federal funds purchased and securities sold under repurchase agreements	146,417			164,519
Other borrowings	94,889			168,252
Subordinated notes	122,987			122,921
Junior subordinated debt securities	61,856			61,856
ACL on off-balance sheet credit exposures	32,684			38,572
Operating lease liabilities	36,531			32,290
Other liabilities	177,494			173,549
Total Liabilities	15,595,697			14,810,723
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares Issued and outstanding: 62,461,832 shares - 2021; 63,424,526 shares - 2020	13,014			13,215
Capital surplus	201,837			233,120
Retained earnings	1,573,176			1,495,833
Accumulated other comprehensive income (loss), net of tax	(19,080	)		(1,051	)
Total Shareholders' Equity	1,768,947			1,741,117
Total Liabilities and Shareholders' Equity	17,364,644		$	16,551,840

All values are in US Dollars.

See notes to consolidated financial statements.

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,
	2021			2020			2021			2020
Interest Income
Interest and fees on LHFS & LHFI	$	91,182		$	94,523		$	272,515		$	297,227
Interest and fees on PPP loans		1,533			6,729			36,329			11,773
Interest on securities:
Taxable		9,973			12,542			27,902			38,252
Tax exempt		104			238			451			848
Interest on federal funds sold and securities purchased under reverse<br> repurchase agreements		—			1			—			1
Other interest income		949			331			1,941			1,310
Total Interest Income		103,741			114,364			339,138			349,411
Interest Expense
Interest on deposits		3,691			7,437			13,544			31,124
Interest on federal funds purchased and securities sold under<br> repurchase agreements		51			32			166			699
Other interest expense		1,733			688			5,403			2,429
Total Interest Expense		5,475			8,157			19,113			34,252
Net Interest Income		98,266			106,207			320,025			315,159
Provision for credit losses (PCL), LHFI		(2,492	)		1,760			(16,984	)		40,526
PCL, off-balance sheet credit exposures (1)		(1,049	)		(3,004	)		(5,888	)		10,021
Net Interest Income After PCL		101,807			107,451			342,897			264,612
Noninterest Income
Service charges on deposit accounts		8,911			7,577			23,880			24,006
Bank card and other fees		8,549			8,843			26,322			21,915
Mortgage banking, net		14,004			36,439			52,141			97,667
Insurance commissions		12,133			11,562			36,795			34,980
Wealth management		9,071			7,679			26,433			23,787
Other, net		1,481			1,601			5,572			6,121
Total Noninterest Income		54,149			73,701			171,143			208,476
Noninterest Expense
Salaries and employee benefits		74,623			67,342			215,900			202,597
Services and fees		22,306			20,992			66,559			61,489
Net occupancy - premises		6,854			7,000			20,227			19,873
Equipment expense		5,941			5,828			17,752			17,064
Other real estate expense, net		1,357			1,203			3,192			2,768
Other expense		18,519			14,598			46,197			42,616
Total Noninterest Expense		129,600			116,963			369,827			346,407
Income Before Income Taxes		26,356			64,189			144,213			126,681
Income taxes		5,156			9,749			23,070			17,873
Net Income	$	21,200		$	54,440		$	121,143		$	108,808
Earnings Per Share
Basic	$	0.34		$	0.86		$	1.92		$	1.71
Diluted	$	0.34		$	0.86		$	1.92		$	1.71

(1)

During the second quarter of 2021, Trustmark reclassified its credit loss expense related to off-balance sheet credit exposures from noninterest expense to PCL, off-balance sheet credit exposures. Prior periods have been reclassified accordingly.

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

($ in thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Net income per consolidated statements of income	$	21,200		$	54,440		$	121,143		$	108,808
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on available for sale securities and<br> transferred securities:
Net unrealized holding gains (losses) arising during the<br> period		(9,407	)		(5,781	)		(20,798	)		26,585
Change in net unrealized holding loss on securities<br> transferred to held to maturity		477			603			1,562			1,832
Pension and other postretirement benefit plans:
Reclassification adjustments for changes realized in net<br> income:
Net change in prior service costs		21			28			63			84
Recognized net loss due to lump sum settlement		137			30			137			60
Change in net actuarial loss		333			239			1,007			723
Other comprehensive income (loss), net of tax		(8,439	)		(4,881	)		(18,029	)		29,284
Comprehensive income	$	12,761		$	49,559		$	103,114		$	138,092

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

($ in thousands, except per share data)

(Unaudited)

												Accumulated
												Other
												Comprehensive
						Capital			Retained			Income
			Amount			Surplus			Earnings			(Loss)			Total
Balance, January 1, 2021	63,424,526		$	13,215		$	233,120		$	1,495,833		$	(1,051	)	$	1,741,117
Net income per consolidated statements of income	—			—			—			51,962			—			51,962
Other comprehensive income (loss), net of tax	—			—			—			—			(15,455	)		(15,455	)
Common stock dividends paid (0.23 per share)	—			—			—			(14,685	)		—			(14,685	)
Shares withheld to pay taxes, long-term incentive plan	114,977			24			(1,254	)		—			—			(1,230	)
Repurchase and retirement of common stock	(144,981	)		(30	)		(4,155	)		—			—			(4,185	)
Compensation expense, long-term incentive plan	—			—			2,181			—			—			2,181
Balance, March 31, 2021	63,394,522			13,209			229,892			1,533,110			(16,506	)		1,759,705
Net income per consolidated statements of income	—			—			—			47,981			—			47,981
Other comprehensive income (loss), net of tax	—			—			—			—			5,865			5,865
Common stock dividends paid (0.23 per share)	—			—			—			(14,640	)		—			(14,640	)
Shares withheld to pay taxes, long-term incentive plan	8,524			2			(13	)		—			—			(11	)
Repurchase and retirement of common stock	(629,820	)		(132	)		(20,673	)		—			—			(20,805	)
Compensation expense, long-term incentive plan	—			—			1,214			—			—			1,214
Balance, June 30, 2021	62,773,226			13,079			210,420			1,566,451			(10,641	)		1,779,309
Net income per consolidated statements of income	—			—			—			21,200			—			21,200
Other comprehensive income (loss), net of tax	—			—			—			—			(8,439	)		(8,439	)
Common stock dividends paid (0.23 per share)	—			—			—			(14,475	)		—			(14,475	)
Shares withheld to pay taxes, long-term incentive plan	7,336			1			(97	)		—			—			(96	)
Repurchase and retirement of common stock	(318,730	)		(66	)		(9,602	)		—			—			(9,668	)
Compensation expense, long-term incentive plan	—			—			1,116			—			—			1,116
Balance, September 30, 2021	62,461,832		$	13,014		$	201,837		$	1,573,176		$	(19,080	)	$	1,768,947

All values are in US Dollars.

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity (continued)

($ in thousands, except per share data)

(Unaudited)

												Accumulated
												Other
												Comprehensive
						Capital			Retained			Income
			Amount			Surplus			Earnings			(Loss)			Total
Balance, January 1, 2020	64,200,111		$	13,376		$	256,400		$	1,414,526		$	(23,600	)	$	1,660,702
FASB ASU 2016-13 adoption adjustment	—			—			—			(19,949	)		—			(19,949	)
Net income per consolidated statements of income	—			—			—			22,218			—			22,218
Other comprehensive income (loss), net of tax	—			—			—			—			31,298			31,298
Common stock dividends paid (0.23 per share)	—			—			—			(14,706	)		—			(14,706	)
Shares withheld to pay taxes, long-term incentive plan	83,759			17			(1,037	)		—			—			(1,020	)
Repurchase and retirement of common stock	(886,958	)		(184	)		(27,354	)		—			—			(27,538	)
Compensation expense, long-term incentive plan	—			—			1,394			—			—			1,394
Balance, March 31, 2020	63,396,912			13,209			229,403			1,402,089			7,698			1,652,399
Net income per consolidated statements of income	—			—			—			32,150			—			32,150
Other comprehensive income (loss), net of tax	—			—			—			—			2,867			2,867
Common stock dividends paid (0.23 per share)	—			—			—			(14,687	)		—			(14,687	)
Shares withheld to pay taxes, long-term incentive plan	25,527			5			(64	)		—			—			(59	)
Compensation expense, long-term incentive plan	—			—			1,274			—			—			1,274
Balance, June 30, 2020	63,422,439			13,214			230,613			1,419,552			10,565			1,673,944
Net income per consolidated statements of income	—			—			—			54,440			—			54,440
Other comprehensive income (loss), net of tax	—			—			—			—			(4,881	)		(4,881	)
Common stock dividends paid (0.23 per share)	—			—			—			(14,686	)		—			(14,686	)
Shares withheld to pay taxes, long-term incentive plan	1,381			1			(16	)		—			—			(15	)
Compensation expense, long-term incentive plan	—			—			1,239			—			—			1,239
Balance, September 30, 2020	63,423,820		$	13,215		$	231,836		$	1,459,306		$	5,684		$	1,710,041

All values are in US Dollars.

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2021			2020
Operating Activities
Net income per consolidated statements of income	$	121,143		$	108,808
Adjustments to reconcile net income to net cash provided by operating activities:
Credit loss expense, net		(22,872	)		50,547
Depreciation and amortization		34,337			30,000
Net amortization of securities		15,527			8,458
Gains on sales of loans, net		(58,905	)		(61,464	)
Compensation expense, long-term incentive plan		4,511			3,907
Deferred income tax provision		18,750			(20,600	)
Proceeds from sales of loans held for sale		1,854,487			1,869,187
Purchases and originations of loans held for sale		(1,737,168	)		(1,976,190	)
Originations of mortgage servicing rights		(22,015	)		(20,728	)
Earnings on bank-owned life insurance		(3,633	)		(3,845	)
Net change in other assets		39,808			(53,141	)
Net change in other liabilities		10,781			5,667
Other operating activities, net		(7,551	)		30,367
Net cash from operating activities		247,200			(29,027	)
Investing Activities
Proceeds from maturities, prepayments and calls of securities held to maturity		144,356			128,367
Proceeds from maturities, prepayments and calls of securities available for sale		635,138			465,568
Purchases of securities available for sale		(1,743,290	)		(758,008	)
Net proceeds from bank-owned life insurance		1,791			592
Net change in federal funds sold and securities purchased <br> under reverse repurchase agreements		50			(50	)
Net change in member bank stock		(1,217	)		281
Net change in LHFI and PPP loans		(137,919	)		(1,384,833	)
Proceeds from sales of PPP loans		353,287			—
Purchases of premises and equipment		(19,499	)		(15,634	)
Proceeds from sales of premises and equipment		741			548
Proceeds from sales of other real estate		3,611			11,434
Purchases of software		(2,926	)		(6,050	)
Investments in tax credit and other partnerships		(14,690	)		(4,458	)
Purchase of insurance book of business		—			(3,097	)
Net cash used in business acquisition		—			(4,834	)
Net cash from investing activities		(780,567	)		(1,570,174	)
Financing Activities
Net change in deposits		874,075			1,976,856
Net change in federal funds purchased and securities sold under repurchase agreements		(18,102	)		(102,186	)
Net change in short-term borrowings		(19,171	)		4,272
Payments on long-term FHLB advances		(14	)		(39	)
Payments under finance lease obligations		(1,072	)		(1,319	)
Common stock dividends		(43,800	)		(44,079	)
Repurchase and retirement of common stock		(34,658	)		(27,538	)
Shares withheld to pay taxes, long-term incentive plan		(1,337	)		(1,094	)
Net cash from financing activities		755,921			1,804,873
Net change in cash and cash equivalents		222,554			205,672
Cash and cash equivalents at beginning of period		1,952,504			358,916
Cash and cash equivalents at end of period	$	2,175,058		$	564,588

See notes to consolidated financial statements.

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 180 offices at September 30, 2021 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 Annual Report on Form 10-K for its fiscal year ended December 31, 2020 (2020 Annual Report).

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 2021 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.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness. The COVID-19 pandemic has adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. In response to the pandemic, federal and state authorities in the United States introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing. The full impact of the COVID-19 pandemic is unknown and rapidly evolving. It has caused substantial disruption in international and U.S. economies, markets, and employment. The COVID-19 pandemic may continue to have a significant adverse impact on certain industries Trustmark serves, including restaurants and food services, hotels, retail and energy.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on customers and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect Trustmark’s loan portfolio. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to Trustmark. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and off-balance sheet credit exposures. See Note 3 – LHFI and Allowance for Credit Losses, LHFI for information regarding the impact of COVID-19 on Trustmark’s loan portfolio.

Paycheck Protection Program (PPP) Loans

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), a stimulus package intended to provide relief to businesses and consumers in the United States struggling as a result of the pandemic, was signed into law. A provision in the CARES Act included an initial $349 billion fund for the creation of the PPP through the Small Business Administration (SBA) and Treasury Department. The PPP is intended to provide loans to small businesses, sole proprietorships, independent contractors and self-employed individuals to pay their employees, rent, mortgage interest and utilities. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. If not forgiven, in whole or in part, these loans carry a fixed rate of 1.00% per annum with payments deferred until the date the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period). Originally, the loans carried a term of two years under SBA rules implementing the CARES Act, but

a June 5, 2020 amendment to the CARES Act provided for a five-year minimum loan term for loans made beginning as of such date, and permitted lenders and borrowers to mutually agree to amend existing two-year loans to have terms of five years. The loans are 100% guaranteed by the SBA. Subsequent legislation, including as noted below, has allocated additional funding to the PPP. The SBA pays the originating bank a processing fee ranging from 1.0% to 5.0%, based on the size of the loan. From April to August 2020, Trustmark accepted PPP applications and originated loans to qualified small businesses and other borrowers under this program. The SBA stopped accepting applications for PPP loans on August 8, 2020. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, extended some of the relief provisions in certain respects of the CARES Act, appropriated additional funding to the PPP and permitted certain PPP borrowers to make “second draw” loans. The American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded the eligibility criteria for both first and second draw PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted on March 30, 2021, extended the PPP through May 31, 2021.

In January 2021, Trustmark resumed submitting applications to the SBA on behalf of and originating loans to qualified small businesses and other borrowers under the CARES Act, as amended by the Consolidated Appropriations Act, 2021. During the first nine months of 2021, Trustmark originated 5,727 PPP loans totaling $354.5 million (net of $21.7 million of deferred fees and costs).

On June 30, 2021, Trustmark announced the sale of substantially all PPP loans originated in 2021 by its wholly owned subsidiary, Trustmark National Bank (TNB), to The Loan Source, Inc. (Loan Source), a firm with significant expertise in PPP loans. As a result of this transaction, Loan Source will assume responsibility for the servicing and forgiveness process for the loans it has acquired from Trustmark. This transaction will allow Trustmark to focus on more traditional lending efforts and increase its ability to provide customers with financial services in an improving economic environment.

Trustmark accelerated the recognition of unamortized PPP loan origination fees, net of cost, of approximately $18.6 million, in the second quarter of 2021 due to the sale of approximately $354.2 million in PPP loans. This revenue is substantially the same as Trustmark would expect to recognize upon the maturity or forgiveness of the PPP loans being sold in this transaction, and thus this transaction serves to accelerate revenue anticipated in future periods into the second quarter.

At September 30, 2021, Trustmark had PPP loans outstanding that totaled $46.5 million (net of $798 thousand of deferred fees and costs). Due to the amount and nature of the PPP loans, these loans are not included in the LHFI portfolio and are presented separately in the accompanying consolidated balance sheet. The PPP loans are fully guaranteed by the SBA; therefore, no ACL was estimated for these loans.

Note 2 – 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, 2021 and December 31, 2020 ($ in thousands):

	Securities Available for Sale									Securities Held to Maturity
September 30, 2021	Amortized<br>Cost		Gross<br>Unrealized<br>Gains		Gross<br>Unrealized<br>Losses			Estimated<br>Fair<br>Value		Amortized<br>Cost		Gross<br>Unrealized<br>Gains		Gross<br>Unrealized<br>Losses			Estimated<br>Fair<br>Value
U.S. Treasury securities	$	280,758	$	—	$	(2,143	)	$	278,615	$	—	$	—	$	—		$	—
U.S. Government agency<br> obligations		15,253		88		(362	)		14,979		—		—		—			—
Obligations of states and political<br> subdivisions		5,150		584		—			5,734		10,683		78		(4	)		10,757
Mortgage-backed securities
Residential mortgage pass-<br> through securities
Guaranteed by GNMA		42,772		1,100		(12	)		43,860		5,912		299		—			6,211
Issued by FNMA and<br> FHLMC		2,185,140		13,366		(11,094	)		2,187,412		48,554		1,468		—			50,022
Other residential mortgage-<br> backed securities
Issued or guaranteed by<br> FNMA, FHLMC or<br> GNMA		231,793		5,146		(54	)		236,885		264,638		13,143		(41	)		277,740
Commercial mortgage-backed<br> securities
Issued or guaranteed by<br> FNMA, FHLMC or<br> GNMA		292,428		731		(3,039	)		290,120		65,118		1,284		—			66,402
Total	$	3,053,294	$	21,015	$	(16,704	)	$	3,057,605	$	394,905	$	16,272	$	(45	)	$	411,132

	Securities Available for Sale									Securities Held to Maturity
December 31, 2020	Amortized<br>Cost		Gross<br>Unrealized<br>Gains		Gross<br>Unrealized<br>Losses			Estimated<br>Fair<br>Value		Amortized<br>Cost		Gross<br>Unrealized<br>Gains		Gross<br>Unrealized<br>Losses			Estimated<br>Fair<br>Value
U.S. Government agency<br> obligations	$	18,378	$	144	$	(481	)	$	18,041	$	—	$	—	$	—		$	—
Obligations of states and political<br> subdivisions		5,198		637		—			5,835		26,584		258		(3	)		26,839
Mortgage-backed securities
Residential mortgage pass-<br> through securities
Guaranteed by GNMA		55,193		1,672		(3	)		56,862		7,598		382		—			7,980
Issued by FNMA and<br> FHLMC		1,421,861		20,768		(1,308	)		1,441,321		67,944		2,397		—			70,341
Other residential mortgage-<br> backed securities
Issued or guaranteed by<br> FNMA, FHLMC or<br> GNMA		409,883		9,600		(46	)		419,437		360,361		19,678		(55	)		379,984
Commercial mortgage-backed<br> securities
Issued or guaranteed by<br> FNMA, FHLMC or<br> GNMA		49,260		1,068		(9	)		50,319		75,585		2,386		—			77,971
Total	$	1,959,773	$	33,889	$	(1,847	)	$	1,991,815	$	538,072	$	25,101	$	(58	)	$	563,115

During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale to securities held to maturity. The securities were transferred at fair value, which became the cost basis for the securities held to maturity. At the date of transfer, the net unrealized holding loss on the available for sale securities totaled approximately $46.6 million ($28.8 million, net of tax). The net unrealized holding loss is amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. At September 30, 2021, the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive income (loss) in the accompanying balance sheet totaled approximately $6.8 million ($5.1 million, net of tax) compared to approximately $8.9 million ($6.7 million, net of tax) at December 31, 2020.

ACL on Securities

Securities Available for Sale

Quarterly, Trustmark evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, Trustmark performs further analysis. If Trustmark determines that a credit loss exists, the credit portion of the allowance is measured using a discounted cash flow (DCF) analysis using the effective interest rate as of the security’s purchase date. The amount of credit loss Trustmark records will be limited to the amount by which the amortized cost exceeds the fair value. The DCF analysis utilizes contractual maturities, as well as third-party credit ratings and cumulative default rates published annually by Moody’s Investor Service (Moody’s).

At both September 30, 2021 and December 31, 2020, the results of the analysis did not identify any securities that violate the credit loss triggers; therefore, no DCF analysis was performed and no credit loss was recognized on any of the securities available for sale.

Accrued interest receivable is excluded from the estimate of credit losses for securities available for sale. At September 30, 2021, accrued interest receivable totaled $4.8 million for securities available for sale compared to $4.0 million at December 31, 2020 and was reported in other assets on the accompanying consolidated balance sheets.

Securities Held to Maturity

At September 30, 2021, the potential credit loss exposure was $10.7 million compared to $26.6 million at December 31, 2020 and consisted of municipal securities. After applying appropriate probability of default (PD) and loss given default (LGD) assumptions, the total amount of current expected credit losses was deemed immaterial. Therefore, no reserve was recorded at September 30, 2021 and December 31, 2020.

Accrued interest receivable is excluded from the estimate of credit losses for securities held to maturity. At September 30, 2021 and accrued interest receivable totaled $833 thousand for securities held to maturity compared to $1.2 million at December 31, 2020 and was reported in other assets on the accompanying consolidated balance sheets.

At both September 30, 2021 and December 31, 2020, Trustmark had no securities held to maturity that were past due 30 days or more as to principal or interest payments. Trustmark had no securities held to maturity classified as nonaccrual at September 30, 2021 and December 31, 2020.

Trustmark monitors the credit quality of securities held to maturity on a monthly basis through credit ratings. The following table presents the amortized cost of Trustmark’s securities held to maturity by credit rating, as determined by Moody’s, at September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021		December 31, 2020
Aaa	$	384,222	$	511,488
Aa1 to Aa3		7,510		22,528
Not Rated (1)		3,173		4,056
Total	$	394,905	$	538,072

(1) Not rated securities primarily consist of Mississippi municipal general obligations.

The tables below include securities with gross unrealized losses for which an allowance for credit losses has not been recorded and segregated by length of impairment at September 30, 2021 and December 31, 2020 ($ in thousands):

	Less than 12 Months					12 Months or More					Total
September 30, 2021	Estimated<br>Fair Value		Gross<br>Unrealized<br>Losses			Estimated<br>Fair Value		Gross<br>Unrealized<br>Losses			Estimated<br>Fair Value		Gross<br>Unrealized<br>Losses
U.S. Treasury securities	$	278,615	$	(2,143	)	$	—	$	—		$	278,615	$	(2,143	)
U.S. Government agency obligations		—		—			9,355		(362	)		9,355		(362	)
Obligations of states and political subdivisions		5,506		(2	)		667		(2	)		6,173		(4	)
Mortgage-backed securities
Residential mortgage pass-through<br> securities
Guaranteed by GNMA		1,131		(12	)		—		—			1,131		(12	)
Issued by FNMA and FHLMC		1,553,063		(10,637	)		56,089		(457	)		1,609,152		(11,094	)
Other residential mortgage-backed<br> securities
Issued or guaranteed by FNMA,<br> FHLMC or GNMA		18,583		(95	)		—		—			18,583		(95	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA,<br> FHLMC or GNMA		161,174		(3,030	)		644		(9	)		161,818		(3,039	)
Total	$	2,018,072	$	(15,919	)	$	66,755	$	(830	)	$	2,084,827	$	(16,749	)
December 31, 2020
U.S. Government agency obligations	$	—	$	—		$	11,167	$	(481	)	$	11,167	$	(481	)
Obligations of states and political subdivisions		—		—			667		(3	)		667		(3	)
Mortgage-backed securities
Residential mortgage pass-through<br> securities
Guaranteed by GNMA		1,636		(3	)		—		—			1,636		(3	)
Issued by FNMA and FHLMC		324,905		(1,308	)		—		—			324,905		(1,308	)
Other residential mortgage-backed<br> securities
Issued or guaranteed by FNMA,<br> FHLMC or GNMA		29,398		(101	)		—		—			29,398		(101	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA,<br> FHLMC or GNMA		—		—			659		(9	)		659		(9	)
Total	$	355,939	$	(1,412	)	$	12,493	$	(493	)	$	368,432	$	(1,905	)

The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. 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 at maturity.

Security Gains and Losses

During the nine months ended September 30, 2021 and 2020, there were no gross realized gains or losses as a result of calls and dispositions of securities. Realized gains and losses are determined using the specific identification method and are included in noninterest income as security gains (losses), net.

Securities Pledged

Securities with a carrying value of $2.300 billion and $1.964 billion at September 30, 2021 and December 31, 2020, respectively, were pledged to collateralize public deposits and securities sold under repurchase agreements and for other purposes as permitted by law. At both September 30, 2021 and December 31, 2020, none of these securities were pledged under the Federal Reserve Discount Window program to provide additional contingency funding capacity.

Contractual Maturities

The amortized cost and estimated fair value of securities available for sale and held to maturity at September 30, 2021, 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<br>Available for Sale				Securities<br>Held to Maturity
	Amortized<br>Cost		Estimated<br>Fair Value		Amortized<br>Cost		Estimated<br>Fair Value
Due in one year or less	$	1,709	$	1,729	$	6,161	$	6,186
Due after one year through five years		189,184		188,236		4,522		4,571
Due after five years through ten years		94,838		93,690		—		—
Due after ten years		15,430		15,673		—		—
		301,161		299,328		10,683		10,757
Mortgage-backed securities		2,752,133		2,758,277		384,222		400,375
Total	$	3,053,294	$	3,057,605	$	394,905	$	411,132

Note 3 – LHFI and Allowance for Credit Losses, LHFI

At September 30, 2021 and December 31, 2020, LHFI consisted of the following ($ in thousands):

	September 30, 2021		December 31, 2020
Loans secured by real estate:
Construction, land development and other land	$	559,804	$	514,056
Other secured by 1-4 family residential properties		509,195		524,732
Secured by nonfarm, nonresidential properties		2,924,953		2,709,026
Other real estate secured		986,163		1,065,964
Other loans secured by real estate:
Other construction		726,809		794,983
Secured by 1-4 family residential properties		1,382,097		1,216,400
Commercial and industrial loans		1,327,211		1,309,078
Consumer loans		160,802		164,386
State and other political subdivision loans		1,125,186		1,000,776
Other commercial loans		472,679		525,123
LHFI		10,174,899		9,824,524
Less ACL		104,073		117,306
Net LHFI	$	10,070,826	$	9,707,218

Accrued interest receivable is not included in the amortized cost basis of Trustmark’s LHFI. At September 30, 2021 and December 31, 2020, accrued interest receivable for LHFI totaled $27.9 million and $33.0 million, respectively, with no related ACL and was reported in other assets on the accompanying consolidated balance sheet.

Loan Concentrations

Trustmark does not have any loan concentrations other than those reflected in the preceding table, which exceed 10% of total LHFI. At September 30, 2021, Trustmark’s geographic loan distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. Accordingly, the ultimate collectability of a substantial portion of these loans is susceptible to changes in market conditions in these areas.

Nonaccrual and Past Due LHFI

No material interest income was recognized in the income statement on nonaccrual LHFI for each of the periods ended September 30, 2021 and 2020.

The following tables provide the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more still accruing interest at September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021
	Nonaccrual With No ACL		Total Nonaccrual		Loans Past Due 90 Days or More Still Accruing
Loans secured by real estate:
Construction, land development and other land	$	4,911	$	5,629	$	—
Other secured by 1-4 family residential properties		1,355		3,204		154
Secured by nonfarm, nonresidential properties		11,319		13,077		—
Other real estate secured		56		175		—
Other loans secured by real estate:
Other construction		—		—		—
Secured by 1-4 family residential properties		—		12,562		198
Commercial and industrial loans		1,026		22,218		—
Consumer loans		—		60		273
State and other political subdivision loans		—		3,786		—
Other commercial loans		—		5,529		—
Total	$	18,667	$	66,240	$	625
	December 31, 2020
---	---	---	---	---	---	---
	Nonaccrual With No ACL		Total Nonaccrual		Loans Past Due 90 Days or More Still Accruing
Loans secured by real estate:
Construction, land development and other land	$	5,756	$	5,985	$	—
Other secured by 1-4 family residential properties		1,895		4,487		79
Secured by nonfarm, nonresidential properties		12,037		15,197		—
Other real estate secured		60		185		—
Other loans secured by real estate:
Other construction		—		—		—
Secured by 1-4 family residential properties		—		11,807		1,257
Commercial and industrial loans		12,665		15,618		—
Consumer loans		—		86		240
State and other political subdivision loans		—		3,970		—
Other commercial loans		—		5,793		—
Total	$	32,413	$	63,128	$	1,576

The following tables provide an aging analysis of the amortized cost basis of past due LHFI at September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021
	Past Due
	30-59 Days		60-89 Days		90 Days<br>or More		Total Past Due		Current<br>Loans		Total LHFI
Loans secured by real estate:
Construction, land development and<br> other land	$	1,045	$	155	$	4,847	$	6,047	$	553,757	$	559,804
Other secured by 1-4 family residential<br> properties		1,965		463		381		2,809		506,386		509,195
Secured by nonfarm, nonresidential<br> properties		124		—		1,564		1,688		2,923,265		2,924,953
Other real estate secured		87		—		107		194		985,969		986,163
Other loans secured by real estate:
Other construction		—		—		—		—		726,809		726,809
Secured by 1-4 family residential properties		2,624		612		5,927		9,163		1,372,934		1,382,097
Commercial and industrial loans		1,141		72		3,426		4,639		1,322,572		1,327,211
Consumer loans		1,172		215		273		1,660		159,142		160,802
State and other political subdivision loans		19		—		177		196		1,124,990		1,125,186
Other commercial loans		95		25		5,091		5,211		467,468		472,679
Total	$	8,272	$	1,542	$	21,793	$	31,607	$	10,143,292	$	10,174,899

	December 31, 2020
	Past Due
	30-59 Days		60-89 Days		90 Days<br>or More		Total Past Due		Current<br>Loans		Total LHFI
Loans secured by real estate:
Construction, land development and<br> other land	$	339	$	34	$	161	$	534	$	513,522	$	514,056
Other secured by 1-4 family residential<br> properties		1,505		523		896		2,924		521,808		524,732
Secured by nonfarm, nonresidential<br> properties		920		—		972		1,892		2,707,134		2,709,026
Other real estate secured		103		101		107		311		1,065,653		1,065,964
Other loans secured by real estate:
Other construction		—		—		—		—		794,983		794,983
Secured by 1-4 family residential properties		3,291		1,289		5,110		9,690		1,206,710		1,216,400
Commercial and industrial loans		271		196		1,543		2,010		1,307,068		1,309,078
Consumer loans		926		190		240		1,356		163,030		164,386
State and other political subdivision loans		117		—		177		294		1,000,482		1,000,776
Other commercial loans		2,143		2,971		346		5,460		519,663		525,123
Total	$	9,615	$	5,304	$	9,552	$	24,471	$	9,800,053	$	9,824,524

Troubled Debt Restructurings (TDR)

A TDR occurs when a borrower is experiencing financial difficulties, and for related economic or legal reasons, a concession is granted to the borrower that Trustmark would not otherwise consider. Whatever the form of concession that might be granted by Trustmark, Management’s objective is to enhance collectability by obtaining more cash or other value from the borrower or by increasing the probability of receipt by granting the concession than by not granting it. Other concessions may arise from court proceedings or may be imposed by law. In addition, TDRs also include those credits that are extended or renewed to a borrower who is not able to obtain funds from sources other than Trustmark at a market interest rate for new debt with similar risk.

At September 30, 2021 and 2020, LHFI classified as TDRs totaled $23.5 million and $25.4 million, respectively. At September 30, 2021, TDRs were primarily comprised of bankruptcies, payment concessions and credits with interest-only payments for an extended period of time which totaled $20.1 million. At September 30, 2020, TDRs were primarily comprised of credits with interest-only payments for an extended period of time and credits renewed at a rate that was not commensurate with that of new debt with similar risk which totaled $13.3 million. Trustmark had $1.0 million of unused commitments on TDRs at September 30, 2021 compared to $4.2 million at September 30, 2020.

At both September 30, 2021 and September 30, 2020, TDRs had a related ACL of $2.6 million. Trustmark had $3.7 million in charge-offs on TDRs for the nine months ended September 30, 2021, compared to $2.3 million for the nine months ended September 30, 2020.

The following table illustrates the impact of modifications classified as TDRs for the periods presented ($ in thousands):

	Three Months Ended September 30,
	2021						2020
	Number of<br>Contracts		Pre-Modification<br>Outstanding<br>Recorded<br>Investment		Post-Modification<br>Outstanding<br>Recorded<br>Investment		Number of<br>Contracts		Pre-Modification<br>Outstanding<br>Recorded<br>Investment		Post-Modification<br>Outstanding<br>Recorded<br>Investment
Loans secured by real estate:
Other secured by 1-4 family<br> residential properties		—	$	—	$	—		3	$	87	$	89
Secured by nonfarm,<br> nonresidential properties		3		483		483		—		—		—
Other loans secured by real estate:
Secured by 1-4 family residential<br> properties		1		152		152		—		—		—
Commercial and industrial loans		—		—		—		1		48		47
Total		4	$	635	$	635		4	$	135	$	136

	Nine Months Ended September 30,
	2021						2020
	Number of <br>Contracts		Pre-Modification <br>Outstanding<br>Recorded <br>Investment		Post-Modification <br>Outstanding <br>Recorded <br>Investment		Number of <br>Contracts		Pre-Modification <br>Outstanding <br>Recorded <br>Investment		Post-Modification <br>Outstanding <br>Recorded <br>Investment
Loans secured by real estate:
Construction, land development<br> and other land		5	$	5,582	$	5,582		—	$	—	$	—
Other secured by 1-4 family<br> residential properties		3		37		37		11		794		800
Secured by nonfarm,<br> nonresidential properties		4		860		860		1		139		139
Other loans secured by real estate:
Secured by 1-4 family residential<br> properties		4		401		401		—		—		—
Commercial and industrial loans		2		1,014		1,014		3		1,630		1,629
Consumer loans		—		—		—		6		26		26
State and other political subdivision<br> loans		—		—		—		2		3,902		3,872
Other commercial loans		2		4,929		4,929		—		—		—
Total		20	$	12,823	$	12,823		23	$	6,491	$	6,466

The table below includes the balances at default for TDRs modified within the last 12 months for which there was a payment default during the periods presented ($ in thousands):

	Nine Months Ended September 30,
	2021				2020
	Number of <br>Contracts		Recorded <br>Investment		Number of <br>Contracts		Recorded <br>Investment
Loans secured by real estate:
Construction, land development and other land		5	$	5,582		—	$	—
Other secured by 1-4 family residential properties		1		16		4		484
Secured by nonfarm, nonresidential properties		—		—		1		139
Other loans secured by real estate:
Secured by 1-4 family residential properties		1		78		—		—
Commercial and industrial loans		—		—		1		82
Other commercial loans		2		4,929		—		—
Total		9	$	10,605		6	$	705

Trustmark’s TDRs have resulted primarily from allowing the borrower to pay interest-only for an extended period of time and credits renewed at a rate that was not commensurate with that of new debt with similar risk rather than from forgiveness. Accordingly, as shown above, these TDRs have a similar recorded investment for both the pre-modification and post-modification disclosure. Trustmark has utilized loans 90 days or more past due to define payment default in determining TDRs that have subsequently defaulted.

The following tables detail LHFI classified as TDRs by loan class at September 30, 2021 and 2020 ($ in thousands):

	September 30, 2021
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	4,607	$	4,607
Other secured by 1-4 family residential properties		—		1,007		1,007
Secured by nonfarm, nonresidential properties		394		2,961		3,355
Other loans secured by real estate:
Secured by 1-4 family residential properties		—		2,292		2,292
Commercial and industrial loans		2,000		1,600		3,600
Consumer loans		—		11		11
State and other political subdivision loans		—		3,609		3,609
Other commercial loans		—		5,009		5,009
Total TDRs	$	2,394	$	21,096	$	23,490
	September 30, 2020
---	---	---	---	---	---	---
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	13	$	13
Other secured by 1-4 family residential properties		18		3,689		3,707
Secured by nonfarm, nonresidential properties		—		2,970		2,970
Commercial and industrial loans		1,500		13,198		14,698
Consumer loans		16		19		35
State and other political subdivision loans		—		3,842		3,842
Other commercial loans		—		125		125
Total TDRs	$	1,534	$	23,856	$	25,390

The CARES Act, as amended by subsequent legislation, specified that COVID-19 related modifications executed between March 1, 2020 and the earlier of either (i) 60 days after the date of termination of the national emergency declared by the President or (ii) January 1, 2022, on loans that were current as of December 31, 2019 were not TDRs. Additionally, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 310-40, “Troubled Debt Restructuring by Creditors.” These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Commercial concessions were primarily either interest only for 90 days or full payment deferrals for 90 days. Consumer concessions were 90-day full payment deferrals. At September 30, 2021, the balance of loans remaining under some type of COVID-19 related concession totaled $20.0 million compared to $34.2 million at December 31, 2020.

Collateral-Dependent Loans

The following table presents the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021
	Real Estate		Equipment and<br> Machinery		Inventory and Receivables		Vehicles		Miscellaneous		Total
Loans secured by real estate:
Construction, land development and<br> other land	$	4,911	$	—	$	—	$	—	$	—	$	4,911
Secured by nonfarm, nonresidential<br> properties		11,549		—		—		—		—		11,549
Other real estate secured		56		—		—		—		—		56
Other loans secured by real estate:
Secured by 1-4 family residential<br> properties		1,355		—		—		—		—		1,355
Commercial and industrial loans		42		63		4,219		63		16,671		21,058
State and other political subdivision loans		3,786		—		—		—		—		3,786
Other commercial loans		325		—		1,958		—		3,052		5,335
Total	$	22,024	$	63	$	6,177	$	63	$	19,723	$	48,050
	December 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---
	Real Estate		Equipment and<br> Machinery		Inventory and Receivables		Vehicles		Miscellaneous		Total
Loans secured by real estate:
Construction, land development and<br> other land	$	5,756	$	—	$	—	$	—	$	—	$	5,756
Other secured by 1-4 family<br> residential properties		454		—		—		—		—		454
Secured by nonfarm, nonresidential<br> properties		12,037		—		—		—		—		12,037
Other real estate secured		60		—		—		—		—		60
Other loans secured by real estate:
Secured by 1-4 family residential<br> properties		1,441		—		—		—		—		1,441
Commercial and industrial loans		86		425		4,899		135		8,531		14,076
State and other political subdivision loans		3,970		—		—		—		—		3,970
Other commercial loans		606		—		1,958		—		3,051		5,615
Total	$	24,410	$	425	$	6,857	$	135	$	11,582	$	43,409

A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale of the collateral. The following provides a qualitative description by class of loan of the collateral that secures Trustmark’s collateral-dependent LHFI:

 Loans secured by real estate – Loans within these loan classes are secured by liens on real estate properties. There have been no significant changes to the collateral that secures these financial assets during the period.

 Other loans secured by real estate – Loans within these loan classes are secured by liens on real estate properties. There have been no significant changes to the collateral that secures these financial assets during the period.

 Commercial and industrial loans – Loans within this loan class are primarily secured by inventory, accounts receivables, equipment and other non-real estate collateral. There have been no significant changes to the collateral that secures these financial assets during the period.

 State and other political subdivision loans – Loans within this loan class are secured by liens on real estate properties or other non-real estate collateral. There have been no significant changes to the collateral that secures these financial assets during the period.

 Other commercial loans – Loans within this loan class are secured by liens on real estate properties or other non-real estate collateral. There have been no significant changes to the collateral that secures these financial assets during the period.

Credit Quality Indicators

Trustmark’s LHFI portfolio credit quality indicators focus on six key quality ratios that are compared against bank tolerances. The loan indicators are total classified outstanding, total criticized outstanding, nonperforming loans, nonperforming assets, delinquencies and net loan losses. Due to the homogenous nature of consumer loans, Trustmark does not assign a formal internal risk rating to each credit and therefore the criticized and classified measures are primarily composed of commercial loans.

In addition to monitoring portfolio credit quality indicators, Trustmark also measures how effectively the lending process is being managed and risks are being identified. As part of an ongoing monitoring process, Trustmark grades the commercial portfolio segment as it relates to credit file completion and financial statement exceptions, underwriting, collateral documentation and compliance with law as shown below:

 Credit File Completeness and Financial Statement Exceptions – evaluates the quality and condition of credit files in terms of content and completeness and focuses on efforts to obtain and document sufficient information to determine the quality and status of credits. Also included is an evaluation of the systems/procedures used to ensure compliance with policy.

 Underwriting – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within loan policy requirements. A properly approved credit is approved by adequate authority in a timely manner with all conditions of approval fulfilled. Total policy exceptions measure the level of underwriting and other policy exceptions within a portfolio segment.

 Collateral Documentation – focuses on the adequacy of documentation to perfect Trustmark’s collateral position and substantiate collateral value. Collateral exceptions measure the level of documentation exceptions within a portfolio segment. Collateral exceptions occur when certain collateral documentation is either not present or not current.

 Compliance with Law – focuses on underwriting, documentation, approval and reporting in compliance with banking laws and regulations. Primary emphasis is directed to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Regulation O requirements and regulations governing appraisals.

Commercial Credits

Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to delineate the level of risk across the ten unique credit risk grades. Credit risk grade definitions are as follows:

 Risk Rate (RR) 1 through RR 6 – Grades one through six represent groups of loans that are not subject to criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risk measured by using a variety of credit risk criteria such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.

 Other Assets Especially Mentioned (Special Mention) (RR 7) – a loan that has a potential weakness that if not corrected will lead to a more severe rating. This rating is for credits that are currently protected but potentially weak because of an adverse feature or condition that if not corrected will lead to a further downgrade.

 Substandard (RR 8) – a loan that has at least one identified weakness that is well defined. This rating is for credits where the primary sources of repayment are not viable at the time of evaluation or where either the capital or collateral is not adequate to support the loan and the secondary means of repayment do not provide a sufficient level of support to offset the identified weakness. Loss potential exists in the aggregate amount of substandard loans but does not necessarily exist in individual loans.

 Doubtful (RR 9) – a loan with an identified weakness that does not have a valid secondary source of repayment. Generally, these credits have an impaired primary source of repayment and secondary sources are not sufficient to prevent a loss in the credit. The exact amount of the loss has not been determined at this time.

 Loss (RR 10) – a loan or a portion of a loan that is deemed to be uncollectible.

By definition, credit risk grades special mention (RR 7), substandard (RR 8), doubtful (RR 9) and loss (RR 10) are criticized loans while substandard (RR 8), doubtful (RR 9) and loss (RR 10) are classified loans. These definitions are standardized by all bank regulatory agencies and are generally equally applied to each individual lending institution. The remaining credit risk grades are considered pass credits and are solely defined by Trustmark.

To enhance this process, Trustmark has determined that loans will be individually assessed, and a formal analysis will be performed and based upon the analysis the loan will be written down to net realizable value. Trustmark will individually assess and remove loans from the pool in the following circumstances:

 Commercial nonaccrual loans with total exposure of $500 thousand (excluding those portions of the debt that are government guaranteed or are secured by Trustmark deposits or marketable securities) or more.

 Any loan that is believed to not share similar risk characteristics with the rest of the pool will be individually assessed. Otherwise, the loan will be left within the pool based on the results of the assessment.

 Commercial accruing loans deemed to be a TDR with total exposure of $500 thousand (excluding those portions of the debt that are government guaranteed or are secured by Trustmark deposits or marketable securities) or more. If the loan is believed to not share similar risk characteristics with the rest of the loan pool, the loan will be individually assessed. Otherwise, the loan will be left within the pool and monitored on an ongoing basis.

Each loan officer assesses the appropriateness of the internal risk rating assigned to their credits on an ongoing basis. Trustmark’s Asset Review area conducts independent credit quality reviews of the majority of Trustmark’s commercial loan portfolio both on the underlying credit quality of each individual loan class as well as the adherence to Trustmark’s loan policy and the loan administration process.

In addition to the ongoing internal risk rate monitoring described above, Trustmark’s Credit Quality Review Committee meets monthly and performs a review of all loans of $100 thousand or more that are either delinquent 30 days or more or on nonaccrual. This review includes recommendations regarding risk ratings, accrual status, charge-offs and appropriate servicing officer as well as evaluation of problem credits for determination of TDRs. Quarterly, the Credit Quality Review Committee reviews and modifies continuous action plans for all credits risk rated seven or worse for relationships of $100 thousand or more.

In addition, periodic reviews of significant development, commercial construction, multi-family and nonowner-occupied projects are performed. These reviews assess each particular project with respect to location, project valuations, progress of completion, leasing status, current financial information, rents, operating expenses, cash flow, adherence to budget and projections and other information as applicable. Summary results are reviewed by Senior and Regional Credit Officers in addition to the Chief Credit Officer with a determination made as to the appropriateness of existing risk ratings and accrual status.

Consumer Credits

Consumer LHFI that do not meet a minimum custom credit score are reviewed quarterly. The Retail Credit Review Committee, Management Credit Policy Committee and the Directors Credit Policy Committee review the volume and/or percentage of approvals that did not meet the minimum passing custom score to ensure that Trustmark continues to originate quality loans.

Trustmark monitors the levels and severity of past due consumer LHFI on a daily basis through its collection activities. A detailed assessment of consumer LHFI delinquencies is performed monthly at both a product and market level.

The tables below present the amortized cost basis of loans by credit quality indicator and class of loans based on analyses performed at September 30, 2021 and December 31, 2020 ($ in thousands):

	Term Loans by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
As of September 30, 2021	Commercial LHFI
Loans secured by real estate:
Construction, land<br> development and other<br> land:
Pass - RR 1 through RR 6	$	283,032	$	116,423	$	29,505	$	17,454	$	1,721	$	3,345	$	20,890	$	472,370
Special Mention - RR 7		—		—		—		—		—		—		—		—
Substandard - RR 8		1,948		—		3,461		43		4		—		—		5,456
Doubtful - RR 9		—		—		—		—		—		42		—		42
Total		284,980		116,423		32,966		17,497		1,725		3,387		20,890		477,868
Other secured by 1-4 family<br> residential properties:
Pass - RR 1 through RR 6	$	33,343	$	25,263	$	14,164	$	10,894	$	6,535	$	4,208	$	7,049	$	101,456
Special Mention - RR 7		83		176		—		—		—		—		—		259
Substandard - RR 8		591		315		7		173		151		642		—		1,879
Doubtful - RR 9		24		—		—		—		—		—		—		24
Total		34,041		25,754		14,171		11,067		6,686		4,850		7,049		103,618
Secured by nonfarm,<br> nonresidential properties:
Pass - RR 1 through RR 6	$	530,254	$	655,169	$	609,318	$	383,231	$	214,750	$	311,903	$	105,190	$	2,809,815
Special Mention - RR 7		325		9,655		416		596		1,602		4,839		—		17,433
Substandard - RR 8		9,034		2,390		24,568		3,747		1,957		54,258		1,535		97,489
Doubtful - RR 9		45		—		114		—		—		22		—		181
Total		539,658		667,214		634,416		387,574		218,309		371,022		106,725		2,924,918
Other real estate secured:
Pass - RR 1 through RR 6	$	192,093	$	155,079	$	385,085	$	154,131	$	19,297	$	62,354	$	12,947	$	980,986
Special Mention - RR 7		—		—		—		—		—		791		—		791
Substandard - RR 8		3,212		690		—		12		—		122		—		4,036
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		195,305		155,769		385,085		154,143		19,297		63,267		12,947		985,813

	Term Loans by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
As of September 30, 2021	Commercial LHFI
Other loans secured by real<br> estate:
Other construction:
Pass - RR 1 through RR 6	$	223,507	$	371,269	$	103,566	$	12,837	$	—	$	—	$	14,217	$	725,396
Special Mention - RR 7		—		—		—		—		—		—		—		—
Substandard - RR 8		1,413		—		—		—		—		—		—		1,413
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		224,920		371,269		103,566		12,837		—		—		14,217		726,809
Commercial and industrial<br> loans:
Pass - RR 1 through RR 6	$	369,588	$	289,157	$	82,992	$	39,484	$	59,199	$	43,148	$	379,014	$	1,262,582
Special Mention - RR 7		730		385		180		601		62		—		109		2,067
Substandard - RR 8		12,394		2,528		18,486		1,289		3,469		2,992		21,200		62,358
Doubtful - RR 9		—		37		35		109		—		23		—		204
Total		382,712		292,107		101,693		41,483		62,730		46,163		400,323		1,327,211
State and other political<br> subdivision loans:
Pass - RR 1 through RR 6	$	283,286	$	154,957	$	84,901	$	35,182	$	97,614	$	450,583	$	11,527	$	1,118,050
Special Mention - RR 7		—		—		—		—		—		3,350		—		3,350
Substandard - RR 8		—		—		—		—		—		3,786		—		3,786
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		283,286		154,957		84,901		35,182		97,614		457,719		11,527		1,125,186
Other commercial loans:
Pass - RR 1 through RR 6	$	67,431	$	42,992	$	65,384	$	9,646	$	8,308	$	43,696	$	197,403	$	434,860
Special Mention - RR 7		4,167		—		—		—		—		—		9,013		13,180
Substandard - RR 8		70		7,098		2,096		371		—		127		14,804		24,566
Doubtful - RR 9		—		50		—		—		—		23		—		73
Total		71,668		50,140		67,480		10,017		8,308		43,846		221,220		472,679
Total commercial<br> LHFI	$	2,016,570	$	1,833,633	$	1,424,278	$	669,800	$	414,669	$	990,254	$	794,898	$	8,144,102

	Term Loans by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
As of September 30, 2021	Consumer LHFI
Loans secured by real estate:
Construction, land<br> development and other<br> land:
Current	$	37,059	$	29,173	$	7,958	$	3,212	$	897	$	2,701	$	—	$	81,000
Past due 30-89 days		—		703		—		32		—		11		—		746
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		190		—		190
Total		37,059		29,876		7,958		3,244		897		2,902		—		81,936
Other secured by 1-4 family<br> residential properties:
Current	$	21,308	$	12,368	$	6,727	$	6,913	$	3,388	$	8,768	$	341,019	$	400,491
Past due 30-89 days		32		8		193		7		66		371		1,531		2,208
Past due 90 days or more		—		—		—		—		—		123		31		154
Nonaccrual		12		56		13		10		347		372		1,914		2,724
Total		21,352		12,432		6,933		6,930		3,801		9,634		344,495		405,577
Secured by nonfarm,<br> nonresidential properties:
Current	$	33	$	—	$	—	$	—	$	2	$	—	$	—	$	35
Past due 30-89 days		—		—		—		—		—		—		—		—
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		—		—		—
Total		33		—		—		—		2		—		—		35
Other real estate secured:
Current	$	—	$	100	$	—	$	8	$	33	$	209	$	—	$	350
Past due 30-89 days		—		—		—		—		—		—		—		—
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		—		—		—
Total		—		100		—		8		33		209		—		350

	Term Loans by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
As of September 30, 2021	Consumer LHFI
Other loans secured by real<br> estate:
Secured by 1-4 family<br> residential properties
Current	$	475,651	$	243,852	$	147,846	$	117,312	$	64,973	$	317,231	$	—	$	1,366,865
Past due 30-89 days		316		600		330		351		164		711		—		2,472
Past due 90 days or more		5		—		—		11		—		182		—		198
Nonaccrual		174		1,123		1,272		2,529		647		6,817		—		12,562
Total		476,146		245,575		149,448		120,203		65,784		324,941		—		1,382,097
Consumer loans:
Current	$	53,613	$	33,221	$	11,432	$	6,256	$	1,677	$	653	$	52,231	$	159,083
Past due 30-89 days		412		231		91		26		26		—		600		1,386
Past due 90 days or more		36		33		3		9		—		—		192		273
Nonaccrual		11		14		2		17		9		—		7		60
Total		54,072		33,499		11,528		6,308		1,712		653		53,030		160,802
Total consumer LHFI	$	588,662	$	321,482	$	175,867	$	136,693	$	72,229	$	338,339	$	397,525	$	2,030,797
Total LHFI	$	2,605,232	$	2,155,115	$	1,600,145	$	806,493	$	486,898	$	1,328,593	$	1,192,423	$	10,174,899
	Term Loans by Origination Year
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
As of December 31, 2020	Commercial LHFI
Loans secured by real estate:
Construction, land<br> development and other<br> land:
Pass - RR 1 through RR 6	$	287,218	$	62,078	$	26,401	$	4,487	$	3,274	$	3,564	$	28,548	$	415,570
Special Mention - RR 7		—		—		—		—		—		—		—		—
Substandard - RR 8		5,419		4,363		1,226		12		494		22		101		11,637
Doubtful - RR 9		—		—		—		—		—		42		—		42
Total		292,637		66,441		27,627		4,499		3,768		3,628		28,649		427,249
Other secured by 1-4 family<br> residential properties:
Pass - RR 1 through RR 6	$	35,139	$	19,596	$	15,399	$	9,605	$	10,273	$	4,786	$	8,486	$	103,284
Special Mention - RR 7		255		—		50		—		—		—		—		305
Substandard - RR 8		1,155		8		914		341		302		337		3,950		7,007
Doubtful - RR 9		29		—		—		—		—		—		—		29
Total		36,578		19,604		16,363		9,946		10,575		5,123		12,436		110,625
Secured by nonfarm,<br> nonresidential properties:
Pass - RR 1 through RR 6	$	697,439	$	496,476	$	442,264	$	293,072	$	254,747	$	251,219	$	96,098	$	2,531,315
Special Mention - RR 7		13,452		6,139		2,956		4,466		4,957		20,545		—		52,515
Substandard - RR 8		19,119		20,572		4,516		12,956		38,956		25,438		2,779		124,336
Doubtful - RR 9		52		163		—		—		217		306		—		738
Total		730,062		523,350		449,736		310,494		298,877		297,508		98,877		2,708,904
Other real estate secured:
Pass - RR 1 through RR 6	$	146,803	$	376,765	$	347,472	$	48,626	$	89,824	$	23,680	$	12,116	$	1,045,286
Special Mention - RR 7		—		—		—		—		—		841		—		841
Substandard - RR 8		18,649		14		18		—		556		122		—		19,359
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		165,452		376,779		347,490		48,626		90,380		24,643		12,116		1,065,486

	Term Loans by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
As of December 31, 2020	Commercial LHFI
Other loans secured by real<br> estate:
Other construction
Pass - RR 1 through RR 6	$	262,544	$	425,936	$	81,476	$	14,074	$	2,464	$	—	$	7,735	$	794,229
Special Mention - RR 7		—		—		—		—		—		—		—		—
Substandard - RR 8		754		—		—		—		—		—		—		754
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		263,298		425,936		81,476		14,074		2,464		—		7,735		794,983
Commercial and industrial<br> loans:
Pass - RR 1 through RR 6	$	444,304	$	165,163	$	77,611	$	77,985	$	59,131	$	43,214	$	372,486	$	1,239,894
Special Mention - RR 7		677		45		—		—		—		—		240		962
Substandard - RR 8		12,090		1,814		9,737		3,735		2,160		5,024		33,380		67,940
Doubtful - RR 9		151		95		—		—		32		4		—		282
Total		457,222		167,117		87,348		81,720		61,323		48,242		406,106		1,309,078
State and other political<br> subdivision loans:
Pass - RR 1 through RR 6	$	250,363	$	79,595	$	41,334	$	113,817	$	132,634	$	372,831	$	1,446	$	992,020
Special Mention - RR 7		—		—		—		—		—		4,018		—		4,018
Substandard - RR 8		—		—		—		247		—		4,491		—		4,738
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		250,363		79,595		41,334		114,064		132,634		381,340		1,446		1,000,776
Other commercial loans:
Pass - RR 1 through RR 6	$	101,230	$	70,990	$	20,769	$	9,723	$	33,481	$	30,715	$	225,533	$	492,441
Special Mention - RR 7		7,500		—		—		—		—		—		11,333		18,833
Substandard - RR 8		381		2,099		683		6		707		—		9,948		13,824
Doubtful - RR 9		2		—		—		—		—		23		—		25
Total		109,113		73,089		21,452		9,729		34,188		30,738		246,814		525,123
Total commercial<br> LHFI	$	2,304,725	$	1,731,911	$	1,072,826	$	593,152	$	634,209	$	791,222	$	814,179	$	7,942,224

	Term Loans by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
As of December 31, 2020	Consumer LHFI
Loans secured by real estate:
Construction, land<br> development and other<br> land:
Current	$	47,336	$	24,174	$	8,496	$	2,036	$	1,447	$	2,868	$	—	$	86,357
Past due 30-89 days		—		318		20		—		1		12		—		351
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		99		—		99
Total		47,336		24,492		8,516		2,036		1,448		2,979		—		86,807
Other secured by 1-4 family<br> residential properties:
Current	$	20,864	$	10,253	$	12,037	$	4,177	$	2,082	$	11,124	$	348,830	$	409,367
Past due 30-89 days		93		12		—		13		—		133		1,058		1,309
Past due 90 days or more		—		—		—		—		—		30		22		52
Nonaccrual		6		44		121		428		—		382		2,398		3,379
Total		20,963		10,309		12,158		4,618		2,082		11,669		352,308		414,107
Secured by nonfarm,<br> nonresidential properties:
Current	$	109	$	—	$	—	$	4	$	—	$	9	$	—	$	122
Past due 30-89 days		—		—		—		—		—		—		—		—
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		—		—		—
Total		109		—		—		4		—		9		—		122
Other real estate secured:
Current	$	107	$	—	$	38	$	37	$	96	$	200	$	—	$	478
Past due 30-89 days		—		—		—		—		—		—		—		—
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		—		—		—
Total		107		—		38		37		96		200		—		478
Other loans secured by real<br> estate:
Secured by 1-4 family<br> residential properties
Current	$	289,521	$	214,056	$	173,324	$	92,564	$	109,031	$	321,250	$	—	$	1,199,746
Past due 30-89 days		499		93		753		366		1,080		799		—		3,590
Past due 90 days or more		159		214		208		127		—		549		—		1,257
Nonaccrual		283		711		2,024		682		239		7,868		—		11,807
Total		290,462		215,074		176,309		93,739		110,350		330,466		—		1,216,400
Consumer loans:
Current	$	65,370	$	25,303	$	13,140	$	3,893	$	1,257	$	345	$	53,669	$	162,977
Past due 30-89 days		524		158		67		19		7		3		305		1,083
Past due 90 days or more		77		—		4		—		—		—		159		240
Nonaccrual		12		4		55		13		2		—		—		86
Total		65,983		25,465		13,266		3,925		1,266		348		54,133		164,386
Total consumer LHFI	$	424,960	$	275,340	$	210,287	$	104,359	$	115,242	$	345,671	$	406,441	$	1,882,300
Total LHFI	$	2,729,685	$	2,007,251	$	1,283,113	$	697,511	$	749,451	$	1,136,893	$	1,220,620	$	9,824,524

Past Due LHFS

LHFS past due 90 days or more totaled $75.1 million and $119.4 million at September 30, 2021 and December 31, 2020, respectively. LHFS past due 90 days or more are serviced loans eligible for repurchase, which are fully guaranteed by the Government National Mortgage Association (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% 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.

Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first nine months of 2021 or 2020.

ACL on LHFI

Trustmark’s ACL methodology for LHFI is based upon guidance within the FASB ASC Subtopic 326-20 as well as applicable regulatory guidance. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the LHFI portfolio is continuously monitored by Management and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within Trustmark’s existing LHFI portfolio. The ACL for LHFI is adjusted through the PCL and reduced by the charge off of loan amounts, net of recoveries.

The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a collective, or pooled, component for estimated expected credit losses for pools of loans that share similar risk characteristics, and an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. In estimating the allowance for credit losses for the collective component, loans are segregated into loan pools based on loan product types and similar risk characteristics.

The loans secured by real estate and other loans secured by real estate portfolio segments include loans for both commercial and residential properties. The underwriting process for these loans includes analysis of the financial position and strength of both the borrower and guarantor, experience with similar projects in the past, market demand and prospects for successful completion of the proposed project within the established budget and schedule, values of underlying collateral, availability of permanent financing, maximum loan-to-value ratios, minimum equity requirements, acceptable amortization periods and minimum debt service coverage requirements, based on property type. The borrower’s financial strength and capacity to repay their obligations remain the primary focus of underwriting. Financial strength is evaluated based upon analytical tools that consider historical and projected cash flows and performance in addition to analysis of the proposed project for income-producing properties. Additional support offered by guarantors is also considered. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.

The commercial and industrial LHFI portfolio segment includes loans within Trustmark’s geographic markets made to many types of businesses for various purposes, such as short term working capital loans that are usually secured by accounts receivable and inventory and term financing for equipment and fixed asset purchases that are secured by those assets. Trustmark’s credit underwriting process for commercial and industrial loans includes analysis of historical and projected cash flows and performance, evaluation of financial strength of both borrowers and guarantors as reflected in current and detailed financial information and evaluation of underlying collateral to support the credit.

The consumer LHFI portfolio segment is comprised of loans which are underwritten after evaluating a borrower’s repayment capacity, credit and collateral. Several factors are considered when assessing a borrower’s capacity to repay the obligation, including the borrower’s employment, income, current debt and assets. Credit is assessed using a credit report that provides credit scores and the borrower’s current and past information about their credit history. Property appraisals are obtained to assist in evaluating collateral. Loan-to-value and debt-to-income ratios, loan amount and lien position are also considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices and demand and levels of unemployment.

The state and other political subdivision LHFI and the other commercial LHFI portfolio segments primarily consist of loans to non-depository financial institutions, such as mortgage companies, finance companies and other financial intermediaries, loans to state and

political subdivisions, and loans to non-profit and charitable organizations. These loans are underwritten based on the specific nature or purpose of the loan and underlying collateral with special consideration given to the specific source of repayment for the loan.

The following table provides a description of each of Trustmark’s portfolio segments, loan classes, loan pools and the ACL methodology and loss drivers:

Portfolio Segment	Loan Class	Loan Pool	Methodology	Loss Drivers
Loans secured by real estate	Construction, land<br> development and other land	1-4 family residential<br> construction	DCF	Prime Rate, National GDP
		Lots and development	DCF	Prime Rate, Southern Unemployment
		Unimproved land	DCF	Prime Rate, Southern Unemployment
		All other consumer	DCF	Southern Unemployment
	Other secured by 1-4<br> family residential<br> properties	Consumer 1-4 family - 1st liens	DCF	Prime Rate, Southern Unemployment
		All other consumer	DCF	Southern Unemployment
		Nonresidential owner-occupied	DCF	Southern Unemployment, National GDP
	Secured by nonfarm,<br> nonresidential properties	Nonowner-occupied -<br> hotel/motel	DCF	Southern Vacancy Rate, Southern Unemployment
		Nonowner-occupied - office	DCF	Southern Vacancy Rate, Southern Unemployment
		Nonowner-occupied- Retail	DCF	Southern Vacancy Rate, Southern Unemployment
		Nonowner-occupied - senior<br> living/nursing homes	DCF	Southern Vacancy Rate, Southern Unemployment
		Nonowner-occupied -<br> all other	DCF	Southern Vacancy Rate, Southern Unemployment
		Nonresidential owner-occupied	DCF	Southern Unemployment, National GDP
	Other real estate secured	Nonresidential nonowner<br> -occupied - apartments	DCF	Southern Vacancy Rate, Southern Unemployment
		Nonresidential owner-occupied	DCF	Southern Unemployment, National GDP
		Nonowner-occupied -<br> all other	DCF	Southern Vacancy Rate, Southern Unemployment
Other loans secured by<br> real estate	Other construction	Other construction	WARM	Prime Rate, National Unemployment
	Secured by 1-4 family<br> residential properties	Trustmark mortgage	WARM	Southern Unemployment
Commercial and<br> industrial loans	Commercial and<br> industrial loans	Commercial and industrial -<br> non-working capital	DCF	Trustmark historical data
		Commercial and industrial -<br> working capital	DCF	Trustmark historical data
		Credit cards	WARM	Trustmark call report data
Consumer loans	Consumer loans	Credit cards	WARM	Trustmark call report data
		Overdrafts	Loss Rate	Trustmark historical data
		All other consumer	DCF	Southern Unemployment
State and other political<br> subdivision loans	State and other political<br> subdivision loans	Obligations of state and<br> political subdivisions	DCF	Moody's Bond Default Study
Other commercial loans	Other commercial loans	Other loans	DCF	Prime Rate, Southern Unemployment
		Commercial and industrial -<br> non-working capital	DCF	Trustmark historical data
		Commercial and industrial -<br> working capital	DCF	Trustmark historical data

In general, Trustmark utilizes a DCF method to estimate the quantitative portion of the allowance for credit losses for loan pools. The DCF model consists of two key components, a loss driver analysis (LDA) and a cash flow analysis. For loan pools utilizing the DCF methodology, multiple assumptions are in place, depending on the loan pool. A reasonable and supportable forecast is utilized for each loan pool by developing a LDA for each loan class. The LDA uses charge off data from Federal Financial Institutions Examination Council (FFIEC) reports to construct a periodic default rate (PDR). The PDR is decomposed into a PD. Regressions are run using the

data for various macroeconomic variables in order to determine which ones correlate to Trustmark’s losses. These variables are then incorporated into the application to calculate a quarterly PD using a third-party baseline forecast. In addition to the PD, a LGD is derived using a method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the levels of PD forecasts. This model approach is applicable to all pools within the construction, land development and other land, other secured by 1-4 family residential properties, secured by nonfarm, nonresidential properties and other real estate secured loan classes as well as the all other consumer and other loans pools.

For the commercial and industrial loans related pools, Trustmark uses its own PD and LGD data, instead of the macroeconomic variables and the Frye Jacobs method described above, to calculate the PD and LGD as there were no defensible macroeconomic variables that correlated to Trustmark’s losses. Trustmark utilizes a third-party Bond Default Study to derive the PD and LGD for the obligations of state and political subdivisions pool. Due to the lack of losses within this pool, no defensible macroeconomic factors were identified to correlate.

The PD and LGD measures are used in conjunction with prepayment data as inputs into the DCF model to calculate the cash flows at the individual loan level. Contractual cash flows based on loan terms are adjusted for PD, LGD and prepayments to derive loss cash flows. These loss cash flows are discounted by the loan’s coupon rate to arrive at the discounted cash flow based quantitative loss. The prepayment studies are updated quarterly by a third-party for each applicable pool.

An alternate method of estimating the ACL is used for certain loan pools due to specific characteristics of these loans. For the non-DCF pools, specifically, those using the weighted average remaining maturity (WARM) method, the remaining life is incorporated into the ACL quantitative calculation.

Trustmark determined that reasonable and supportable forecasts could be made for a twelve-month period for all of its loan pools. To the extent the lives of the loans in the LHFI portfolio extend beyond this forecast period, Trustmark uses a reversion period of four quarters and reverts to the historical mean on a straight-line basis over the remaining life of the loans. The econometric models currently in production reflect segment or pool level sensitivities of PD to changes in macroeconomic variables. By measuring the relationship between defaults and changes in the economy, the quantitative reserve incorporates reasonable and supportable forecasts of future conditions that will affect the value of its assets, as required by FASB ASC Topic 326. Under stable forecasts, these linear regressions will reasonably predict a pool’s PD. However, due to the COVID-19 pandemic, the macroeconomic variables used for reasonable and supportable forecasting have changed rapidly. At the current levels, it is not clear that the models currently in production will produce reasonably representative results since the models were originally estimated using data beginning in 2004 through 2019. During this period, a traditional, albeit severe, economic recession occurred. Thus, econometric models are sensitive to similar future levels of PD.

In order to prevent the econometric models from extrapolating beyond reasonable boundaries of their input variables, Trustmark chose to establish an upper and lower limit process when applying the periodic forecasts. In this way, Management will not rely upon unobserved and untested relationships in the setting of the quantitative reserve. This approach applies to all input variables, including: Southern Unemployment, National Unemployment, National GDP, Southern Vacancy Rate and the Prime Rate. The upper and lower limits are based on the distribution of the macroeconomic variable by selecting extreme percentiles at the upper and lower limits of the distribution, the 1st and 99th percentiles, respectively. These upper and lower limits are then used to calculate the PD for the forecast time period in which the forecasted values are outside of the upper and lower limit range. During the second quarter of 2021, the forecast related to the macroeconomic variables used in the quantitative modeling process were positively impacted due to the updated forecast effects. However, due to multiple periods in the second quarter of 2021 having a PD or LGD at or near zero as a result of the improving macroeconomic forecasts, Management implemented PD and LGD floors to account for the risk associated with each portfolio. The PD and LGD floors are based on Trustmark’s historical loss experience and applied at a portfolio level.

Qualitative factors used in the ACL methodology include the following:

 Lending policies and procedures

 Economic conditions and concentrations of credit

 Nature and volume of the portfolio

 Performance trends

 External factors

While all these factors are incorporated into the overall methodology, only three are currently considered active: (i) economic conditions and concentrations of credit, (ii) performance trends and (iii) external factors.

Two of Trustmark’s largest loan classes are the loans secured by nonfarm, nonresidential properties and the loans secured by other real estate. Trustmark elected to create a qualitative factor specifically for these loan classes which addresses changes in the economic conditions of metropolitan areas and applies additional pool level reserves. This qualitative factor is based on third-party market data and forecast trends and is updated quarterly as information is available, by market and by loan pool.

For the performance trends factor, Trustmark uses migration analyses to allocate additional ACL to non-pass/delinquent loans within each pool. In this way, Management believes the ACL will directly reflect changes in risk, based on the performance of the loans within a pool, whether declining or improving.

The external factors qualitative factor is Management’s best judgement on the loan or pool level impact of all factors that affect the portfolio that are not accounted for using any other part of the ACL methodology (e.g., natural disasters, changes in legislation, impacts due to technology and pandemics). During the third quarter of 2020, Trustmark activated the External Factor – Pandemic to ensure reserve adequacy for collectively evaluated loans most likely to be impacted by the unique economic and behavioral conditions created by the COVID-19 pandemic. Additional qualitative reserves are derived based on two principles. The first is the disconnect of economic factors to Trustmark’s modeled probability of default (derived from the econometric models underpinning the quantitative pooled reserves). During the pandemic, extraordinary measures by the federal government were made available to consumers and businesses, including COVID-19 loan payment concessions, direct transfer payments to households, tax deferrals, and reduced interest rates, among others. These government interventions may have extended the lag between economic conditions and default, relative to what was captured in the model development data. Because Trustmark’s econometric PD models rely on the observed relationship from the economic downturn from 2007 to 2009 in both timing and severity, Management does not expect the models to reflect these current conditions. For example, while the models would predict contemporaneous unemployment peaks and loan defaults, this may not occur when borrowers can request payment deferrals. Thus, for the affected population, economic conditions are not fully considered as a part of Trustmark’s quantitative reserve. The second principle is the change in risk that is identified by rating changes. As a part of Trustmark’s credit review process, loans in the affected population have been given more frequent screening to ensure accurate ratings are maintained through this dynamic period. Trustmark’s quantitative reserve does not directly address changes in ratings, thus a migration qualitative factor was designed to work in concert with the quantitative reserve. In a downturn, the qualitative factor is inactive for most pools because changes in ratings are congruent with changes in macroeconomic conditions, which directly influence the PD models in the quantitative reserve.

As discussed above, the disconnect of economic factors means that changes in rating caused by deteriorating and weak economic conditions as a result of the pandemic are not being captured in the quantitative reserve. During the fourth quarter of 2020, due to unforeseen pandemic conditions that varied from Management’s expectations during the third quarter of 2020, additional reserves were further dimensioned in order to appropriately reflect the risk within the portfolio related to the COVID-19 pandemic. In an effort to ensure the External Factor-Pandemic qualitative factor is reasonable and supportable, historical Trustmark loss data was leveraged to construct a framework that is quantitative in nature. To dimension the additional reserve, Management uses the sensitivity of the quantitative commercial loan reserve to changes in macroeconomic conditions to apply to loans rated acceptable or better (RR 1-4). In addition, to account for the known changes in risk, a weighted average of the commercial loan portfolio loss rate, derived from the performance trends qualitative factor, is used to dimension additional reserves for downgraded credits. Loans rated acceptable with risk (RR 5) or watch (RR 6) received the additional reserves based on the average of the macroeconomic conditions and weighted- average of the commercial loan portfolio loss rate while the loans rated special mention and substandard received additional reserves based on the weighted-average described above.

The following tables disaggregate the ACL and the amortized cost basis of the loans by the measurement methodology used at September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021
	ACL						LHFI
	Individually Evaluated for Credit Loss		Collectively Evaluated for Credit Loss		Total		Individually Evaluated for Credit Loss		Collectively Evaluated for Credit Loss		Total
Loans secured by real estate:
Construction, land development and<br> other land	$	—	$	5,133	$	5,133	$	4,911		554,893	$	559,804
Other secured by 1-4 family residential<br> properties		—		10,223		10,223		—		509,195		509,195
Secured by nonfarm, nonresidential<br> properties		—		43,306		43,306		11,549		2,913,404		2,924,953
Other real estate secured		—		4,370		4,370		56		986,107		986,163
Other loans secured by real estate:
Other construction		—		5,945		5,945		—		726,809		726,809
Secured by 1-4 family residential<br> properties		—		2,654		2,654		1,355		1,380,742		1,382,097
Commercial and industrial loans		7,034		12,339		19,373		21,058		1,306,153		1,327,211
Consumer loans		—		4,862		4,862		—		160,802		160,802
State and other political subdivision loans		1,517		1,447		2,964		3,786		1,121,400		1,125,186
Other commercial loans		797		4,446		5,243		5,335		467,344		472,679
Total	$	9,348	$	94,725	$	104,073	$	48,050	$	10,126,849	$	10,174,899
	December 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---
	ACL						LHFI
	Individually Evaluated for Credit Loss		Collectively Evaluated for Credit Loss		Total		Individually Evaluated for Credit Loss		Collectively Evaluated for Credit Loss		Total
Loans secured by real estate:
Construction, land development and<br> other land	$	—	$	6,854	$	6,854	$	5,756	$	508,300	$	514,056
Other secured by 1-4 family residential<br> properties		—		9,928		9,928		454		524,278		524,732
Secured by nonfarm, nonresidential<br> properties		—		48,523		48,523		12,037		2,696,989		2,709,026
Other real estate secured		—		7,382		7,382		60		1,065,904		1,065,964
Other loans secured by real estate:
Other construction		—		8,158		8,158		—		794,983		794,983
Secured by 1-4 family residential<br> properties		—		5,143		5,143		1,441		1,214,959		1,216,400
Commercial and industrial loans		579		14,272		14,851		14,076		1,295,002		1,309,078
Consumer loans		—		5,838		5,838		—		164,386		164,386
State and other political subdivision loans		1,700		1,490		3,190		3,970		996,806		1,000,776
Other commercial loans		2,100		5,339		7,439		5,615		519,508		525,123
Total	$	4,379	$	112,927	$	117,306	$	43,409	$	9,781,115	$	9,824,524

Changes in the ACL were as follows for the periods presented ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Balance at beginning of period	$	104,032		$	119,188		$	117,306		$	84,277
FASB ASU 2016-13 adoption adjustments:
LHFI		—			—			—			(3,039	)
Allowance for loan losses, acquired loans transfer		—			—			—			815
Acquired loans ACL adjustment		—			—			—			1,007
Loans charged-off		(1,586	)		(1,263	)		(7,659	)		(8,678	)
Recoveries		4,119			2,325			11,410			7,102
Net (charge-offs) recoveries		2,533			1,062			3,751			(1,576	)
PCL		(2,492	)		1,760			(16,984	)		40,526
Balance at end of period	$	104,073		$	122,010		$	104,073		$	122,010

The following tables detail changes in the ACL by loan class for the periods presented ($ in thousands):

	Three Months Ended September 30, 2021
	Balance at Beginning of Period		Charge-offs			Recoveries		PCL			Balance at End of Period
Loans secured by real estate:
Construction, land development and other land	$	5,110	$	(3	)	$	391	$	(365	)	$	5,133
Other secured by 1-4 family residential properties		10,399		(7	)		85		(254	)		10,223
Secured by nonfarm, nonresidential properties		44,416		—			45		(1,155	)		43,306
Other real estate secured		5,311		—			4		(945	)		4,370
Other loans secured by real estate:
Other construction		6,530		—			2		(587	)		5,945
Secured by 1-4 family residential properties		2,910		(144	)		15		(127	)		2,654
Commercial and industrial loans		13,973		(5	)		2,028		3,377			19,373
Consumer loans		4,876		(287	)		451		(178	)		4,862
State and other political subdivision loans		3,233		—			—		(269	)		2,964
Other commercial loans		7,274		(1,140	)		1,098		(1,989	)		5,243
Total	$	104,032	$	(1,586	)	$	4,119	$	(2,492	)	$	104,073

The decreases in the PCL for the three months ended September 30, 2021 were primarily due to improvements in the macroeconomic forecasting variables used in the ACL modeling, such as National and Southern Unemployment, National GDP, Prime Rate and Southern Vacancy Rate and the PD and LGD floors.

The PCL for the commercial and industrial loan portfolio increased $3.4 million during the three months ended September 30, 2021 primarily due to the specific reserves on individually analyzed credits.

	Three Months Ended September 30, 2020
	Balance at Beginning of Period		Charge-offs			Recoveries		PCL			Balance at End of Period
Loans secured by real estate:
Construction, land development and other land	$	11,940	$	—		$	443	$	(1,478	)	$	10,905
Other secured by 1-4 family residential properties		12,716		(18	)		75		(1,415	)		11,358
Secured by nonfarm, nonresidential properties		36,417		(115	)		18		7,442			43,762
Other real estate secured		7,600		—			42		(470	)		7,172
Other loans secured by real estate:
Other construction		10,803		—			30		(624	)		10,209
Secured by 1-4 family residential properties		10,899		—			18		(2,183	)		8,734
Commercial and industrial loans		12,550		(71	)		447		232			13,158
Consumer loans		6,397		(384	)		375		(348	)		6,040
State and other political subdivision loans		3,414		—			—		(456	)		2,958
Other commercial loans		6,452		(675	)		877		1,060			7,714
Total	$	119,188	$	(1,263	)	$	2,325	$	1,760		$	122,010

The decrease in the PCL for loans and other loans secured by real estate during the three months ended September 30, 2020 were primarily due to improvements in the microeconomic forecasting variables used in the ACL modeling, such as National and Southern Unemployment, National GDP and Prime Rate.

During the third quarter of 2020, Trustmark conducted a review of significantly impacted borrowers that received one or more payment concessions and other borrowers in industries significantly impacted by COVID-19. The increases in the PCL for loans secured by nonfarm, nonresidential properties and other commercial loans during the three months ended September 30, 2020 were primarily due to downgrades that resulted from the in-depth portfolio review for those loans affected by the COVID-19 pandemic.

	Nine Months Ended September 30, 2021
	Balance at Beginning of Period		Charge-offs			Recoveries		PCL			Balance at End of Period
Loans secured by real estate:
Construction, land development and other land	$	6,854	$	(3	)	$	1,470	$	(3,188	)	$	5,133
Other secured by 1-4 family residential properties		9,928		(91	)		337		49			10,223
Secured by nonfarm, nonresidential properties		48,523		(79	)		1,102		(6,240	)		43,306
Other real estate secured		7,382		—			15		(3,027	)		4,370
Other loans secured by real estate:
Other construction		8,158		—			46		(2,259	)		5,945
Secured by 1-4 family residential properties		5,143		(148	)		123		(2,464	)		2,654
Commercial and industrial loans		14,851		(3,702	)		3,967		4,257			19,373
Consumer loans		5,838		(1,120	)		1,200		(1,056	)		4,862
State and other political subdivision loans		3,190		—			—		(226	)		2,964
Other commercial loans		7,439		(2,516	)		3,150		(2,830	)		5,243
Total	$	117,306	$	(7,659	)	$	11,410	$	(16,984	)	$	104,073

Decreases in the PCL for the first nine months of 2021 were primarily due to improvements in the macroeconomic forecasting variables used in the ACL modeling, such as National and Southern Unemployment, National GDP, Prime Rate and Southern Vacancy Rate.

The PCL for the commercial and industrial loan portfolio increased $4.3 million during the nine months ended September 30, 2021 and was primarily due to specific reserves for individually analyzed loans.

	Nine Months Ended September 30, 2020
	Balance at Beginning of Period		FASB ASU 2016-13 Adoption Adjustment			Charge-offs			Recoveries		PCL			Balance at End of Period
Loans secured by real estate:
Construction, land development and other land	$	6,371	$	(188	)	$	(7	)	$	629	$	4,100		$	10,905
Other secured by 1-4 family residential properties		5,888		4,188			(118	)		221		1,179			11,358
Secured by nonfarm, nonresidential properties		26,158		(8,179	)		(2,563	)		524		27,822			43,762
Other real estate secured		4,024		(765	)		(8	)		60		3,861			7,172
Other loans secured by real estate:
Other construction		1,889		3,202			—			70		5,048			10,209
Secured by 1-4 family residential properties		3,044		2,891			(19	)		124		2,694			8,734
Commercial and industrial loans		25,992		(8,964	)		(1,350	)		1,180		(3,700	)		13,158
Consumer loans		3,379		2,059			(1,745	)		1,316		1,031			6,040
State and other political subdivision loans		2,229		2,455			—			—		(1,726	)		2,958
Other commercial loans		5,303		2,084			(2,868	)		2,978		217			7,714
Total	$	84,277	$	(1,217	)	$	(8,678	)	$	7,102	$	40,526		$	122,010

The increase in the PCL for loans and other loans secured by real estate and consumer loans during the nine months ended September 30, 2020 were primarily due to the negative impact of COVID-19 on the macroeconomic forecasting variables used in the ACL modeling, such as National and Southern Unemployment, National GDP, Prime Rate and Southern Vacancy Rate.

The PCL for the commercial and industrial loan portfolio decreased $3.7 million during the nine months ended September 30, 2020 primarily due to loans that had been specifically reserved for being charged down, upgrades on loans from substandard to pass, paydowns as well as a slight decrease in the calculated PD and LGD, which uses Trustmark’s historical data. The decrease in the PCL for state

and other political subdivision loans of $1.7 million was primarily due to a decrease in reserves based on routine updates to the qualitative portion of the allowance calculation.

Note 4 – Mortgage Banking

Mortgage Servicing Rights

The activity in the mortgage servicing rights (MSR) is detailed in the table below for the periods presented ($ in thousands):

	Nine Months Ended September 30,
	2021			2020
Balance at beginning of period	$	66,464		$	79,394
Origination of servicing assets		22,015			20,728
Change in fair value:
Due to market changes		11,037			(27,098	)
Due to run-off		(15,415	)		(11,411	)
Balance at end of period	$	84,101		$	61,613

Trustmark determines the fair value of the MSR using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. Trustmark considers the conditional prepayment rate (CPR), which is an estimated loan prepayment rate that uses historical prepayment rates for previous loans similar to the loans being evaluated, and the discount rate in determining the fair value of the MSR. An increase in either the CPR 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. At September 30, 2021, the fair value of the MSR included an assumed average prepayment speed of 12 CPR and an average discount rate of 9.55% compared to an assumed average prepayment speed of 16 CPR and an average discount rate of 9.59% at September 30, 2020.

Mortgage Loans Serviced/Sold

During the first nine months of 2021 and 2020, Trustmark sold $1.796 billion and $1.808 billion, respectively, of residential mortgage loans. Gains on these sales were recorded as noninterest income in mortgage banking, net and totaled $47.0 million for the first nine months of 2021 compared to $82.9 million for the first nine months of 2020.

The table below details the mortgage loans sold and serviced for others at September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021		December 31, 2020
Federal National Mortgage Association	$	4,676,745	$	4,629,670
Government National Mortgage Association		3,146,324		2,960,760
Federal Home Loan Mortgage Corporation		39,275		50,459
Other		14,183		16,201
Total mortgage loans sold and serviced for others	$	7,876,527	$	7,657,090

Trustmark is subject to losses in its loan servicing portfolio due to loan foreclosures. Trustmark has obligations to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loan sold was in violation of representations or warranties made by Trustmark at the time of the sale, herein referred to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that had missing or insufficient file documentation, loans that do not meet investor guidelines, loans in which the appraisal does not support the value and/or loans obtained through fraud by the borrowers or other third parties. Generally, putback requests may be made until the loan is paid in full. However, mortgage loans delivered to Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) on or after January 1, 2013 are subject to the Representations and Warranties Framework, which provides certain instances in which FNMA and FHLMC will not exercise their remedies, including a putback request, for breaches of certain selling representations and warranties, such as payment history and quality control review.

When a putback request is received, Trustmark evaluates the request and takes appropriate actions based on the nature of the request. Trustmark is required by FNMA and FHLMC to provide a response to putback requests within 60 days of the date of receipt. The total mortgage loan servicing putback expenses are included in other expense. At both September 30, 2021 and 2020, Trustmark had a reserve for mortgage loan servicing putback expenses of $500 thousand.

There is inherent uncertainty in reasonably estimating the requirement for reserves against potential future mortgage loan servicing putback expenses. Future putback expenses are dependent on many subjective factors, including the review procedures of the purchasers and the potential refinance activity on loans sold with servicing released and the subsequent consequences under the representations and warranties. Trustmark believes that it has appropriately reserved for potential mortgage loan servicing putback requests.

Note 5 – Other Real Estate

At September 30, 2021, Trustmark’s geographic other real estate distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. The ultimate recovery of a substantial portion of the carrying amount of other real estate is susceptible to changes in market conditions in these areas.

For the periods presented, changes and gains (losses), net on other real estate were as follows ($ in thousands):

	Nine Months Ended September 30,
	2021			2020
Balance at beginning of period	$	11,651		$	29,248
Additions		770			496
Disposals		(4,326	)		(11,823	)
Write-downs		(1,882	)		(1,673	)
Balance at end of period	$	6,213		$	16,248
Gains (losses), net on the sale of other real estate included in<br> other real estate expense	$	(716	)	$	(388	)

At September 30, 2021 and December 31, 2020, other real estate by type of property consisted of the following ($ in thousands):

	September 30, 2021		December 31, 2020
Construction, land development and other land properties	$	922	$	3,857
1-4 family residential properties		395		1,349
Nonfarm, nonresidential properties		4,896		6,445
Total other real estate	$	6,213	$	11,651

At September 30, 2021 and December 31, 2020, other real estate by geographic location consisted of the following ($ in thousands):

	September 30, 2021		December 31, 2020
Alabama	$	613	$	3,271
Mississippi (1)		5,600		8,330
Tennessee (2)		—		50
Total other real estate	$	6,213	$	11,651

(1)

Mississippi includes Central and Southern Mississippi Regions.

(2)

Tennessee includes Memphis, Tennessee and Northern Mississippi Regions.

At September 30, 2021, the balance of other real estate included $395 thousand of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property compared to $1.3 million at December 31, 2020. At September 30, 2021 and December 31, 2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $885 thousand and $424 thousand, respectively.

Note 6 – Leases

The following table details the components of net lease cost for the periods presented ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Finance leases:
Amortization of right-of-use assets	$	388		$	449		$	1,159		$	1,427
Interest on lease liabilities		54			62			167			194
Operating lease cost		1,332			1,306			3,979			3,885
Short-term lease cost		108			104			337			324
Variable lease cost		310			304			928			983
Sublease income		(118	)		(84	)		(271	)		(246	)
Net lease cost	$	2,074		$	2,141		$	6,299		$	6,567

The following table details the cash payments included in the measurement of lease liabilities during the periods presented ($ in thousands):

	Nine Months Ended September 30,
	2021		2020
Finance leases:
Operating cash flows included in operating activities	$	167	$	194
Financing cash flows included in payments under finance lease obligations		1,072		1,319
Operating leases:
Operating cash flows (fixed payments) included in other operating activities, net		3,509		3,739
Operating cash flows (liability reduction) included in other operating activities, net		2,929		2,896

The following table details balance sheet information, as well as weighted-average lease terms and discount rates, related to leases at September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021			December 31, 2020
Finance lease right-of-use assets, net of accumulated depreciation	$	6,405		$	7,471
Finance lease liabilities		6,826			7,805
Operating lease right-of-use assets		34,689			30,901
Operating lease liabilities		36,531			32,290
Weighted-average lease term:
Finance leases	8.36 years			8.53 years
Operating leases	8.97 years			8.65 years
Weighted-average discount rate:
Finance leases		3.19	%		3.10	%
Operating leases		3.14	%		3.41	%

At September 30, 2021, future minimum rental commitments under finance and operating leases were as follows ($ in thousands):

	Finance Leases			Operating Leases
2021 (excluding the nine months ended September 30, 2021)	$	414		$	1,269
2022		1,597			5,159
2023		885			4,973
2024		572			5,024
2025		584			4,991
Thereafter		3,868			20,435
Total minimum lease payments		7,920			41,851
Less imputed interest		(1,094	)		(5,320	)
Lease liabilities	$	6,826		$	36,531

Note 7 – Deposits

At September 30, 2021 and December 31, 2020, deposits consisted of the following ($ in thousands):

	September 30, 2021		December 31, 2020
Noninterest-bearing demand	$	4,987,885	$	4,349,010
Interest-bearing demand		4,149,103		3,646,246
Savings		4,547,353		4,647,610
Time		1,238,498		1,405,898
Total	$	14,922,839	$	14,048,764

Note 8 – Securities Sold Under Repurchase Agreements

Trustmark utilizes securities sold under repurchase agreements as a source of borrowing in connection with overnight repurchase agreements offered to commercial deposit customers by using its unencumbered investment securities as collateral. Trustmark accounts for its securities sold under repurchase agreements as secured borrowings in accordance with FASB ASC Subtopic 860-30, “Transfers and Servicing – Secured Borrowing and Collateral.” Securities sold under repurchase agreements are stated at the amount of cash received in connection with the transaction. Trustmark monitors collateral levels on a continual basis and may be required to provide additional collateral based on the fair value of the underlying securities. Securities sold under repurchase agreements were secured by securities with a carrying amount of $161.9 million and $156.1 million at September 30, 2021 and December 31, 2020, respectively. Trustmark’s repurchase agreements are transacted under master repurchase agreements that give Trustmark, in the event of default by the counterparty, the right of offset with the same counterparty. As of September 30, 2021, all repurchase agreements were short-term and consisted primarily of sweep repurchase arrangements, under which excess deposits are “swept” into overnight repurchase agreements with Trustmark. The following table presents the securities sold under repurchase agreements by collateral pledged at September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021		December 31, 2020
Mortgage-backed securities
Residential mortgage pass-through securities
Issued by FNMA and FHLMC	$	103,196	$	115,357
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		1,354		12,696
Total securities sold under repurchase agreements	$	104,550	$	128,053

Note 9 – Revenue from Contracts with Customers

Trustmark accounts for revenue from contracts with customers in accordance with FASB ASC Topic 606, “Revenue from Contracts with Customers,” which provides that revenue be recognized in a manner that depicts the transfer of goods or services to a customer in an amount that reflects the consideration Trustmark expects to be entitled to in exchange for those goods or services. Revenue from contracts with customers is recognized either over time in a manner that depicts Trustmark’s performance, or at a point in time when control of the goods or services are transferred to the customer. Trustmark’s noninterest income, excluding all of mortgage banking, net and securities gains (losses), net and portions of bank card and other fees and other income, are considered within the scope of FASB ASC Topic 606. Gains or losses on the sale of other real estate, which are included in Trustmark’s noninterest expense as other real estate expense, are also within the scope of FASB ASC Topic 606.

Trustmark records a gain or loss from the sale of other real estate when control of the property transfers to the buyer. Trustmark records the gain or loss from the sale of other real estate in noninterest expense as other real estate expense, net. Other real estate sales for the three and nine months ended September 30, 2021 resulted in net losses of $734 thousand and $716 thousand, respectively, compared to net losses of $133 thousand and $388 thousand for the three and nine months ended September 30, 2020, respectively.

The following tables present noninterest income disaggregated by reportable operating segment and revenue stream for the periods presented ($ in thousands):

	Three Months Ended September 30, 2021							Three Months Ended September 30, 2020
	Topic 606		Not Topic <br>606 (1)			Total		Topic 606		Not Topic <br>606 (1)		Total
General Banking Segment
Service charges on deposit accounts	$	8,893	$	—		$	8,893	$	7,557	$	—	$	7,557
Bank card and other fees		7,561		979			8,540		7,019		1,817		8,836
Mortgage banking, net		—		14,004			14,004		—		36,439		36,439
Wealth management		13		—			13		54		—		54
Other, net		1,826		(413	)		1,413		1,496		40		1,536
Total noninterest income	$	18,293	$	14,570		$	32,863	$	16,126	$	38,296	$	54,422
Wealth Management Segment
Service charges on deposit accounts	$	18	$	—		$	18	$	20	$	—	$	20
Bank card and other fees		9		—			9		7		—		7
Wealth management		9,058		—			9,058		7,625		—		7,625
Other, net		32		9			41		27		15		42
Total noninterest income	$	9,117	$	9		$	9,126	$	7,679	$	15	$	7,694
Insurance Segment
Insurance commissions	$	12,133	$	—		$	12,133	$	11,562	$	—	$	11,562
Other, net		27		—			27		23		—		23
Total noninterest income	$	12,160	$	—		$	12,160	$	11,585	$	—	$	11,585
Consolidated
Service charges on deposit accounts	$	8,911	$	—		$	8,911	$	7,577	$	—	$	7,577
Bank card and other fees		7,570		979			8,549		7,026		1,817		8,843
Mortgage banking, net		—		14,004			14,004		—		36,439		36,439
Insurance commissions		12,133		—			12,133		11,562		—		11,562
Wealth management		9,071		—			9,071		7,679		—		7,679
Other, net		1,885		(404	)		1,481		1,546		55		1,601
Total noninterest income	$	39,570	$	14,579		$	54,149	$	35,390	$	38,311	$	73,701

(1)

Noninterest income not in scope for FASB ASC Topic 606 includes customer derivatives revenue and miscellaneous credit card fee income within bank card and other fees; mortgage banking, net; amortization of tax credits, accretion of the FDIC indemnification asset, cash surrender value on various life insurance policies, earnings on Trustmark’s non-qualified deferred compensation plans, other partnership investments and rental income within other, net; and security gains (losses), net.

	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
	Topic 606		Not Topic <br>606 (1)		Total		Topic 606		Not Topic <br>606 (1)		Total
General Banking Segment
Service charges on deposit accounts	$	23,822	$	—	$	23,822	$	23,949	$	—	$	23,949
Bank card and other fees		23,264		3,031		26,295		20,294		1,600		21,894
Mortgage banking, net		—		52,141		52,141		—		97,667		97,667
Wealth management		33		—		33		219		—		219
Other, net		4,913		478		5,391		4,614		1,306		5,920
Total noninterest income	$	52,032	$	55,650	$	107,682	$	49,076	$	100,573	$	149,649
Wealth Management Segment
Service charges on deposit accounts	$	58	$	—	$	58	$	57	$	—	$	57
Bank card and other fees		27		—		27		21		—		21
Wealth management		26,400		—		26,400		23,568		—		23,568
Other, net		99		25		124		77		37		114
Total noninterest income	$	26,584	$	25	$	26,609	$	23,723	$	37	$	23,760
Insurance Segment
Insurance commissions	$	36,795	$	—	$	36,795	$	34,980	$	—	$	34,980
Other, net		57		—		57		87		—		87
Total noninterest income	$	36,852	$	—	$	36,852	$	35,067	$	—	$	35,067
Consolidated
Service charges on deposit accounts	$	23,880	$	—	$	23,880	$	24,006	$	—	$	24,006
Bank card and other fees		23,291		3,031		26,322		20,315		1,600		21,915
Mortgage banking, net		—		52,141		52,141		—		97,667		97,667
Insurance commissions		36,795		—		36,795		34,980		—		34,980
Wealth management		26,433		—		26,433		23,787		—		23,787
Other, net		5,069		503		5,572		4,778		1,343		6,121
Total noninterest income	$	115,468	$	55,675	$	171,143	$	107,866	$	100,610	$	208,476

(1)

Noninterest income not in scope for FASB ASC Topic 606 includes customer derivatives revenue and miscellaneous credit card fee income within bank card and other fees; mortgage banking, net; amortization of tax credits, accretion of the FDIC indemnification asset, cash surrender value on various life insurance policies, earnings on Trustmark’s non-qualified deferred compensation plans, other partnership investments and rental income within other, net; and security gains (losses), net.

Note 10 – Defined Benefit and Other Postretirement Benefits

Qualified Pension Plan

Trustmark maintains a noncontributory tax-qualified defined benefit pension plan titled the Trustmark Corporation Pension Plan for Certain Employees of Acquired Financial Institutions (the Continuing Plan) to satisfy commitments made by Trustmark to associates covered through plans obtained in acquisitions.

The following table presents information regarding the net periodic benefit cost for the Continuing Plan for the periods presented ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Service cost	$	63		$	64		$	189		$	191
Interest cost		43			60			129			181
Expected return on plan assets		(33	)		(39	)		(98	)		(116	)
Recognized net loss due to lump sum settlements		183			40			183			80
Recognized net actuarial loss		149			82			446			245
Net periodic benefit cost	$	405		$	207		$	849		$	581

For the plan year ending December 31, 2021, Trustmark’s minimum required contribution to the Continuing Plan is $324 thousand; however, Management and the Board of Directors of Trustmark will monitor the Continuing Plan throughout 2021 to determine any additional funding requirements by the plan’s measurement date, which is December 31.

Supplemental Retirement Plans

Trustmark maintains a nonqualified supplemental retirement plan covering key executive officers and senior officers as well as directors who have elected to defer fees. The plan provides for retirement and/or death benefits based on a participant’s covered salary or deferred fees. Although plan benefits may be paid from Trustmark’s general assets, Trustmark has purchased life insurance contracts on the participants covered under the plan, which may be used to fund future benefit payments under the plan. The annual measurement date for the plan is December 31. As a result of mergers prior to 2014, Trustmark became the administrator of small nonqualified supplemental retirement plans, for which the plan benefits were frozen prior to the merger date.

The following table presents information regarding the net periodic benefit cost for Trustmark’s nonqualified supplemental retirement plans for the periods presented ($ in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Service cost	$	19	$	19	$	57	$	58
Interest cost		277		388		847		1,189
Amortization of prior service cost		28		37		84		112
Recognized net actuarial loss		295		237		896		719
Net periodic benefit cost	$	619	$	681	$	1,884	$	2,078

Note 11 – Stock and Incentive Compensation

Trustmark has granted stock and incentive compensation awards and units subject to the provisions of the Stock and Incentive Compensation Plan (the Stock Plan). Current outstanding and future grants of stock and incentive compensation awards are subject to the provisions of the Stock Plan, which is designed to provide flexibility to Trustmark regarding its ability to motivate, attract and retain the services of key associates and directors. The Stock Plan also allows Trustmark to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance units to key associates and directors.

Restricted Stock Grants

Performance Awards

Trustmark’s performance awards vest over three years and are granted to Trustmark’s executive and senior management teams. Performance awards granted vest based on performance goals of return on average tangible equity and total shareholder return. Performance awards are valued utilizing a Monte Carlo simulation model to estimate fair value of the awards at the grant date. The Monte Carlo simulation was performed by an independent valuation consultant and requires the use of subjective modeling assumptions. These awards are recognized using the straight-line method over the requisite service period. These awards provide for achievement shares if performance measures exceed 100%. The restricted share agreement for these awards provides for voting rights and dividend privileges. During 2020, Trustmark began granting performance units instead of performance awards. The performance units have the same attributes as the previously granted performance awards, except the performance units do not provide voting rights.

Time-Vested Awards

Trustmark’s time-vested awards vest over three years and are granted to members of Trustmark’s Board of Directors as well as Trustmark’s executive and senior management teams. 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. During 2020, Trustmark began granting time-vested units instead of time-vested awards. The time-vested units have the same attributes as the previously granted time-vested awards, except the time-vested units do not provide voting rights.

The following tables summarize the Stock Plan activity for the periods presented:

	Three Months Ended September 30, 2021
	Performance<br>Awards and Units		Time-Vested<br>Awards and Units
Nonvested shares, beginning of period		141,969		352,055
Granted		—		—
Released from restriction		—		(10,489	)
Forfeited		—		(2,669	)
Nonvested shares, end of period		141,969		338,897
	Nine Months Ended September 30, 2021
---	---	---	---	---	---	---
	Performance<br>Awards and Units			Time-Vested<br>Awards and Units
Nonvested shares, beginning of period		145,042			301,619
Granted		53,273			176,022
Released from restriction		(44,536	)		(130,779	)
Forfeited		(11,810	)		(7,965	)
Nonvested shares, end of period		141,969			338,897

The following table presents information regarding compensation expense for awards and units under the Stock Plan for the periods presented ($ in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Performance awards and units	$	311	$	417	$	517	$	360
Time-vested awards and units		805		822		3,994		3,547
Total compensation expense	$	1,116	$	1,239	$	4,511	$	3,907

Note 12 – Contingencies

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.

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 fully 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 nature of the transaction and the assessed creditworthiness of the borrower. At September 30, 2021 and 2020, Trustmark had unused commitments to extend credit of $4.907 billion and $4.647 billion, respectively.

Letters of credit are conditional commitments issued by Trustmark to insure the performance of a customer to a third-party. 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 the same policies regarding credit risk and collateral, which are followed in the lending process. At September 30, 2021 and 2020, Trustmark’s maximum exposure to credit loss in the event of nonperformance by the customer for letters of credit was $129.0 million and $109.3 million, respectively. These amounts consist primarily of commitments with maturities of less than three years, which have an immaterial carrying value. Trustmark holds collateral to support standby letters of credit when deemed necessary. As of September 30, 2021 and 2020, the fair value of collateral held was $38.6 million and $22.5 million, respectively.

ACL on Off-Balance Sheet Credit Exposures

Changes in the ACL on off-balance sheet credit exposures were as follows for the periods presented ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Balance at beginning of period	$	33,733		$	42,663		$	38,572		$	—
FASB ASU 2016-13 adoption adjustment		—			—			—			29,638
PCL, off-balance sheet credit exposures (1)		(1,049	)		(3,004	)		(5,888	)		10,021
Balance at end of period	$	32,684		$	39,659		$	32,684		$	39,659

(1)

During the second quarter of 2021, Trustmark reclassified its credit loss expense related to off-balance sheet credit exposures from noninterest expense to PCL, off-balance sheet credit exposures. Prior periods have been reclassified accordingly.

Adjustments to the ACL on off-balance sheet credit exposures are recorded to PCL, off-balance sheet credit exposures. The decrease in the ACL on off-balance sheet credit exposures for the three months and the nine months ended September 30, 2021 was primarily due to improvements of the overall economy and macroeconomic factors used to determine the necessary reserves for off-balance sheet credit exposures.

No credit loss estimate is reported for off-balance sheet credit exposures that are unconditionally cancellable by Trustmark or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement.

Legal Proceedings

Trustmark’s wholly-owned subsidiary, TNB, has been named as a defendant in several lawsuits related to the collapse of the Stanford Financial Group.

On August 23, 2009, a purported class action complaint was filed 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 (collectively, Class Plaintiffs), on behalf of themselves and all others similarly situated, naming TNB and four other financial institutions and one individual, each of which are unaffiliated with Trustmark, as defendants. The complaint seeks to recover (i) alleged fraudulent transfers from each of the defendants in the amount of fees and other monies 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 on the asserted grounds that defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme. Class Plaintiffs have demanded a jury trial. Class Plaintiffs did not quantify damages.

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. In May 2010, all defendants (including TNB) filed motions to dismiss the lawsuit. In August 2010, the court authorized and approved the formation of an Official Stanford Investors Committee (OSIC) to represent the interests of Stanford investors and, under certain circumstances, to file legal actions for the benefit of Stanford investors. In December 2011, the OSIC filed a motion to intervene in this action. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues. In December 2012, the court granted the OSIC’s motion to intervene, and the OSIC filed an Intervenor Complaint against one of the other defendant financial institutions. In February 2013, the OSIC filed a second Intervenor Complaint that asserts claims against TNB and the remaining defendant financial institutions. The OSIC seeks to recover: (i) alleged fraudulent transfers in the amount of the fees each of the defendants allegedly received from Stanford Financial Group, the profits each of the defendants allegedly made from Stanford Financial Group deposits, and other monies each of the defendants allegedly received from Stanford Financial Group; (ii) damages attributable to alleged conspiracies by each of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud and conversion on the asserted grounds that the defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme; and (iii) punitive damages. The OSIC did not quantify damages.

In July 2013, all defendants (including TNB) filed motions to dismiss the OSIC’s claims. In March 2015, the court entered an order authorizing the parties to conduct discovery regarding class certification, staying all other discovery and setting a deadline for the parties to complete briefing on class certification issues. In April 2015, the court granted in part and denied in part the defendants’ motions to dismiss the Class Plaintiffs’ claims and the OSIC’s claims. The court dismissed all of the Class Plaintiffs’ fraudulent transfer claims and dismissed certain of the OSIC’s claims. The court denied the motions by TNB and the other financial institution defendants to dismiss the OSIC’s constructive fraudulent transfer claims.

On June 23, 2015, the court allowed the Class Plaintiffs to file a Second Amended Class Action Complaint (SAC), which asserted new claims against TNB and certain of the other defendants for (i) aiding, abetting and participating in a fraudulent scheme, (ii) aiding, abetting and participating in violations of the Texas Securities Act, (iii) aiding, abetting and participating in breaches of fiduciary duty, (iv) aiding, abetting and participating in conversion and (v) conspiracy. On July 14, 2015, the defendants (including TNB) filed motions to dismiss the SAC and to reconsider the court’s prior denial to dismiss the OSIC’s constructive fraudulent transfer claims against TNB and the other financial institutions that are defendants in the action. On July 27, 2016, the court denied the motion by TNB and the other financial institution defendants to dismiss the SAC and also denied the motion by TNB and the other financial institution defendants to reconsider the court’s prior denial to dismiss the OSIC’s constructive fraudulent transfer claims. On August 24, 2016, TNB filed its answer to the SAC. On October 20, 2017, the OSIC filed a motion seeking an order lifting the discovery stay and establishing a trial schedule. On November 4, 2016, the OSIC filed a First Amended Intervenor Complaint, which added claims for (i) aiding, abetting or participation in violations of the Texas Securities Act and (ii) aiding, abetting or participation in the breach of fiduciary duty. On November 7, 2017, the court denied the Class Plaintiffs’ motion seeking class certification and designation of class representatives and counsel, finding that common issues of fact did not predominate. The court granted the OSIC’s motion to lift the discovery stay that it had previously ordered.

On May 3, 2019, individual investors and entities filed motions to intervene in the action. On September 18, 2019, the court denied the motions to intervene. On October 14, 2019, certain of the proposed intervenors filed a notice of appeal. On February 3, 2021, the Fifth Circuit Court of Appeals affirmed the denial of the motions to intervene; this decision was affirmed by a panel of the Fifth Circuit on March 12, 2021.

On February 12, 2021, all defendants (including TNB) filed a motion for summary judgment with respect to OSIC claims that applied to all defendants. In addition, on the same date, TNB filed a separate motion for summary judgment with respect to aspects of OSIC claims that applied specifically to TNB. On March 19, 2021, OSIC filed notice with the court that it was abandoning as against all of the defendants (including TNB) the five claims described above. As a result, only the claims for (i) aiding, abetting and participating in breaches of fiduciary duty, (ii) aiding, abetting and participating in violations of the Texas Securities Act, and (iii) punitive damages remain as against TNB. On March 19, 2021, OSIC also filed responses to defendants’ motions for summary judgment. Briefing on the defendants’ (including TNB’s) summary judgment motions in respect of these remaining claims continues.

The parties to the action have agreed that the case is to be tried in the District Court for the Southern District of Texas, and it is Trustmark’s understanding that the judge of the District Court for the Northern District of Texas to whom the case is currently assigned has agreed to this transfer, but he has yet to formally remand the case to the Southern District of Texas. However, on March 25, 2021, the judge to whom the case is currently assigned in the District Court for the Northern District of Texas rescinded his previously-issued trial scheduling orders so that the Southern District of Texas could set scheduling for this case once the case has in fact been remanded.

On December 14, 2009, a different Stanford-related lawsuit was filed in the District Court of Ascension Parish, Louisiana, individually by Harold Jackson, Paul Blaine and Carolyn Bass Smith, Christine Nichols, and Ronald and Ramona Hebert naming TNB (misnamed as Trust National Bank) and other individuals and entities not affiliated with Trustmark as defendants. The complaint seeks to recover the money lost by these individual plaintiffs as a result of the collapse of the Stanford Financial Group (in addition to other damages) under various theories and causes of action, including negligence, breach of contract, breach of fiduciary duty, negligent misrepresentation, detrimental reliance, conspiracy, and violation of Louisiana’s uniform fiduciary, securities, and racketeering laws. The complaint does not quantify the amount of money the plaintiffs seek to recover. In January 2010, 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. On March 29, 2010, the court stayed the case. TNB filed a motion to lift the stay, which was denied on February 28, 2012. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues.

On April 11, 2016, Trustmark learned that a different Stanford-related lawsuit had been filed on that date in the Superior Court of Justice in Ontario, Canada, by The Toronto-Dominion Bank (“TD Bank”), naming TNB and three other financial institutions not affiliated with Trustmark as defendants (the “TD Bank Declaratory Action”). The complaint seeks a declaration specifying the degree to which each of TNB and the other defendants are liable in respect of any loss and damage for which TD Bank is found to be liable in separate litigation commenced against TD Bank brought by the joint liquidators of Stanford International Bank Limited in the Superior Court of Justice, Commercial List in Ontario, Canada (the “Joint Liquidators’ Action”), as well as contribution and indemnity in respect of any judgment, interest and costs TD Bank is ordered to pay in the Joint Liquidators’ Action. Trustmark understands that on or about June 8, 2021, after an extensive trial on the merits, the judge in the Joint Liquidators’ Action ruled in favor of TD Bank and found TD Bank not liable as to the claims asserted against the bank by the joint liquidators of Stanford International Bank Limited. It is not yet known whether the plaintiffs in the Joint Liquidators’ Action intend to appeal this decision. TNB was never served in connection with the TD Bank Declaratory Action, and thus did not make an appearance in that action.

On November 1, 2019, TNB was named as a defendant in a complaint filed by Paul Blaine Smith, Carolyn Bass Smith and other plaintiffs identified therein (the Smith Complaint). The Smith Complaint was filed in Texas state court (District Court, Harris County, Texas) and named TNB and four other financial institutions and one individual, each of which are unaffiliated with Trustmark, as defendants. The Smith Complaint relates to the collapse of the Stanford Financial Group, as does the other pending litigation relating to Stanford summarized above. Plaintiffs in the Smith Complaint have demanded a jury trial.

On January 15, 2020, the court granted Stanford Financial Group receiver’s motion to stay the Texas state court action. On February 26, 2020, the lawsuit was removed to federal court in the Southern District of Texas by TNB. Trustmark and its counsel are carefully evaluating the Smith Complaint in the form that is publicly available, and will update the foregoing description to the extent that additional material facts are ascertained.

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. All Stanford-related lawsuits are in pre-trial stages.

On December 30, 2019, a complaint was filed in the United States District Court for the Southern District of Mississippi, Northern Division by Alysson Mills in her capacity as Court-appointed Receiver (the Receiver) for Arthur Lamar Adams (Adams) and Madison Timber Properties, LLC (Madison Timber), naming TNB, two other Mississippi-based financial institutions both of which are unaffiliated with Trustmark and two individuals, one of who was employed by TNB at all times relevant to the complaint and the other was employed either by TNB or one of the other defendant financial institutions, as defendants. The complaint seeks to recover from the defendants, for the benefit of the receivership estate and also for certain investors who were allegedly defrauded by Adams and Madison Timber, damages (including punitive damages) and related costs allegedly attributable to actions of the defendants that allegedly enabled illegal and fraudulent activities engaged in by Adams and Madison Timber. The Receiver did not quantify damages. Pursuant to a Case Management Order issued by the court on June 16, 2021, a trial date of October 17, 2022 was set for this action. By order issued by the court on September 30, 2021, the action to which TNB is a party was consolidated with three other pending cases for purposes of discovery, based upon a finding by the court that the actions involve overlapping questions of law and fact. At a subsequent hearing, the court stated that the October 17, 2022 trial date was no longer effective, and that each of the consolidated actions (including the action to which TNB is party) is stayed pending resolution of certain criminal matters in the Adams and Madison Timber investigation that are unrelated to and do not involve Trustmark or any of its employees.

TNB’s relationship with Adams and Madison Timber consisted of traditional banking services in the ordinary course of business.

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.

All pending legal proceedings described above (save for the TD Bank Declaratory Action, in which, as noted above, Trustmark has never been served) are being vigorously contested. In accordance with FASB ASC Subtopic 450-20, “Loss Contingencies,” Trustmark will establish an accrued liability for litigation matters when those matters present loss contingencies that are both probable and reasonably estimable. At the present time, Trustmark believes, based on its evaluation and the advice of legal counsel, that a loss in any such proceeding is not probable and a reasonable estimate cannot reasonably be made.

Note 13 – Earnings Per Share (EPS)

The following table reflects weighted-average shares used to calculate basic and diluted EPS for the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Basic shares		62,522		63,423		63,041		63,531
Dilutive shares		208		159		179		134
Diluted shares		62,730		63,582		63,220		63,665

Weighted-average antidilutive stock awards were excluded in determining diluted EPS. The following table reflects weighted-average antidilutive stock awards for the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Weighted-average antidilutive stock awards		—		60		—		61

Note 14 – Statements of Cash Flows

The following table reflects specific transaction amounts for the periods presented ($ in thousands):

	Nine Months Ended September 30,
	2021		2020
Income taxes paid	$	14,825	$	36,211
Interest expense paid on deposits and borrowings		19,354		35,246
Noncash transfers from loans to other real estate		770		496
Finance right-of-use assets resulting from lease liabilities		92		—
Operating right-of-use assets resulting from lease liabilities		6,833		2,368
Transfer of long-term FHLB advances to short-term		—		651

Note 15 – Shareholders’ Equity

Regulatory Capital

Trustmark and TNB are subject to minimum risk-based capital and leverage capital requirements, as described in the section captioned “Capital Adequacy” included in Part I. Item 1. – Business of Trustmark’s 2020 Annual Report, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Trustmark’s and TNB’s minimum risk-based capital requirements include a capital conservation buffer of 2.50% at September 30, 2021 and December 31, 2020. Accumulated other comprehensive income (loss), net of tax, is not included in computing regulatory capital. Trustmark has elected the five-year phase-in transition period (through December 31, 2024) related to adopting FASB ASU 2016-13 for regulatory capital purposes. Failure to meet minimum capital requirements can result in 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 and limit Trustmark’s and TNB’s ability to pay dividends. As of September 30, 2021, Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered well-capitalized at September 30, 2021. To be categorized in this manner, Trustmark and TNB maintained, as applicable, minimum common equity Tier 1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and Tier 1 leverage ratios as set forth in the accompanying table, and were not subject to any written agreement, order or capital directive, or prompt corrective action directive issued by their primary federal regulators to meet and maintain a specific capital level for any capital measures. There are no significant conditions or events that have occurred since September 30, 2021, which Management believes have affected Trustmark’s or TNB’s present classification.

The following table provides Trustmark’s and TNB’s actual regulatory capital amounts and ratios under regulatory capital standards in effect at September 30, 2021 and December 31, 2020 ($ in thousands):

	Actual
	Regulatory Capital					Minimum			To Be Well
	Amount		Ratio			Requirement			Capitalized
At September 30, 2021:
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,439,365		11.68	%		7.00	%	n/a
Trustmark National Bank		1,505,242		12.22	%		7.00	%		6.50	%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,499,365		12.17	%		8.50	%	n/a
Trustmark National Bank		1,505,242		12.22	%		8.50	%		8.00	%
Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,726,040		14.01	%		10.50	%	n/a
Trustmark National Bank		1,608,930		13.06	%		10.50	%		10.00	%
Tier 1 Leverage (to Average Assets)
Trustmark Corporation	$	1,499,365		8.92	%		4.00	%	n/a
Trustmark National Bank		1,505,242		8.98	%		4.00	%		5.00	%
At December 31, 2020:
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,395,844		11.62	%		7.00	%	n/a
Trustmark National Bank		1,412,015		11.75	%		7.00	%		6.50	%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,455,844		12.11	%		8.50	%	n/a
Trustmark National Bank		1,412,015		11.75	%		8.50	%		8.00	%
Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,696,794		14.12	%		10.50	%	n/a
Trustmark National Bank		1,530,044		12.73	%		10.50	%		10.00	%
Tier 1 Leverage (to Average Assets)
Trustmark Corporation	$	1,455,844		9.33	%		4.00	%	n/a
Trustmark National Bank		1,412,015		9.07	%		4.00	%		5.00	%

Stock Repurchase Program

On April 1, 2019, the Board of Directors of Trustmark authorized a stock repurchase program under which $100.0 million of Trustmark’s outstanding common stock could be acquired through March 31, 2020. Trustmark repurchased approximately 887 thousand shares of its common stock valued at $27.5 million during the three months ended March 31, 2020. Under this authority, Trustmark repurchased approximately 1.5 million shares valued at $47.2 million.

On January 28, 2020, the Board of Directors of Trustmark authorized a new stock repurchase program, effective April 1, 2020, under which $100.0 million of Trustmark’s outstanding common stock may be acquired through December 31, 2021. On March 9, 2020, Trustmark suspended its share repurchase programs to preserve capital to support customers during the COVID-19 pandemic. Trustmark resumed the repurchase of its shares in January 2021. Under this authority, Trustmark repurchased approximately 319 thousand shares of its outstanding common stock valued at $9.7 million during three months ended September 30, 2021. During the first nine months of 2021, Trustmark repurchased $34.7 million, or approximately 1.1 million shares of its outstanding common stock. The shares may be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. There is no guarantee as to the number of shares that will be repurchased by Trustmark, and Trustmark may discontinue repurchases at any time at Management’s discretion.

Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

The following tables present the net change in the components of accumulated other comprehensive income (loss) and the related tax effects allocated to each component for the periods presented ($ in thousands). The amortization of prior service cost, recognized net loss due to lump sum settlements and change in net actuarial loss are included in the computation of net periodic benefit cost (see Note 10 – Defined Benefit and Other Postretirement Benefits for additional details). Reclassification adjustments related to pension and other postretirement benefit plans are included in salaries and employee benefits and other expense in the accompanying consolidated statements of income.

	Three Months Ended September 30, 2021									Three Months Ended September 30, 2020
	Before Tax<br>Amount			Tax (Expense)<br>Benefit			Net of Tax<br>Amount			Before Tax<br>Amount			Tax (Expense)<br>Benefit			Net of Tax<br>Amount
Securities available for sale and transferred securities:
Net unrealized holding gains (losses) arising <br> during the period	$	(12,543	)	$	3,136		$	(9,407	)	$	(7,707	)	$	1,926		$	(5,781	)
Change in net unrealized holding loss on <br> securities transferred to held to maturity		636			(159	)		477			804			(201	)		603
Total securities available for sale <br> and transferred securities		(11,907	)		2,977			(8,930	)		(6,903	)		1,725			(5,178	)
Pension and other postretirement benefit plans:
Reclassification adjustments for changes<br> realized in net income:
Net change in prior service costs		28			(7	)		21			37			(9	)		28
Recognized net loss due to lump sum<br> settlements		183			(46	)		137			40			(10	)		30
Change in net actuarial loss		444			(111	)		333			319			(80	)		239
Total pension and other postretirement<br> benefit plans		655			(164	)		491			396			(99	)		297
Total other comprehensive income (loss)	$	(11,252	)	$	2,813		$	(8,439	)	$	(6,507	)	$	1,626		$	(4,881	)
	Nine Months Ended September 30, 2021									Nine Months Ended September 30, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Before Tax<br>Amount			Tax (Expense)<br>Benefit			Net of Tax<br>Amount			Before Tax<br>Amount		Tax (Expense)<br>Benefit			Net of Tax<br>Amount
Securities available for sale and transferred securities:
Net unrealized holding gains (losses) arising <br> during the period	$	(27,731	)	$	6,933		$	(20,798	)	$	35,448	$	(8,863	)	$	26,585
Change in net unrealized holding loss on <br> securities transferred to held to maturity		2,083			(521	)		1,562			2,443		(611	)		1,832
Total securities available for sale <br> and transferred securities		(25,648	)		6,412			(19,236	)		37,891		(9,474	)		28,417
Pension and other postretirement benefit plans:
Reclassification adjustments for changes<br> realized in net income:
Net change in prior service costs		84			(21	)		63			112		(28	)		84
Recognized net loss due to lump sum<br> settlements		183			(46	)		137			80		(20	)		60
Change in net actuarial loss		1,342			(335	)		1,007			964		(241	)		723
Total pension and other postretirement<br> benefit plans		1,609			(402	)		1,207			1,156		(289	)		867
Total other comprehensive income (loss)	$	(24,039	)	$	6,010		$	(18,029	)	$	39,047	$	(9,763	)	$	29,284

The following table presents the changes in the balances of each component of accumulated other comprehensive income (loss) for the periods presented ($ in thousands). All amounts are presented net of tax.

	Securities <br>Available for Sale <br>and Transferred <br>Securities			Defined<br>Benefit <br>Pension Items			Total
Balance at January 1, 2021	$	17,331		$	(18,382	)	$	(1,051	)
Other comprehensive income (loss) before reclassification		(19,236	)		—			(19,236	)
Amounts reclassified from accumulated other <br> comprehensive income (loss)		—			1,207			1,207
Net other comprehensive income (loss)		(19,236	)		1,207			(18,029	)
Balance at September 30, 2021	$	(1,905	)	$	(17,175	)	$	(19,080	)
Balance at January 1, 2020	$	(8,017	)	$	(15,583	)	$	(23,600	)
Other comprehensive income (loss) before reclassification		28,417			—			28,417
Amounts reclassified from accumulated other <br> comprehensive income (loss)		—			867			867
Net other comprehensive income (loss)		28,417			867			29,284
Balance at September 30, 2020	$	20,400		$	(14,716	)	$	5,684

Note 16 – Fair Value

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 predominant portion 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 marketplace.

Trustmark estimates fair value of the 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.

Trustmark obtains the fair value of interest rate swaps from a third-party pricing service that uses an industry standard discounted cash flow methodology. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its interest rate swap contracts for the effect of nonperformance risk, Trustmark has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB’s fair value measurement guidance, Trustmark made an accounting policy election to measure the credit risk of these derivative financial instruments, which are subject to master netting agreements, on a net basis by counterparty portfolio.

Trustmark has determined that the majority of the inputs used to value its interest rate swaps offered to qualified commercial borrowers fall within Level 2 of the fair value hierarchy, while the credit valuation adjustments associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads. Trustmark has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate swaps and has determined that the credit valuation adjustment is not significant

to the overall valuation of these derivatives. As a result, Trustmark classifies its interest rate swap valuations in Level 2 of the fair value hierarchy.

Trustmark also utilizes exchange-traded derivative instruments such as Treasury note futures contracts and option contracts to achieve a fair value return that offsets the changes in fair value of the MSR attributable to interest rates. Fair values of these derivative instruments are determined from quoted prices in active markets for identical assets therefore allowing them to be classified within Level 1 of the fair value hierarchy. In addition, Trustmark utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area which lack observable inputs for valuation purposes resulting in their inclusion in Level 3 of the fair value hierarchy.

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 tables summarize financial assets and financial liabilities measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value ($ in thousands). There were no transfers between fair value levels for the nine months ended September 30, 2021 and the year ended December 31, 2020.

	September 30, 2021
	Total		Level 1		Level 2		Level 3
U.S. Treasury securities	$	278,615	$	278,615	$	—	$	—
U.S. Government agency obligations		14,979		—		14,979		—
Obligations of states and political subdivisions		5,734		—		5,734		—
Mortgage-backed securities		2,758,277		—		2,758,277		—
Securities available for sale		3,057,605		278,615		2,778,990		—
Loans held for sale		335,339		—		335,339		—
Mortgage servicing rights		84,101		—		—		84,101
Other assets - derivatives		26,341		25		23,807		2,509
Other liabilities - derivatives		7,443		4,768		2,675		—
	December 31, 2020
---	---	---	---	---	---	---	---	---
	Total		Level 1		Level 2		Level 3
U.S. Government agency obligations	$	18,041	$	—	$	18,041	$	—
Obligations of states and political subdivisions		5,835		—		5,835		—
Mortgage-backed securities		1,967,939		—		1,967,939		—
Securities available for sale		1,991,815		—		1,991,815		—
Loans held for sale		446,951		—		446,951		—
Mortgage servicing rights		66,464		—		—		66,464
Other assets - derivatives		47,768		145		38,063		9,560
Other liabilities - derivatives		5,324		666		4,658		—

The changes in Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2021 and 2020 are summarized as follows ($ in thousands):

	MSR			Other Assets -<br>Derivatives
Balance, January 1, 2021	$	66,464		$	9,560
Total net (loss) gain included in Mortgage banking, net (1)		(4,378	)		7,664
Additions		22,015			—
Sales		—			(14,715	)
Balance, September 30, 2021	$	84,101		$	2,509
The amount of total gains (losses) for the period included in earnings<br> that are attributable to the change in unrealized gains or <br> losses still held at September 30, 2021	$	11,037		$	2,722
Balance, January 1, 2020	$	79,394		$	1,439
Total net (loss) gain included in Mortgage banking, net (1)		(38,509	)		32,833
Additions		20,728			—
Sales		—			(22,059	)
Balance, September 30, 2020	$	61,613		$	12,213
The amount of total gains (losses) for the period included in<br> earnings that are attributable to the change in unrealized<br> gains or losses still held at September 30, 2020	$	(27,098	)	$	19,930

(1)

Total net (loss) gain included in Mortgage banking, net relating to the MSR includes changes in fair value due to market changes and due to run-off.

Trustmark may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. Assets at September 30, 2021, which have been measured at fair value on a nonrecurring basis, include collateral-dependent LHFI. A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale of the collateral. The expected credit loss for collateral-dependent loans is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral, adjusted for the estimated cost to sell. Fair value estimates for collateral-dependent loans are derived from appraised values based on the current market value or as is value of the collateral, normally from recently received and reviewed appraisals. Current appraisals are ordered on an annual basis based on the inspection date or more often if market conditions necessitate. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Trustmark’s Appraisal Review Department to ensure they are acceptable, and values are adjusted down for costs associated with asset disposal. At September 30, 2021, Trustmark had outstanding balances of $48.1 million with a related ACL of $9.3 million in collateral-dependent LHFI, compared to outstanding balances of $43.4 million with a related ACL of $4.4 million in collateral-dependent LHFI at December 31, 2020. The collateral-dependent LHFI 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.

Other real estate includes assets that have been acquired in satisfaction of debt through foreclosure and is recorded at the fair value less cost to sell (estimated fair value) at the time of foreclosure. Fair value is based on independent appraisals and other relevant factors. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market.

Foreclosed assets of $5.4 million were remeasured during the first nine months of 2021, requiring write-downs of $328 thousand to reach their current fair values compared to $7.6 million of foreclosed assets that were remeasured during the first nine months of 2020, requiring write-downs of $1.6 million.

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The carrying amounts and estimated fair values of financial instruments at September 30, 2021 and December 31, 2020, are as follows ($ in thousands):

	September 30, 2021				December 31, 2020
	Carrying<br>Value		Estimated<br>Fair Value		Carrying<br>Value		Estimated<br>Fair Value
Financial Assets:
Level 2 Inputs:
Cash and short-term investments	$	2,175,058	$	2,175,058	$	1,952,554	$	1,952,554
Securities held to maturity		394,905		411,132		538,072		563,115
Level 3 Inputs:
Net LHFI and PPP loans		10,117,312		10,072,186		10,317,352		10,312,395
Financial Liabilities:
Level 2 Inputs:
Deposits		14,922,839		14,923,369		14,048,764		14,052,863
Federal funds purchased and securities sold under<br> repurchase agreements		146,417		146,417		164,519		164,519
Other borrowings		94,889		94,888		168,252		168,252
Subordinated notes		122,987		129,375		122,921		127,500
Junior subordinated debt securities		61,856		48,866		61,856		46,083

Fair Value Option

Trustmark has elected to account for its mortgage LHFS under the fair value option, with interest income on these mortgage LHFS reported in interest and fees on LHFS and LHFI. The fair value of the mortgage LHFS is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan. The mortgage LHFS are actively managed and monitored and certain market risks of the loans may be mitigated through the use of derivatives. These derivative instruments are carried at fair value with changes in fair value recorded as noninterest income in mortgage banking, net. The changes in the fair value of LHFS are largely offset by changes in the fair value of the derivative instruments. For the three and nine months ended September 30, 2021, net losses of $593 thousand and $8.9 million, respectively, were recorded as noninterest income in mortgage banking, net for changes in the fair value of LHFS accounted for under the fair value option, compared to net gains of $4.1 million and $11.3 million for the three and nine months ended September 30, 2020, respectively. Interest and fees on LHFS and LHFI for the three and nine months ended September 30, 2021 included $1.7 million and $5.5 million, respectively, of interest earned on LHFS accounted for under the fair value option, compared to $2.0 million and $4.8 million for the three and nine months ended September 30, 2020, respectively. Election of the fair value option allows Trustmark to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of cost or fair value and the derivatives at fair value. The fair value option election does not apply to GNMA optional repurchase loans which do not meet the requirements under FASB ASC Topic 825 to be accounted for under the fair value option. GNMA optional repurchase loans totaled $88.0 million and $141.2 million at September 30, 2021 and December 31, 2020, respectively, and are included in LHFS on the accompanying consolidated balance sheets. For additional information regarding GNMA optional repurchase loans, please see the section captioned “Past Due LHFS” included in Note 3 – LHFI and Allowance for Credit Losses, LHFI.

The following table provides information about the fair value and the contractual principal outstanding of LHFS accounted for under the fair value option as of September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021		December 31, 2020
Fair value of LHFS	$	247,377	$	305,791
LHFS contractual principal outstanding		241,023		290,625
Fair value less unpaid principal	$	6,354	$	15,166

Note 17 – Derivative Financial Instruments

Derivatives not Designated as Hedging Instruments

Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in the fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. The total notional amount of these derivative instruments was $320.5 million at September 30, 2021 compared to $326.5 million at December 31, 2020. Changes in the fair value of these exchange-traded derivative instruments are recorded as noninterest income in mortgage banking, net and are offset by changes in the fair value of the MSR. The impact of this strategy resulted in a net positive ineffectiveness of $144 thousand and $815 thousand for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, the impact was a net positive ineffectiveness of $1.7 million and $8.7 million, respectively.

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 sales contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. Changes in the fair value of these derivative instruments are recorded as noninterest income in mortgage banking, net and are offset by changes in the fair value of LHFS. Trustmark’s off-balance sheet obligations under these derivative instruments totaled $298.0 million at September 30, 2021, with a positive valuation adjustment of $839 thousand, compared to $377.5 million, with a negative valuation adjustment of $3.1 million, at December 31, 2020.

Trustmark also utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area. Interest 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 as 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 $201.5 million at September 30, 2021, with a positive valuation adjustment of $2.5 million, compared to $329.3 million, with a positive valuation adjustment of $9.6 million, at December 31, 2020.

Trustmark offers certain derivatives products directly to qualified commercial lending clients seeking to manage their interest rate risk. Trustmark economically hedges interest rate swap transactions executed with commercial lending clients by entering into offsetting interest rate swap transactions with institutional derivatives market participants. Derivatives transactions executed as part of this program are not designated as qualifying hedging relationships and are, therefore, carried at fair value with the change in fair value recorded as noninterest income in bank card and other fees. Because these derivatives have mirror-image contractual terms, in addition to collateral provisions which mitigate the impact of non-performance risk, the changes in fair value are expected to substantially offset. The Chicago Mercantile Exchange rules legally characterize variation margin collateral payments made or received for centrally cleared interest rate swaps as settlements rather than collateral. As a result, centrally cleared interest rate swaps included in other assets and other liabilities are presented on a net basis in the accompanying consolidated balance sheets. At September 30, 2021, Trustmark had interest rate swaps with an aggregate notional amount of $1.216 billion related to this program, compared to $1.125 billion at December 31, 2020.

Credit-risk-related Contingent Features

Trustmark has agreements with its financial institution counterparties that contain provisions where if Trustmark defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Trustmark could also be declared in default on its derivatives obligations.

At September 30, 2021 and December 31, 2020, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $846 thousand and $1.3 million, respectively. At September 30, 2021, Trustmark had posted collateral of $1.1 million against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at September 30, 2021, it could have been required to settle its obligations under the agreements at the termination value.

Credit risk participation agreements arise when Trustmark contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third-party default on the underlying swap. At September 30, 2021, Trustmark had entered into six risk participation agreements as a beneficiary with an aggregate notional amount of $51.2 million compared to three risk participation agreements as a beneficiary with an aggregate notional amount of $41.1 million at December 31, 2020. At both September 30, 2021 and December 31, 2020, Trustmark had entered into twenty-four risk participation agreements as a guarantor with an aggregate notional amount of $173.8 million and $172.0 million, respectively. The aggregate fair values of these risk participation agreements were immaterial at both September 30, 2021 and December 31, 2020.

Tabular Disclosures

The following tables disclose the fair value of derivative instruments in Trustmark’s consolidated balance sheets at September 30, 2021 and December 31, 2020 as well as the effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):

	September 30, 2021			December 31, 2020
Derivatives not designated as hedging instruments
Interest rate contracts:
Exchange traded purchased options included in other assets	$	25		$	145
OTC written options (rate locks) included in other assets		2,509			9,560
Futures contracts included in other assets		—			—
Interest rate swaps included in other assets (1)		23,688			37,974
Credit risk participation agreements included in other assets		119			89
Futures contracts included in other liabilities		4,337			34
Forward contracts included in other liabilities		(839	)		3,145
Exchange traded written options included in other liabilities		431			632
Interest rate swaps included in other liabilities (1)		3,396			1,313
Credit risk participation agreements included in other liabilities		118			200

(1)

In accordance with GAAP, the variation margin collateral payments made or received for interest rate swaps that are centrally cleared are legally characterized as settled. As a result, the centrally cleared interest rate swaps included in other assets and other liabilities are presented on a net basis in the accompanying consolidated balance sheets.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021			2020		2021			2020
Derivatives not designated as hedging instruments:
Amount of gain (loss) recognized in mortgage banking, net	$	(1,612	)	$	74	$	(12,424	)	$	45,955
Amount of gain (loss) recognized in bank card and other fees		217			234		1,152			(1,502	)

Trustmark’s interest rate swap derivative instruments are subject to master netting agreements, and therefore, eligible for offsetting in the consolidated balance sheets. Trustmark has elected to not offset any derivative instruments in its consolidated balance sheets. Information about financial instruments that are eligible for offset in the consolidated balance sheets as of September 30, 2021 and December 31, 2020 is presented in the following tables ($ in thousands):

Offsetting of Derivative Assets
As of September 30, 2021
							Gross Amounts Not Offset in the<br>Statement of Financial Position
	Gross <br>Amounts of <br>Recognized <br>Assets		Gross Amounts<br>Offset in the<br>Statement of<br>Financial Position		Net Amounts of<br>Assets presented in<br>the Statement of<br>Financial Position		Financial <br>Instruments			Cash Collateral <br>Received		Net Amount
Derivatives	$	23,688	$	—	$	23,688	$	(10	)	$	—	$	23,678
Offsetting of Derivative Liabilities
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
As of September 30, 2021
							Gross Amounts Not Offset in the <br>Statement of Financial Position
	Gross <br>Amounts of <br>Recognized<br>Liabilities		Gross Amounts<br>Offset in the<br>Statement of<br>Financial Position		Net Amounts of <br>Liabilities presented <br>in the Statement of <br>Financial Position		Financial<br>Instruments			Cash Collateral<br>Posted			Net Amount
Derivatives	$	3,396	$	—	$	3,396	$	(10	)	$	(1,100	)	$	2,286
Offsetting of Derivative Assets
---	---	---	---	---	---	---	---	---	---	---	---	---
As of December 31, 2020
							Gross Amounts Not Offset in the <br>Statement of Financial Position
	Gross <br>Amounts of <br>Recognized <br>Assets		Gross Amounts<br>Offset in the<br>Statement of<br>Financial Position		Net Amounts of<br>Assets presented in<br>the Statement of<br>Financial Position		Financial <br>Instruments		Cash Collateral<br>Received		Net Amount
Derivatives	$	37,974	$	—	$	37,974	$	—	$	—	$	37,974

Offsetting of Derivative Liabilities
As of December 31, 2020
							Gross Amounts Not Offset in the <br>Statement of Financial Position
	Gross <br>Amounts of <br>Recognized<br>Liabilities		Gross Amounts <br>Offset in the <br>Statement of <br>Financial Position		Net Amounts of<br>Liabilities presented<br>in the Statement of<br>Financial Position		Financial <br>Instruments		Cash Collateral<br>Posted			Net Amount
Derivatives	$	1,313	$	—	$	1,313	$	—	$	(1,313	)	$	—

Note 18 – Segment Information

Trustmark’s management reporting structure includes three segments: General Banking, Wealth Management and Insurance. For a complete overview of Trustmark’s operating segments, see Note 21 – Segment Information included in Part II. Item 8. – Financial Statements and Supplementary Data, of Trustmark’s 2020 Annual Report.

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 TNB’s funding and interest rate risk strategies.

The following table discloses financial information by reportable segment for the periods presented ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
General Banking
Net interest income	$	96,928		$	104,738		$	316,205		$	310,517
Provision for credit losses (1)		(3,539	)		969			(22,865	)		50,556
Noninterest income		32,863			54,422			107,682			149,649
Noninterest expense (1)		112,996			101,388			319,159			298,168
Income before income taxes		20,334			56,803			127,593			111,442
Income taxes		3,693			7,971			18,953			14,155
General banking net income	$	16,641		$	48,832		$	108,640		$	97,287
Selected Financial Information
Total assets	$	17,015,176		$	15,255,359		$	17,015,176		$	15,255,359
Depreciation and amortization	$	11,653		$	10,081		$	33,563		$	29,297
Wealth Management
Net interest income	$	1,341		$	1,401		$	3,828		$	4,481
Provision for credit losses		(2	)		(2,213	)		(7	)		(9	)
Noninterest income		9,126			7,694			26,609			23,760
Noninterest expense		7,747			7,067			23,690			22,527
Income before income taxes		2,722			4,241			6,754			5,723
Income taxes		685			1,009			1,694			1,380
Wealth management net income	$	2,037		$	3,232		$	5,060		$	4,343
Selected Financial Information
Total assets	$	265,672		$	224,773		$	265,672		$	224,773
Depreciation and amortization	$	65		$	69		$	199		$	203
Insurance
Net interest income	$	(3	)	$	68		$	(8	)	$	161
Noninterest income		12,160			11,585			36,852			35,067
Noninterest expense		8,857			8,508			26,978			25,712
Income before income taxes		3,300			3,145			9,866			9,516
Income taxes		778			769			2,423			2,338
Insurance net income	$	2,522		$	2,376		$	7,443		$	7,178
Selected Financial Information
Total assets	$	83,796		$	78,030		$	83,796		$	78,030
Depreciation and amortization	$	191		$	194		$	575		$	500
Consolidated
Net interest income	$	98,266		$	106,207		$	320,025		$	315,159
Provision for credit losses (1)		(3,541	)		(1,244	)		(22,872	)		50,547
Noninterest income		54,149			73,701			171,143			208,476
Noninterest expense (1)		129,600			116,963			369,827			346,407
Income before income taxes		26,356			64,189			144,213			126,681
Income taxes		5,156			9,749			23,070			17,873
Consolidated net income	$	21,200		$	54,440		$	121,143		$	108,808
Selected Financial Information
Total assets	$	17,364,644		$	15,558,162		$	17,364,644		$	15,558,162
Depreciation and amortization	$	11,909		$	10,344		$	34,337		$	30,000

(1)

During the second quarter of 2021, Trustmark reclassified its credit loss expense related to off-balance sheet credit exposures from noninterest expense to PCL, off-balance sheet credit exposures. Prior periods have been reclassified accordingly.

Note 19 – Accounting Policies Recently Adopted and Pending Accounting Pronouncements

Accounting Policies Recently Adopted

Except for the changes detailed below, Trustmark has consistently applied its accounting policies to all periods presented in the accompanying consolidated financial statements.

ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” Issued in December 2019, ASU 2019-12 seeks to simplify the accounting for income taxes by removing certain exceptions to the general principles in FASB ASC Topic 740. In particular, the amendments of ASU 2019-12 remove the exceptions to (1) the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (e.g., discontinued operations or other comprehensive income); (2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments of ASU 2019-12 (1) require that an entity recognize a franchise tax (or similar tax), that is partially based on income, in accordance with FASB ASC Topic 740 and account for any incremental amount incurred as a non-income-based tax; (2) require that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should instead be considered a separate transaction; (3) specify that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, but rather may elect to do so for a legal entity that is both not subject to tax and disregarded by the taxing authority; and (4) require that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. Trustmark adopted the amendments of ASU 2019-12 effective January 1, 2021. Adoption of ASU 2019-12 did not have a material impact to Trustmark’s consolidated financial statements.

ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” Issued in August 2018, ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in ASU 2018-14 remove certain disclosure requirements that are no longer considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. Trustmark adopted the amendments of ASU 2018-14 effective January 1, 2021. Trustmark will include the revised disclosures in its Annual Report on Form 10-K for the year ending December 31, 2021. Changes to the disclosures related to the defined benefit plans as a result of adopting ASU 2018-14 will not have a material impact to Trustmark’s consolidated financial statements.

Pending Accounting Pronouncements

ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” Issued in March 2020, ASU 2020-04 seeks to provided additional guidance, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The FASB issued ASU 2020-04 is response to concerns about the structural risks of interbank offered rates (IBORs) and, in particular, the risk that the London Interbank Offer Rate (LIBOR) will no longer be used. Regulators have begun reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. Stakeholders have raised operational challenges likely to arise with the reference rate reform, particularly related to contract modifications and hedge accounting. The amendments of ASU 2020-04, which are elective and apply to all entities, provide expedients and exceptions for applying GAAP to contract modifications and hedging relationships affected by the reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate that is expected to be discontinued due to reference rate reform. The optional expedients for contract modifications should be applied consistently for all contracts or transactions within the relevant Codification Topic or Subtopic or Industry Subtopic that contains the related guidance. The optional expedients for hedging relationships can be elected on an individual hedging relationship basis. As the guidance in ASU 2020-04 is intended to assist entities during the global market-wide reference rate transition period, it is in effect for a limited time, from March 12, 2020 through December 31, 2022. Management is currently evaluating the impact to Trustmark as a result of the potential discontinuance of LIBOR, and a determination cannot be made at this time as to the impact the amendments of ASU 2020-04 or the reference rate reform will have on its consolidated financial statements.

ITEM 2. MANAGEMENT’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 unaudited consolidated financial statements and the supplemental financial data included in Part I. Item 1. – Financial Statements of this report.

Description of Business

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 September 30, 2021, TNB had total assets of $17.363 billion, which represented approximately 99.99% 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 180 offices and 2,680 full-time equivalent associates (measured at September 30, 2021) located in the states of Alabama, Florida (primarily in the northwest or “Panhandle” region of that state, which is referred to herein as Trustmark’s Florida market), Mississippi, Tennessee (in the Memphis and Northern Mississippi regions, which are collectively referred to herein as Trustmark’s Tennessee market), and Texas (primarily in Houston, which is referred to herein as Trustmark’s Texas market). Trustmark’s operations are managed along three operating segments: General Banking Segment, Wealth Management Segment and Insurance Segment. For a complete overview of Trustmark’s business, see the section captioned “The Corporation” included in Part I. Item 1. – Business of Trustmark’s Annual Report on Form 10-K for its fiscal year ended December 31, 2020 (2020 Annual Report).

Executive Overview

Trustmark has been committed to meeting the banking and financial needs of its customers and communities for over 130 years, and remains focused on providing support, advice and solutions to meet its customers’ unique needs. Trustmark’s financial performance during the nine months ended September 30, 2021 reflected continued balance sheet growth, with growth in loans held for investment (LHFI) of $350.4 million, or 3.6%, and deposits of $874.1 million, or 6.2%, as well as strong credit quality and disciplined expense management. Trustmark remains focused on expanding customer relationships, which was reflected in the solid performance of its banking, insurance and wealth management businesses. Mortgage banking revenue remained strong during the first nine months of 2021 following record setting levels in the prior year.

During the third quarter of 2021, Trustmark completed a voluntary early retirement program, resulting in non-routine expenses of $5.7 million (salaries and employee benefits expense of $5.6 million and other miscellaneous expense of $89 thousand). In addition, Trustmark’s third quarter results were impacted by its previously disclosed settlement with regulatory authorities to resolve fair lending allegations in the Memphis metropolitan statistical area (MSA). As previously disclosed, Trustmark incurred a one-time settlement expense of $5.0 million, and undertook other commitments to enhance credit opportunities to residents of majority-Black and Hispanic neighborhoods in the Memphis MSA.

Trustmark is committed to managing the franchise for the long term, supporting investments to promote profitable revenue growth, realigning delivery channels to support changing customer preferences as well as reengineering and efficiency opportunities to enhance long-term shareholder value. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable December 15, 2021, to shareholders of record on December 1, 2021.

Recent Economic and Industry Developments

The COVID-19 pandemic and actions taken to mitigate the spread of it have had and may continue to have an adverse impact on economic activity globally, nationally and locally, including the geographical area in which Trustmark operates and industries in which Trustmark regularly extends credit. For additional information regarding Trustmark’s exposure to industries impacted by the COVID-19 pandemic, please see the section captioned “Exposure to COVID-19 Stressed Industries.” Economic activity during the first nine months of 2021 increased as certain restrictions were lifted following increased COVID-19 vaccination rates; however, restrictions remain in place for many areas and the long-term effectiveness of the vaccine and the full impact of the COVID-19 pandemic on economies and financial markets remains unknown.

Additionally, the COVID-19 pandemic has significantly affected the financial markets and resulted in a number of actions by the FRB during 2020 and continuing in 2021. Market interest rates declined to and remain at historical lows. During 2020, the ten-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds rate to a range of 0.00% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. The FRB reduced the interest that it pays on excess reserves from 1.60% to 0.10% during the first quarter of 2020. These rates have continued into the third quarter of 2021. The prolonged reduction in interest rates has had and is expected to continue to have an adverse effect on net interest income and margins and profitability for financial institutions, including Trustmark.

In the October 2021 “Summary of Commentary on Current Economic Conditions by Federal Reserve District,” the twelve Federal Reserve Districts’ reports suggested that economic activity during the reporting period (covering the period from August 31, 2021 through October 8, 2021) strengthened further, displaying a modest to moderate rate of growth; however, several Districts noted that

the pace of growth slowed, constrained by supply chain disruptions, labor shortages and uncertainty around the Delta variant of COVID-19. Reports by the twelve Federal Reserve Districts (Districts) noted the following during the reporting period:

 Positive growth in consumer spending; however, auto sales were widely reported as declining due to low inventory levels and rising prices. Travel and tourism varied by District, with some seeing continued or strengthening leisure travel while other saw declines that coincided with rises in COVID-19 cases and the start of the school year. Manufacturing grew moderately to robustly, as did trucking and freight. Growth in nonmanufacturing activity ranged from slight to moderate for most Districts. Agriculture conditions were mixed and energy markets were little changed on balance.

 Residential real estate activity was unchanged or slowed slightly, but the market remained healthy overall, while nonresidential real estate activity varied across Districts and market segments.

 Prices were significantly elevated, fueled by rising demand for goods and raw materials. Input cost increases were widespread across industry sectors, driven by product scarcity resulting from supply chain bottlenecks. Price pressures also arose from increased transportation and labor constraints as well as commodity shortages. Prices of steel and electronic components as well as freight costs rose markedly during the reporting period. Many firms raised selling prices, indicating a greater ability to pass along cost increases to customers amid strong demand.

 Employment increased at a modest to moderate rate as demand for workers was high, but labor growth was dampened by a low supply of workers. Transportation and technology firms saw particularly low labor supply, while many retail, hospitality and manufacturing firms cut hours or production because they did not have enough workers. Firms reported high turnover as workers left for other jobs or retired. Child-care issues and vaccine mandates were widely cited as contributing to the problem, along with COVID-19-related absences. Wage growth was robust. Firms reported increasing starting wages to attract talent and increasing wages for existing workers to retain them.

 Banking contacts in most Districts reported that loan demand was flat to modest during the period.

 Outlooks for near-term economic activity remain positive overall, but some Districts noted increased uncertainty and more cautious optimism than previous reports.

Reports by the Federal Reserve’s Sixth District, Atlanta (which includes Trustmark’s Alabama, Florida and Mississippi market regions), Eighth District, St. Louis (which includes Trustmark’s Tennessee market region), and Eleventh District, Dallas (which includes Trustmark’s Texas market region), noted similar findings for the reporting period as those discussed above. The Federal Reserve’s Eleventh District also reported that elevated growth continued and optimism improved in the oil and gas sector, spurred by higher oil and natural gas prices, and although supply-chain problems continue to worsen, contacts noted that current prices are conducive to increasing production and drilling and well completion activity rose steadily.

It is unknown what the complete financial effect of the COVID-19 pandemic will be on Trustmark. It is reasonably possible that estimates made in the financial statements, including the expected credit losses on loans and off-balance sheet credit exposures, could be materially and adversely impacted in the near term as a result of the adverse conditions associated with the COVID-19 pandemic.

Exposure to COVID-19 Stressed Industries

The full impact of COVID-19 is unknown and continues to evolve rapidly. It has caused substantial disruption in international and domestic economies, markets and employment. The pandemic has had and may continue to have a significant adverse impact on certain industries Trustmark serves. The following provides a summary of Trustmark’s exposure to COVID-19 impacted industries within the LHFI portfolio as of September 30, 2021:

 Restaurants: Aggregate outstanding balance of $104.0 million, credit exposure of $121.0 million, 299 total loans, represents 1.0% of Trustmark’s outstanding LHFI portfolio, 88% of the loans are real estate secured, 38% are full-service restaurants, 59% are limited-service restaurants and 3% are other.

 Hotels: Aggregate outstanding balance of $354.0 million, credit exposure of $373.0 million, 84 total loans, represents 3.5% of Trustmark’s outstanding LHFI portfolio, 99% of the loans are real estate secured, consists of experienced operators and carry secondary guarantor support, 95% operate under a major hotel chain.

 Retail (Commercial Real Estate): Aggregate outstanding balance of $422.0 million, credit exposure of $494.0 million, 288 total loans, represents 4.2% of Trustmark’s outstanding LHFI portfolio, 22% are stand-alone buildings with strong essential services tenants, 2% are national grocery store-anchored, 19% are investment grade anchored centers, mall exposure in only one borrower with $5.0 million outstanding.

 Energy: Aggregate outstanding balance of $101.2 million, credit exposure of $316.0 million, 111 total loans, represents 0.99% of Trustmark’s outstanding LHFI portfolio, no loans where repayment or underlying security ties to realization of value from energy reserves.

 Higher Risk Commercial and Industrial: Aggregate outstanding balance of $10.3 million, credit exposure of $13.6 million, one borrower.

During the third quarter of 2021, Trustmark conducted an analysis of borrowers with $1.0 million or more in outstanding balances in the COVID-19 impacted industries as well as borrowers in other selected categories, primarily nursing homes and senior living facilities, healthcare facilities and churches. Collectively, the review included borrowers with $1.700 billion in outstanding balances at September 30, 2021, including $705.0 million in outstanding balances of borrowers in COVID-19 impacted industries. As a result of this review, no credits were downgraded to a criticized category. A total of $20.0 million was removed from a criticized category, which included borrowers in COVID-19 impacted industries.

COVID-19 Related Loan Concessions

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encouraged financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance went on to explain that, in consultation with the FASB staff, the federal banking agencies concluded that short-term modifications (i.e., six months) made on a good faith basis to borrowers that were current as of the implementation date of a relief program were not TDRs. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), a stimulus package intended to provide relief to businesses and consumers in the United States struggling as a result of the pandemic, was signed into law. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 were not TDRs. On April 7, 2020, the federal banking agencies revised its earlier guidance to clarify the interaction between the March 22, 2020 interagency statement and section 4013 of the CARES Act, as well as the agencies’ views on consumer protection considerations. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, amended section 4013 of the CARES Act to provide an extension of the period in which TDR relief is available to financial institutions. At September 30, 2021, the balance of loans remaining under some type of COVID-19 related concession totaled $20.0 million compared to $34.2 million at December 31, 2020. Commercial concessions were primarily either interest only for 90 days or full payment deferrals for 90 days. Consumer concessions were 90-day full payment deferrals.

Paycheck Protection Program

A provision in the CARES Act included initial funds for the creation of the PPP through the Small Business Administration (SBA) and Treasury Department. The PPP is intended to provide loans to small businesses, sole proprietorships, independent contractors and self-employed individuals to pay their employees, rent, mortgage interest and utilities. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. The loans are 100% guaranteed by the SBA. The SBA and Treasury Department released a series of rules, guidance documents and processes governing the PPP, including a streamlined process for loan forgiveness of PPP loans of $150 thousand or less. The Consolidated Appropriations Act, 2021 extended some of the relief provisions in certain respects of the CARES Act, and appropriated additional funds to the PPP and permitted certain PPP borrowers to make “second draw” loans. Subsequently, the American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded the eligibility criteria for both first and second draw PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted on March 30, 2021, extended the PPP through May 31, 2021.

From April to August 2020, Trustmark originated PPP loans for qualified small businesses and other borrowers. Trustmark resumed submitting PPP applications to the SBA on behalf of qualified small businesses and other borrowers under the CARES Act, as amended by the Consolidated Appropriations Act, 2021, in January 2021. During the first nine months of 2021, Trustmark originated 5,727 PPP loans totaling $376.2 million ($354.5 million net of $21.7 million of deferred fees and costs).

On June 30, 2021, Trustmark announced the sale of approximately $354.2 million of its outstanding PPP loans, substantially all PPP loans originated in 2021, to The Loan Source, Inc. (Loan Source), a firm with significant expertise in PPP loans. As a result of this transaction, Loan Source will assume responsibility for the servicing and forgiveness process for the loans it has acquired from Trustmark. This transaction will allow Trustmark to focus on more traditional lending efforts and increase its ability to provide customers with financial services in an improving economic environment. Trustmark accelerated the recognition of unamortized PPP loan origination fees, net of cost, of approximately $18.6 million, in the second quarter of 2021 due to the sale. This revenue is substantially the same as Trustmark would expect to recognize upon the maturity or forgiveness of the PPP loans being sold in this transaction, and thus this transaction serves to accelerate revenue anticipated in future periods and recognize it during the second quarter of 2021.

At September 30, 2021, Trustmark had 197 PPP loans outstanding totaling $47.3 million ($46.5 million net of $798 thousand of deferred fees and costs), compared to 7,398 PPP loans outstanding totaling $623.0 million ($610.1 million net of $12.9 million of deferred fees and costs) at December 31, 2020. In addition to the loans sold, PPP loans totaling $597.9 million were forgiven by SBA during the first nine months of 2021, compared to PPP loans totaling $346.9 million forgiven by the SBA during the fourth quarter of 2020.

Due to the amount and nature of the PPP loans, these loans are not included in Trustmark’s LHFI portfolio and are presented separately in the accompanying consolidated balance sheet. Trustmark cannot predict the amount of PPP loans that will be forgiven in whole or in part by the SBA, nor can it predict the magnitude and timing of the impact the PPP loans and related fees will have on Trustmark’s net interest margin.

Financial Highlights

Trustmark reported net income of $21.2 million, or basic and diluted earnings per share (EPS) of $0.34, in the third quarter of 2021, compared to $54.4 million, or basic and diluted EPS of $0.86, in the third quarter of 2020. Trustmark’s reported performance during the quarter ended September 30, 2021 produced a return on average tangible equity of 6.16%, a return on average assets of 0.49%, an average equity to average assets ratio of 10.39% and a dividend payout ratio of 67.65%, compared to a return on average tangible equity of 16.82%, a return on average assets of 1.37%, an average equity to average assets ratio of 10.75% and a dividend payout ratio of 26.74% during the quarter ended September 30, 2020.

Trustmark reported net income of $121.1 million, or basic and diluted EPS of $1.92, for the nine months ended September 30, 2021, compared to $108.8 million, or basic and diluted EPS of $1.71, for the nine months ended September 30, 2020. Trustmark’s reported performance during the first nine months of 2021 produced a return on average tangible equity of 11.84%, a return on average assets of 0.96%, an average equity to average assets ratio of 10.47% and a dividend payout ratio of 35.94%, compared to a return on average tangible equity of 11.57%, a return on average assets of 0.97%, an average equity to average assets ratio of 11.13% and a dividend payout ratio of 40.35% for the first nine months of 2020.

Total revenue, which is defined as net interest income plus noninterest income, for the three and nine months ended September 30, 2021 was $152.4 million and $491.2 million, respectively, a decrease of $27.5 million, or 15.3%, and $32.5 million, or 6.2%, respectively, when compared to the same time periods in 2020. The decrease in total revenue for the third quarter of 2021 when compared to the same time period in 2020, resulted from a decline in noninterest income, primarily due to a decline in mortgage banking, net, as well as a decline in net interest income, primarily due to decreases in interest and fees on PPP loans, interest and fees on LHFS and LHFI and interest on securities, partially offset by a decline in interest on deposits. The decrease in total revenue for the nine months ended September 30, 2021 when compared to the same time period in 2020, resulted from a decline in noninterest income, primarily due to a decrease in mortgage banking, net, partially offset by an increase in net interest income, primarily due to an increase in interest and fees on PPP loans, primarily due to the accelerated recognition of the unamortized loan fees on the PPP loans sold during the quarter ended June 30, 2021, and a decline in interest on deposits, partially offset by declines in interest and fees on LHFS and LHFI and interest on securities. These factors are discussed in further detail below.

Net interest income for the three and nine months ended September 30, 2021 totaled $98.3 million and $320.0 million, respectively, a decrease of $7.9 million, or 7.5%, and an increase of $4.9 million, or 1.5%, respectively, when compared to the same time periods in 2020. Interest income totaled $103.7 million and $339.1 million for the three and nine months ended September 30, 2021, respectively, a decrease of $10.6 million, or 9.3%, and $10.3 million, or 2.9%, respectively, when compared to the same time periods in 2020. The decrease in interest income for the three months ended September 30, 2021 when compared to the same time period in 2020 was principally due to a decline in interest and fees on PPP loans, primarily due to PPP loans forgiven by the SBA, as well as declines in interest and fees on LHFS and LHFI and interest on securities primarily due to lower interest rates. The decrease in interest income when the first nine months of 2021 is compared to the same time period in 2020 was principally due to declines in interest and fees from LHFS and LHFI and interest on securities as a result of lower interest rates, partially offset by the increase in interest and fees from PPP loans. Interest expense totaled $5.5 million and $19.1 million for the three and nine months ended September 30, 2021, respectively, a decrease of $2.7 million, or 32.9%, and $15.1 million, or 44.2%, respectively, when compared to the same time periods in 2020, principally due to the decline in interest on deposits as a result of lower interest rates.

Noninterest income for the three months ended September 30, 2021 totaled $54.1 million, a decrease of $19.6 million, or 26.5%, when compared to the same time period in 2020, primarily due to a decline in mortgage banking, net, partially offset by increases in wealth management and service charges on deposit accounts. Mortgage banking, net totaled $14.0 million for the three months ended September 30, 2021, a decrease of $22.4 million, or 61.6%, when compared to the same time period in 2020, principally due to a decline in the gain on sales of loans, net. Wealth management income totaled $9.1 million for the third quarter of 2021, an increase of $1.4 million, or 18.1%, when compared to the third quarter of 2020, primarily due to increases in income from both investment services and trust management services. Service charges on deposit accounts totaled $8.9 million for the three months ended September 30, 2021, an increase of $1.3 million, or 17.6%, when compared to the same time period in 2020 principally due to an increase in the amount of

non-sufficient funds (NSF) and overdraft occurrences on consumer demand deposit accounts (DDAs) and interest checking accounts and commercial DDAs, primarily as a result of an increase in customer transactions with the further abatement of pandemic-related concerns.

Noninterest income for the first nine months of 2021 totaled $171.1 million, a decrease of $37.3 million, or 17.9%, when compared to the same time period in 2020. The decrease in noninterest income when the first nine months of 2021 is compared to the same time period in 2020 was principally due to a decline in mortgage banking, net, partially offset by increases in bank card and other fees and wealth management. Mortgage banking, net totaled $52.1 million for the nine months ended September 30, 2021, a decrease of $45.5 million, or 46.6%, when compared to the same time period in 2020, principally due to declines in the gain on sales of loans, net and the net hedge ineffectiveness and an increase in the run-off of the MSR. Bank card and other fees totaled $26.3 million for the first nine months of 2021, an increase of $4.4 million, or 20.1%, when compared to the same time period in 2020, principally due to increases in interchange income from point-of-sale transactions and the credit valuation adjustment on customer derivatives partially offset by declines in interchange income from signature transactions and income from customer derivatives. Wealth management income totaled $26.4 million for the first nine months of 2021, an increase of $2.6 million, or 11.1%, when compared to the same time period in 2020, primarily due to increases in income from both investment services and trust management services.

Noninterest expense for the three months ended September 30, 2021 totaled $129.6 million, an increase of $12.6 million, or 10.8%, when compared to the same time period in 2020, principally due to increases in salaries and employee benefits, other expense and services and fees. Salaries and employee benefits totaled $74.6 million for the three months ended September 30, 2021, an increase of $7.3 million, or 10.8%, when compared to the same time period in 2020. The increase in salaries and employee benefits when the third quarter of 2021 is compared to the same time period in 2020 was principally due to the $5.6 million of non-routine expenses related to the voluntary early retirement program completed during the third quarter of 2021. Excluding these non-routine expenses, salaries and employee benefits increased $1.7 million, or 2.5%, when the third quarter of 2021 is compared to the third quarter of 2020, principally due to increases in salary expense, primarily resulting from general merit increases, and accruals for annual performance incentives. Other expense totaled $18.5 million for the three months ended September 30, 2021, an increase of $3.9 million, or 26.9%, when compared to the same time period in 2020, principally due to the previously disclosed one-time settlement expense of $5.0 million and other commitments to enhance credit opportunities to residents of majority-Black and Hispanic neighborhoods in the Memphis MSA. Services and fees totaled $22.3 million for the three months ended September 30, 2021, an increase of $1.3 million, or 6.3%, when compared to the same time period in 2020, primarily due to increases in data processing charges related to software.

Noninterest expense for the nine months ended September 30, 2021 totaled $369.8 million, an increase of $23.4 million, or 6.8%, when compared to the same time period in 2020, principally due to increases in salaries and employee benefits, services and fees and other expense. Salaries and employee benefits totaled $215.9 million for the nine months ended September 30, 2021, an increase of $13.3 million, or 6.6%, when compared to the same time period in 2020. The increase in salaries and employee benefits when the first nine months of 2021 is compared to the same time period in 2020 was principally due to the non-routine expense related to the voluntary early retirement program completed in the third quarter of 2021 as well as increases in salary expense as a result of general merit increases, commissions expense resulting primarily from improvements in mortgage originations and production and accruals for annual incentive compensation, partially offset by non-routine expenses related to the voluntary early retirement program completed by Trustmark during the first quarter of 2020. Trustmark incurred $5.6 million of non-routine salaries and employee benefits expense during the third quarter of 2021 compared to $4.3 million during the first quarter of 2020 related to these programs. Excluding these non-routine expenses, salaries and employee benefits increased $12.0 million, or 6.0%, when the first nine months of 2021 is compared to the same time period in 2020. Services and fees totaled $66.6 million for the nine months ended September 30, 2021, an increase of $5.1 million, or 8.2%, when compared to the same time period in 2020, primarily due to increases in data processing charges related to software and outside services and fees related to independent contractors expenses. Other expense totaled $46.2 million for the first nine months of 2021, an increase of $3.6 million, or 8.4%, when compared to the same time period in 2020, principally due to the previously disclosed one-time settlement expense of $5.0 million and other commitments to enhance credit opportunities to residents of majority-Black and Hispanic neighborhoods in the Memphis MSA.

Trustmark’s provision for credit losses (PCL) on LHFI for the three and nine months ended September 30, 2021 totaled a negative $2.5 million and a negative $17.0 million, respectively, a decrease of $4.3 million and $57.5 million, respectively, when compared to the same time periods in 2020. The PCL on off-balance sheet credit exposures totaled a negative $1.0 million and a negative $5.9 million for the three and nine months ended September 30, 2021, respectively, an increase of $2.0 million and a decrease of $15.9 million, respectively, when compared to the same time periods in 2020. The negative PCL on LHFI for the third quarter of 2021 primarily reflected a decline in required reserves as a result of risk rate upgrades resulting from improved credit quality and improvements in the overall economy and macroeconomic forecasting variables used in the allowance for credit losses (ACL) modeling, partially offset by an increase in specific reserves for individually analyzed credits. The negative PCL on off-balance sheet credit exposures for the third quarter of 2021 primarily reflected a decline in required reserves as a result of decreases in the total reserve rate used in the calculation of the ACL. The negative PCL on both LHFI and off-balance sheet credit exposures for the first nine months of 2021 primarily reflected declines in required reserves as a result of improvements in the overall economy and macroeconomic factors used in the calculation of

the ACL. Please see the section captioned “Provision for Credit Losses” for additional information regarding the PCL on LHFI and off-balance sheet credit exposures.

At September 30, 2021, nonperforming assets totaled $72.5 million, a decrease of $2.3 million, or 3.1%, compared to December 31, 2020, due to a decline in other real estate partially offset by an increase in nonaccrual LHFI. Nonaccrual LHFI totaled $66.2 million at September 30, 2021, an increase of $3.1 million, or 4.9%, relative to December 31, 2020, primarily due to one large commercial credit in the Texas market region totaling $16.7 million that was placed on nonaccrual status during the third quarter of 2021, partially offset by the pay down and charge off of one large energy-related commercial credit of $8.5 million as well as a $2.8 million commercial credit which was returned to accrual status in Trustmark’s Mississippi market region. Other real estate totaled $6.2 million at September 30, 2021, a decline of $5.4 million, or 46.7%, compared to December 31, 2020, principally due to properties sold in the Alabama and Mississippi market regions as well as an increase in reserves for other real estate write-downs in Trustmark’s Mississippi market region.

LHFI totaled $10.175 billion at September 30, 2021, an increase of $350.4 million, or 3.6%, compared to December 31, 2020. The increase in LHFI during the first nine months of 2021 was primarily due to net growth in LHFI secured by real estate in Trustmark’s Mississippi and Alabama market regions and state and other political subdivision loans in the Mississippi, Texas, Florida and Alabama market regions, partially offset by net declines in LHFI secured by real estate in the Texas and Florida market regions and other commercial LHFI in the Mississippi market region. For additional information regarding changes in LHFI and comparative balances by loan category, see the section captioned “LHFI.”

Management has 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 highly liquid investment portfolio and its access to funding from a variety of external funding sources such as upstream federal funds lines, FHLB advances and, on a limited basis, brokered deposits. See the section captioned “Liquidity” for further discussion of the components of Trustmark’s excess funding capacity.

Total deposits were $14.923 billion at September 30, 2021, an increase of $874.1 million, or 6.2%, compared to December 31, 2020, primarily reflecting deposits of proceeds from line draws, PPP loans and other COVID-19 related stimulus programs. During the first nine months of 2021, noninterest-bearing deposits increased $638.9 million, or 14.7%, reflecting growth in all categories of noninterest-bearing DDAs. Interest-bearing deposits increased $235.2 million, or 2.4%, during the first nine months of 2021, primarily due to growth in consumer and commercial interest checking and Money Market Deposit Accounts (MMDA) as well as consumer savings accounts, partially offset by declines in all categories of certificates of deposits and public interest checking accounts.

Recent Legislative and Regulatory Developments

On March 5, 2021, the United Kingdom Financial Conduct Authority (FCA), which regulates London Interbank Offered Rate (LIBOR), confirmed that the publication of most LIBOR term rates will end on June 30, 2023 (excluding one-week U.S. LIBOR and two-month U.S. LIBOR, the publication of which will end on December 31, 2021). Additionally, on April 6, 2021, New York Governor Cuomo signed into law legislation that provides for the substitution of an alternative reference rate, the Secured Overnight Funding Rate (SOFR), in any LIBOR-based contract governed by New York state law that does not include clear fallback language, once LIBOR is discontinued. The FRB and other federal banking agencies have continued to encourage banks to transition away from LIBOR as soon as practicable. Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including Trustmark. For additional information regarding the transition from LIBOR and Trustmark’s management of this transition, please see the respective risk factor included in Part I. Item 1A. – Risk Factors, of Trustmark’s 2020 Annual Report.

For additional information regarding legislation and regulation applicable to Trustmark, see the section captioned “Supervision and Regulation” included in Part I. Item 1. – Business of Trustmark’s 2020 Annual Report.

Selected Financial Data

The following tables present financial data derived from Trustmark’s consolidated financial statements as of and for the periods presented ($ in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Consolidated Statements of Income
Total interest income	$	103,741		$	114,364		$	339,138		$	349,411
Total interest expense		5,475			8,157			19,113			34,252
Net interest income		98,266			106,207			320,025			315,159
Provision for credit losses (PCL), LHFI		(2,492	)		1,760			(16,984	)		40,526
PCL, off-balance sheet credit exposures (1)		(1,049	)		(3,004	)		(5,888	)		10,021
Noninterest income		54,149			73,701			171,143			208,476
Noninterest expense (1)		129,600			116,963			369,827			346,407
Income before income taxes		26,356			64,189			144,213			126,681
Income taxes		5,156			9,749			23,070			17,873
Net Income	$	21,200		$	54,440		$	121,143		$	108,808
Total Revenue (2)	$	152,415		$	179,908		$	491,168		$	523,635
Per Share Data
Basic EPS	$	0.34		$	0.86		$	1.92		$	1.71
Diluted EPS		0.34			0.86			1.92			1.71
Cash dividends per share		0.23			0.23			0.69			0.69
Performance Ratios
Return on average equity		4.72	%		12.78	%		9.13	%		8.72	%
Return on average tangible equity		6.16	%		16.82	%		11.84	%		11.57	%
Return on average assets		0.49	%		1.37	%		0.96	%		0.97	%
Average equity / average assets		10.39	%		10.75	%		10.47	%		11.13	%
Net interest margin (fully taxable equivalent)		2.57	%		3.03	%		2.84	%		3.21	%
Dividend payout ratio		67.65	%		26.74	%		35.94	%		40.35	%
Credit Quality Ratios (3)
Net charge-offs (recoveries) / average loans		-0.10	%		-0.04	%		-0.05	%		0.02	%
PCL, LHFI / average loans		-0.10	%		0.07	%		-0.22	%		0.55	%
Nonaccrual LHFI / (LHFI + LHFS)		0.63	%		0.52	%
Nonperforming assets / (LHFI + LHFS)<br> plus other real estate		0.69	%		0.68	%
ACL LHFI / LHFI		1.02	%		1.24	%

(1)

During the second quarter of 2021, Trustmark reclassified its credit loss expense related to off-balance sheet credit exposures from noninterest expense to PCL, off-balance sheet credit exposures. Prior periods have been reclassified accordingly.

(2)

Consistent with Trustmark’s audited annual financial statements, total revenue is defined as net interest income plus noninterest income.

(3)

Excludes PPP loans.

	September 30,
	2021			2020
Consolidated Balance Sheets
Total assets	$	17,364,644		$	15,558,162
Securities		3,452,510			2,534,008
Total loans (LHFI + LHFS)		10,510,238			10,332,831
Deposits		14,922,839			13,222,413
Total shareholders' equity		1,768,947			1,710,041
Stock Performance
Market value - close	$	32.22		$	21.41
Book value		28.32			26.96
Tangible book value		22.08			20.76
Capital Ratios
Total equity / total assets		10.19	%		10.99	%
Tangible equity / tangible assets		8.12	%		8.68	%
Tangible equity / risk-weighted assets		11.19	%		11.01	%
Tier 1 leverage ratio (1)		8.92	%		9.20	%
Common equity Tier 1 risk-based capital ratio (1)		11.68	%		11.36	%
Tier 1 risk-based capital ratio (1)		12.17	%		11.86	%
Total risk-based capital ratio (1)		14.01	%		12.88	%

(1)

Trustmark elected the five-year phase-in transition period related to adopting FASB ASU 2016-13 for regulatory capital purposes.

Non-GAAP Financial Measures

In addition to capital ratios defined by U.S. generally accepted accounting principles (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. In Management’s experience, many stock analysts use tangible common equity measures in conjunction with more traditional bank capital ratios to compare capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions.

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 and the notes related thereto 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 for the periods presented ($ in thousands, except per share data):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2021			2020			2021			2020
TANGIBLE EQUITY
AVERAGE BALANCES
Total shareholders' equity		$	1,782,304		$	1,694,903		$	1,774,204		$	1,666,999
Less: Goodwill			(384,237	)		(385,270	)		(384,540	)		(383,016	)
Identifiable intangible assets			(5,899	)		(8,550	)		(6,482	)		(8,146	)
Total average tangible equity		$	1,392,168		$	1,301,083		$	1,383,182		$	1,275,837
PERIOD END BALANCES
Total shareholders' equity		$	1,768,947		$	1,710,041
Less: Goodwill			(384,237	)		(385,270	)
Identifiable intangible assets			(5,621	)		(8,142	)
Total tangible equity	(a)	$	1,379,089		$	1,316,629
TANGIBLE ASSETS
Total assets		$	17,364,644		$	15,558,162
Less: Goodwill			(384,237	)		(385,270	)
Identifiable intangible assets			(5,621	)		(8,142	)
Total tangible assets	(b)	$	16,974,786		$	15,164,750
Risk-weighted assets	(c)	$	12,324,254		$	11,963,269
NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION
Net income		$	21,200		$	54,440		$	121,143		$	108,808
Plus: Intangible amortization net of tax			412			564			1,327			1,725
Net income adjusted for intangible amortization		$	21,612		$	55,004		$	122,470		$	110,533
Period end shares outstanding	(d)		62,461,832			63,423,820
TANGIBLE EQUITY MEASUREMENTS
Return on average tangible equity (1)			6.16	%		16.82	%		11.84	%		11.57	%
Tangible equity/tangible assets	(a)/(b)		8.12	%		8.68	%
Tangible equity/risk-weighted assets	(a)/(c)		11.19	%		11.01	%
Tangible book value	(a)/(d)*1,000	$	22.08		$	20.76
COMMON EQUITY TIER 1 CAPITAL (CET1)
Total shareholders' equity		$	1,768,947		$	1,710,041
CECL transitional adjustment (2)			26,419			32,647
AOCI-related adjustments			19,080			(5,684	)
CET1 adjustments and deductions:
Goodwill net of associated deferred tax liabilities (DTLs)			(370,264	)		(371,345	)
Other adjustments and deductions for CET1 (3)			(4,817	)		(6,770	)
CET1 capital	(e)		1,439,365			1,358,889
Additional Tier 1 capital instruments plus related surplus			60,000			60,000
Tier 1 Capital		$	1,499,365		$	1,418,889
Common equity Tier 1 risk-based capital ratio	(e)/(c)		11.68	%		11.36	%

(1)

Calculated using annualized net income adjusted for intangible amortization divided by total average tangible equity.

(2)

Trustmark elected the five-year phase-in transition period related to adopting FASB ASU 2016-13 for regulatory capital purposes.

(3)

Includes other intangible assets, net of DTLs, disallowed deferred tax assets, threshold deductions and transition adjustments, as applicable.

Trustmark discloses certain non-GAAP financial measures, including net income adjusted for significant non-routine transactions, because Management uses these measures for business planning purposes, including to manage Trustmark’s business against internal projected results of operations and to measure Trustmark’s performance. Trustmark views these as measures of its core operating business, which exclude the impact of the items detailed below, as these items are generally not operational in nature. These non-GAAP financial measures also provide another basis for comparing period-to-period results as presented in the accompanying selected financial data table and the consolidated financial statements by excluding potential differences caused by non-operational and unusual or non-recurring items. Readers are cautioned that these adjustments are not permitted under GAAP. Trustmark encourages readers to consider its consolidated financial statements and the notes related thereto in their entirety, and not to rely on any single financial measure.

The following table presents adjustments to net income and selected financial ratios as reported in accordance with GAAP resulting from significant non-routine items occurring during the periods presented ($ in thousands, except per share data):

	Three Months Ended September 30,											Nine Months Ended September 30,
	2021						2020					2021						2020
	Amount			Diluted EPS			Amount			Diluted EPS		Amount			Diluted EPS			Amount			Diluted EPS
Net Income (GAAP)	$	21,200		$	0.34		$	54,440		$	0.86	$	121,143		$	1.92		$	108,808		$	1.71
Significant non-routine<br> transactions (net of taxes):
Voluntary early retirement<br> program		4,275			0.07			—			—		4,275			0.07			3,281			0.05
Regulatory settlement<br> charge (not tax deductible)		5,000			0.08			—			—		5,000			0.08			—			—
Net Income adjusted for<br> significant non-routine<br> transactions (Non-GAAP)	$	30,475		$	0.49		$	54,440		$	0.86	$	130,418		$	2.07		$	112,089		$	1.76
	Reported (GAAP)			Adjusted <br>(Non-GAAP)			Reported (GAAP)			Adjusted <br>(Non-GAAP)		Reported (GAAP)			Adjusted <br>(Non-GAAP)			Reported (GAAP)			Adjusted <br>(Non-GAAP)
Return on average equity		4.72	%		6.77	%		12.78	%	n/a			9.13	%		9.82	%		8.72	%		8.97	%
Return on average tangible equity		6.16	%		8.77	%		16.82	%	n/a			11.84	%		12.72	%		11.57	%		11.89	%
Return on average assets		0.49	%		0.71	%		1.37	%	n/a			0.96	%		1.03	%		0.97	%		1.00	%

n/a – not applicable

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 is computed by dividing fully taxable equivalent (FTE) 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 FTE basis using the federal statutory corporate tax rate in effect for each of the periods shown. Loans on nonaccrual 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 LHFS and LHFI balances were immaterial.

Net interest income-FTE for the three and nine months ended September 30, 2021 decreased $8.0 million, or 7.3%, and increased $4.6 million, or 1.4%, respectively, when compared with the same time periods in 2020. The decrease in net interest income-FTE for the third quarter of 2021 compared to the third quarter of 2020 was principally due declines in interest and fees on PPP loans, interest and fees on LHFS and LHFI and taxable interest on securities, partially offset by a decline in interest on deposits. The increase in net interest income-FTE for the first nine months of 2021 compared to the same time period in 2020 was principally due to the increase in interest and fees on PPP loans and the decline in interest on deposits, partially offset by declines in interest and fees on LHFS and LHFI and taxable interest on securities. The net interest margin for the three and nine months ended September 30, 2021 decreased 46 basis points and 37 basis points to 2.57% and 2.84%, respectively, when compared to the same time periods in 2020. The net interest margin excluding PPP loans and the balance held at the Federal Reserve Bank of Atlanta (FRBA), which equals the reported net interest income-FTE excluding interest and fees on PPP and interest on the FRBA balance, as a percentage of average earning assets excluding average PPP loans and the FRBA balance, was 2.90% and 2.94% for the three and nine months ended September 30, 2021, respectively, a decrease of 30 basis points and 42 basis points, respectively, when compared to 3.20% and 3.36% for the same time periods in 2020, respectively. The decreases in the net interest margin excluding PPP loans and the balance held at the FRBA for the three and nine months ended September 30, 2021 compared to the same time periods in 2020, were principally due to declines in the yield on the LHFS and LHFI and securities portfolios, partially offset by lower costs of interest-bearing deposits.

At September 30, 2021, Trustmark had PPP loans outstanding totaling $46.5 million, net of deferred fees and costs of $798 thousand, compared to $944.3 million, net of $25.7 million of deferred fees and costs, at September 30, 2020. Processing fees earned by TNB as the originating lender are being amortized over the life of the loans. Payments on PPP loans are deferred until the date the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period). During the second quarter of 2021, Trustmark sold $354.2 million of its outstanding PPP loans, resulting in accelerated recognition of $18.6 million of unamortized PPP loan origination fees, net of cost, which was included in net interest income for the quarter ended June 30, 2021. In addition, PPP loans totaling $597.9 million were forgiven by SBA during the first nine months of 2021. Average PPP loans for the three and nine months ended September 30, 2021 totaled $122.2 million and $454.4 million, respectively, a decrease of $819.3 million, or 87.0%, and $115.5 million, or 20.3%, respectively, when compared to the same time periods in 2020. Interest and fees on PPP loans for the three and nine months ended September 30, 2021 decreased $5.2 million and increased $24.6 million, respectively, when compared to the same time periods in 2020. The yield on PPP loans for the three and nine months ended September 30, 2021 increased to 4.98% and 10.69%, respectively, when compared 2.84% and 2.76% for both the three and nine months ended September 30, 2020, respectively. Trustmark cannot predict the amount of PPP loans that will be forgiven in whole or in part by the SBA, nor can it predict the magnitude and timing of the impact the PPP loans and related fees will have on Trustmark’s net interest margin.

The average FRBA balance, included in other earning assets, for the three and nine months ended September 30, 2021 totaled $1.996 billion and $1.773 billion, respectively, an increase of $1.320 billion and $1.224 billion, respectively, when compared to the same time periods in 2020. Interest earned on FRBA balances increased $631 thousand and $666 thousand, respectively, when the three and nine months ended September 30, 2021 are compared to the same time periods in 2020. The yield on the FRBA balance was 0.16% and 0.11% for the three months ended September 30, 2021 and 2020, respectively, an increase of 5 basis points as a result of the FRBA's increase in the interest rate that it pays on excess reserves during the third quarter of 2021. The yield on the FRBA balance was 0.12% for the nine months ended September 30, 2021, a decline of 10 basis points when compared to 0.22% for the nine months ended September 30, 2020, reflecting the FRBA’s reduction of the interest rate that it pays on excess reserves during the first quarter of 2020.

Average interest-earning assets for the three months ended September 30, 2021 were $15.653 billion compared to $14.324 billion for the same time period in 2020, an increase of $1.329 billion, or 9.3%, principally due to increases in average other earning assets of $1.316 billion, average securities of $605.1 million, or 24.2%, and average loans (LHFS and LHFI) of $227.4 million, or 2.2%, partially offset by a decline in average PPP loans of $819.3 million, or 87.0%. Average interest-earning assets for the first nine months of 2021 were $15.456 billion compared to $13.501 billion for the same time period in 2020, an increase of $1.955 billion, or 14.5%. The increase in average earning assets during the first nine months of 2021 was primarily due to increases in average other earning assets of $1.232 billion, average loans (LHFS and LHFI) of $423.8 million, or 4.3%, and average securities of $415.4 million, or 17.1%, partially offset by a decrease in average PPP loans of $115.5 million, or 20.3%. The increase in average other earning assets when the first nine months of 2021 is compared to the same time period in 2020, was primarily due to an increase in excess reserves held at the FRBA as a result of the increase in customer deposit account balances. The increase in average loans (LHFS and LHFI) was primarily attributable to the $327.2 million, or 3.3%, increase in the LHFI portfolio when balances at September 30, 2021 are compared to balances at September 30, 2020. This increase was principally due to net growth in loans secured by real estate and state and other political subdivision loans, partially offset by net declines in other commercial loans and commercial and industrial loans. The increase in average securities when the first nine months of 2021 is compared to the same time period in 2020 was primarily due to purchases of securities available for sale, partially offset by calls, maturities and pay-downs of the underlying loans of government-sponsored enterprise (GSE) guaranteed securities and a decline in the fair market value of the securities available for sale.

Interest income-FTE for the three months ended September 30, 2021 totaled $106.7 million, a decrease of $10.6 million, or 9.1%, while the yield on total earning assets declined 56 basis points to 2.70% when compared to the same time period in 2020. The decrease in interest income-FTE for the third quarter of 2021 was primarily due to decreases in interest and fees on PPP loans, interest and fees on LHFS and LHFI-FTE and interest on securities-taxable. During the first nine months of 2021, interest income-FTE totaled $347.9 million, a decrease of $10.6 million, or 2.9%, while the yield on total earning assets declined 54 basis points to 3.01% when compared to the first nine months of 2020. The decrease in interest income-FTE for the first nine months of 2021 was primarily due to declines in interest and fees on LHFS and LHFI-FTE and interest on securities-taxable, partially offset by the increase in interest and fees on PPP loans. During the three and nine months ended September 30, 2021, interest and fees on LHFS and LHFI-FTE declined $3.3 million, or 3.4%, and $24.9 million, or 8.1%, respectively, when compared to the same time periods in 2020, while the yield on loans (LHFS and LHFI) decreased 22 basis points to 3.59% and 48 basis points to 3.64%, respectively, as a result of lower interest rates. During the three and nine months ended September 30, 2021, interest on securities-taxable decreased $2.6 million, or 20.5%, and $10.4 million, or 27.1%, respectively, while the yield on securities-taxable declined 74 basis points to 1.28% and 82 basis points to 1.32%, respectively, when compared to the same time periods in 2020, primarily due to the run off of maturing investment securities and lower interest rates on securities available for sale purchased.

Average interest-bearing liabilities for the three months ended September 30, 2021 totaled $10.543 billion compared to $9.906 billion for the same time period in 2020, an increase of $637.6 million, or 6.4%. Average interest-bearing liabilities for the first nine months of 2021 totaled $10.439 billion compared to $9.540 billion for the same time period in 2020, an increase of $899.1 million, or 9.4%. The increase in average interest-bearing liabilities when the three and nine months ended September 30, 2021 are compared to the same time periods in 2020 was primarily the result of the increase in average interest-bearing deposits and the addition of the subordinated debt during the fourth quarter of 2020. Average interest-bearing deposits for the three and nine months ended September 30, 2021 increased $508.6 million, or 5.3%, and $742.8 million, or 8.1%, respectively, when compared to the same time periods in 2020, primarily due to growth in average savings deposits and interest-bearing demand deposits as customers deposited proceeds from line draws, PPP loans and other COVID-19 related stimulus programs.

Interest expense for the three and nine months ended September 30, 2021 totaled $5.5 million and $19.1 million, respectively, a decrease of $2.7 million, or 32.9%, and $15.1 million, or 44.2%, respectively, when compared with the same time periods in 2020, while the rate on total interest-bearing liabilities decreased 12 basis points to 0.21% and 24 basis points to 0.24%, respectively, primarily due to a decline in interest on deposits. Interest on deposits decreased $3.7 million, or 50.4%, and $17.6 million, or 56.5%, respectively, while the rate on interest-bearing deposits decreased 17 basis points to 0.14% and 27 basis points to 0.18%, respectively, when the three and nine months ended September 30, 2021 are compared to the same time periods in 2020, primarily due to lower interest rates.

The following table provides the tax equivalent basis yield or rate for each component of the tax equivalent net interest margin for the periods presented ($ in thousands):

	Three Months Ended September 30,
	2021								2020
	Average<br>Balance			Interest		Yield/<br>Rate			Average<br>Balance			Interest		Yield/<br>Rate
Assets
Interest-earning assets:
Federal funds sold and securities<br> purchased under reverse repurchase<br> agreements	$	69		$	—		—		$	301		$	1		1.32	%
Securities - taxable		3,088,450			9,973		1.28	%		2,465,635			12,542		2.02	%
Securities - nontaxable		13,800			132		3.79	%		31,481			301		3.80	%
PPP Loans		122,176			1,533		4.98	%		941,456			6,729		2.84	%
Loans (LHFS and LHFI)		10,389,826			94,101		3.59	%		10,162,379			97,429		3.81	%
Other earning assets		2,038,515			949		0.18	%		722,917			331		0.18	%
Total interest-earning assets		15,652,836			106,688		2.70	%		14,324,169			117,333		3.26	%
Other assets		1,602,611								1,564,825
Allowance for credit losses, LHFI		(104,857	)							(121,842	)
Total Assets	$	17,150,590							$	15,767,152
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	10,101,229			3,691		0.14	%	$	9,592,643			7,437		0.31	%
Federal funds purchased and<br> securities sold under repurchase<br> agreements		147,635			51		0.14	%		84,077			32		0.15	%
Other borrowings		294,542			1,733		2.33	%		229,118			688		1.19	%
Total interest-bearing liabilities		10,543,406			5,475		0.21	%		9,905,838			8,157		0.33	%
Noninterest-bearing demand deposits		4,566,924								3,921,867
Other liabilities		257,956								244,544
Shareholders' equity		1,782,304								1,694,903
Total Liabilities and<br> Shareholders' Equity	$	17,150,590							$	15,767,152
Net Interest Margin					101,213		2.57	%					109,176		3.03	%
Less tax equivalent adjustment					2,947								2,969
Net Interest Margin per<br> Consolidated Statements<br> of Income				$	98,266							$	106,207
	Nine Months Ended September 30,
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	2021								2020
	Average<br>Balance			Interest		Yield/<br>Rate			Average<br>Balance			Interest		Yield/<br>Rate
Assets
Interest-earning assets:
Federal funds sold and securities<br> purchased under reverse repurchase<br> agreements	$	86		$	—		—		$	193		$	1		0.69	%
Securities - taxable		2,820,885			27,902		1.32	%		2,387,022			38,252		2.14	%
Securities - nontaxable		19,674			571		3.88	%		38,167			1,073		3.76	%
PPP Loans		454,436			36,329		10.69	%		569,985			11,773		2.76	%
Loans (LHFS and LHFI)		10,340,960			281,193		3.64	%		9,917,127			306,086		4.12	%
Other earning assets		1,820,293			1,941		0.14	%		588,787			1,310		0.30	%
Total interest-earning assets		15,456,334			347,936		3.01	%		13,501,281			358,495		3.55	%
Other assets		1,608,754								1,582,888
Allowance for credit losses, LHFI		(112,199	)							(103,355	)
Total Assets	$	16,952,889							$	14,980,814
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	9,955,108			13,544		0.18	%	$	9,212,283			31,124		0.45	%
Federal funds purchased and<br> securities sold under repurchase<br> agreements		162,984			166		0.14	%		145,537			699		0.64	%
Other borrowings		320,841			5,403		2.25	%		182,053			2,429		1.78	%
Total interest-bearing liabilities		10,438,933			19,113		0.24	%		9,539,873			34,252		0.48	%
Noninterest-bearing demand deposits		4,481,662								3,494,425
Other liabilities		258,090								279,517
Shareholders' equity		1,774,204								1,666,999
Total Liabilities and<br> Shareholders' Equity	$	16,952,889							$	14,980,814
Net Interest Margin					328,823		2.84	%					324,243		3.21	%
Less tax equivalent adjustment					8,798								9,084
Net Interest Margin per<br> Consolidated Statements<br> of Income				$	320,025							$	315,159

Provision for Credit Losses

The PCL, LHFI is the amount necessary to maintain the ACL for LHFI at the amount of expected credit losses inherent within the LHFI portfolio. The amount of PCL and the related ACL for LHFI are based on Trustmark’s ACL methodology. The PCL, LHFI totaled a negative $2.5 million and a negative $17.0 million for the three and nine months ended September 30, 2021, respectively, compared to a PCL, LHFI of $1.8 million and $40.5 million, respectively, for the same time periods in 2020. The negative PCL on LHFI for the third quarter of 2021 primarily reflected a decline in required reserves as a result of risk rate upgrades resulting from improved credit quality and improvements in the overall economy and macroeconomic forecasting variables used in the ACL modeling, partially offset by an increase in specific reserves for individually analyzed credits. The negative PCL on LHFI for the first nine months of 2021 primarily reflected declines in required reserves as a result of improvements in the overall economy and macroeconomic factors used in the calculation of the ACL. See the section captioned “Allowance for Credit Losses, LHFI” for information regarding Trustmark’s ACL methodology as well as further analysis of the provision for credit losses.

FASB ASC Topic 326 requires Trustmark to estimate expected credit losses for off-balance sheet credit exposures which are not unconditionally cancellable by Trustmark. Trustmark maintains a separate ACL for off-balance sheet credit exposures, including unfunded commitments and letters of credit. Adjustments to the ACL on off-balance sheet credit exposures are recorded to PCL, off-balance sheet credit exposures. The PCL, off-balance sheet credit exposures totaled a negative $1.0 million and a negative $5.9 million for the three and nine months ended September 30, 2021, respectively, compared to a negative $3.0 million and $10.0 million for the

same time periods in 2020, respectively. The negative PCL on off-balance sheet credit exposures for the third quarter of 2021 primarily reflected a decline in required reserves as a result of decreases in the total reserve rate used in the calculation of the ACL on off-balance sheet credit exposures. The negative PCL on off-balance sheet credit exposures for the first nine months of 2021 primarily reflected declines in required reserves as a result of improvements in the overall economy and macroeconomic factors used in the calculation of the ACL on off-balance sheet credit exposures.

Noninterest Income

Noninterest income represented 35.5% and 34.8% of total revenue for the three and nine months ended September 30, 2021, compared to 41.0% and 39.8% for the three and nine months ended September 30, 2020. The following table provides the comparative components of noninterest income for the periods presented ($ in thousands):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2021		2020		Change		% Change			2021		2020		Change		% Change
Service charges on deposit<br> accounts	$	8,911	$	7,577				17.6	%	$	23,880	$	24,006		)		-0.5	%
Bank card and other fees		8,549		8,843		)		-3.3	%		26,322		21,915				20.1	%
Mortgage banking, net		14,004		36,439		)		-61.6	%		52,141		97,667		)		-46.6	%
Insurance commissions		12,133		11,562				4.9	%		36,795		34,980				5.2	%
Wealth management		9,071		7,679				18.1	%		26,433		23,787				11.1	%
Other, net		1,481		1,601		)		-7.5	%		5,572		6,121		)		-9.0	%
Total noninterest income	$	54,149	$	73,701		)		-26.5	%	$	171,143	$	208,476		)		-17.9	%

All values are in US Dollars.

Changes in various components of noninterest income are discussed in further detail below. For analysis of Trustmark’s insurance commissions and wealth management income, please see the section captioned “Results of Segment Operations.”

Service Charges on Deposit Accounts

The increase in service charges on deposit accounts for the three months ended September 30, 2021 compared to the same time period in 2020 was principally due to an increase in the amount of NSF and overdraft occurrences on consumer DDAs and interest checking accounts and commercial DDAs, primarily as a result of an increase in customer transactions with the further abatement of pandemic-related concerns.

Bank Card and Other Fees

The increase in bank card and other fees for the nine months ended September 30, 2021 compared to the same time period in 2020 was principally due to increases in credit valuation adjustment on customer derivatives and interchange income from point-of-sale transactions partially offset by declines in income from customer derivatives and interchange income from signature transactions.

Mortgage Banking, Net

The following table illustrates the components of mortgage banking, net included in noninterest income for the periods presented ($ in thousands):

	Three Months Ended September 30,											Nine Months Ended September 30,
	2021			2020			Change		% Change			2021			2020			Change		% Change
Mortgage servicing income, net	$	6,406		$	5,742					11.6	%	$	18,905		$	17,454					8.3	%
Change in fair value-MSR from<br> runoff		(5,283	)		(4,590	)		)		-15.1	%		(15,415	)		(11,411	)		)		-35.1	%
Gain on sales of loans, net		12,737			34,472			)		-63.1	%		46,971			82,889			)		-43.3	%
Mortgage banking income<br> before net hedge<br> ineffectiveness		13,860			35,624			)		-61.1	%		50,461			88,932			)		-43.3	%
Change in fair value-MSR from<br> market changes		1,806			60				n/m				11,037			(27,098	)			n/m
Change in fair value of<br> derivatives		(1,662	)		755			)	n/m				(9,357	)		35,833			)	n/m
Net hedge ineffectiveness		144			815			)		-82.3	%		1,680			8,735			)		-80.8	%
Mortgage banking, net	$	14,004		$	36,439			)		-61.6	%	$	52,141		$	97,667			)		-46.6	%

All values are in US Dollars.

n/m - percentage changes greater than +/- 100% are not considered meaningful

The decrease in mortgage banking, net for the three months ended September 30, 2021 when compared to the same time period in 2020 was principally due to a decline in the gain on sales of loans, net. The decrease in mortgage banking, net for the first nine months of 2021 when compared to the same time period in 2020 was principally due to declines in the gain on sales of loans, net and the net hedge ineffectiveness and an increase in the run-off of the MSR. The decline in the positive hedge ineffectiveness for the nine months ended September 30, 2021 compared to the same time period in 2020 was primarily due to reduced spreads between mortgage and ten-year Treasury rates. Mortgage loan production for the three and nine months ended September 30, 2021 was $708.8 million and $2.212 billion, respectively, a decrease of $177.0 million, or 20.0%, and an increase of $16.0 million, or 0.7%, respectively, when compared to the same time periods in 2020. Loans serviced for others totaled $7.877 billion at September 30, 2021, compared with $7.501 billion at September 30, 2020, an increase of $375.1 million, or 5.0%.

Representing a significant component of mortgage banking income is the gain on sales of loans, net. The decrease in the gain on sales of loans, net when the three months ended September 30, 2021 is compared to the same time period in 2020, was primarily the result of a decline in the volume of loans sold and lower profit margins in secondary marketing activities. The decrease in the gain on sales of loans, net when the first nine months of 2021 is compared to the same time period in 2020, was principally due to a decline in the mortgage valuation adjustment. Loan sales totaled $506.4 million and $1.796 billion for the three and nine months ended September 30, 2021, respectively, a decrease of $198.4 million, or 28.1%, and $12.1 million, or 0.7%, respectively, when compared with the same time periods in 2020.

Other Income, Net

The following table illustrates the components of other income, net included in noninterest income for the periods presented ($ in thousands):

	Three Months Ended September 30,											Nine Months Ended September 30,
	2021			2020			Change		% Change			2021			2020			Change		% Change
Partnership amortization for tax<br> credit purposes	$	(2,045	)	$	(1,457	)		)		-40.4	%	$	(5,556	)	$	(3,823	)		)		-45.3	%
Increase in life insurance cash<br> surrender value		1,663			1,755			)		-5.2	%		4,955			5,173			)		-4.2	%
Other miscellaneous income		1,863			1,303					43.0	%		6,173			4,771					29.4	%
Total other, net	$	1,481		$	1,601			)		-7.5	%	$	5,572		$	6,121			)		-9.0	%

All values are in US Dollars.

Noninterest Expense

The following table illustrates the comparative components of noninterest expense for the periods presented ($ in thousands):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2021		2020		Change		% Change			2021		2020		Change		% Change
Salaries and employee benefits	$	74,623	$	67,342				10.8	%	$	215,900	$	202,597				6.6	%
Services and fees		22,306		20,992				6.3	%		66,559		61,489				8.2	%
Net occupancy-premises		6,854		7,000		)		-2.1	%		20,227		19,873				1.8	%
Equipment expense		5,941		5,828				1.9	%		17,752		17,064				4.0	%
Other real estate expense:
Write-downs		437		829		)		-47.3	%		1,882		1,673				12.5	%
Net (gain) loss on sale		734		133			n/m				716		388				84.5	%
Carrying costs		186		241		)		-22.8	%		594		707		)		-16.0	%
Total other real estate<br> expense, net		1,357		1,203				12.8	%		3,192		2,768				15.3	%
Other expense		18,519		14,598				26.9	%		46,197		42,616				8.4	%
Total noninterest<br> expense (1)	$	129,600	$	116,963				10.8	%	$	369,827	$	346,407				6.8	%

All values are in US Dollars.

n/m - percentage changes greater than +/- 100% are not considered meaningful

(1)

During the second quarter of 2021, Trustmark reclassified its credit loss expense related to off-balance sheet credit exposures from noninterest expense to PCL, off-balance sheet credit exposures. Prior periods have been reclassified accordingly.

Changes in the various components of noninterest expense are discussed in further detail below. Management considers disciplined expense management a key area of focus in the support of improving shareholder value.

Salaries and Employee Benefits

During the third quarter of 2021, Trustmark completed a voluntary early retirement program and incurred $5.6 million of non-routine salaries and employee benefits expense related to this program. During the first quarter of 2020, Trustmark completed a voluntary early retirement program and incurred $4.3 million of non-routine salaries and employee benefits expense related to this program. Excluding these non-routine expenses, salaries and employee benefits increased $1.7 million, or 2.5%, and $12.0 million, or 6.0%, respectively, when the three and nine months ended September 30, 2021 are compared to the same time periods in 2020.

The increase in salaries and employee benefits, excluding the non-routine expenses, when the third quarter of 2021 is compared to the same time period in 2020 was principally due to increases in salary expense, primarily resulting from general merit increases, and accruals for annual performance incentives. The increase in salaries and employee benefits, excluding non-routine expenses, when the first nine months of 2021 is compared to the same time period in 2020 was principally due to increases in salary expense as a result of general merit increases, commissions expense resulting primarily from improvements in mortgage originations and production and accruals for annual incentive compensation.

Services and Fees

The increase in services and fees when the three months ended September 30, 2021 is compared to the same time period in 2020, was primarily due to increases in data processing charges related to software. The increase in services and fees when the first nine months of 2021 is compared to the same time period in 2020 was primarily due to increases in data processing charges related to software and outside services and fees related to independent contractors expenses.

Other Expense

The following table illustrates the comparative components of other noninterest expense for the periods presented ($ in thousands):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2021		2020		Change		% Change			2021		2020		Change		% Change
Loan expense (1)	$	4,022	$	4,184		)		-3.9	%	$	11,927	$	10,934				9.1	%
Amortization of intangibles		549		752		)		-27.0	%		1,768		2,300		)		-23.1	%
FDIC assessment expense		1,275		1,410		)		-9.6	%		4,040		4,590		)		-12.0	%
Regulatory settlement charge		5,000		—			n/m				5,000		—			n/m
Other miscellaneous expense (1)		7,673		8,252		)		-7.0	%		23,462		24,792		)		-5.4	%
Total other expense	$	18,519	$	14,598				26.9	%	$	46,197	$	42,616				8.4	%

All values are in US Dollars.

(1)

During the second quarter of 2021, Trustmark reclassified certain expenses related to mortgage loan appraisals from other miscellaneous expense to loan expense. Prior period amounts have been reclassified accordingly.

The increase in other expense for the three and nine months ended September 30, 2021 when compared to the same time periods in 2020 were principally due to the previously disclosed one-time settlement expense of $5.0 million and other commitments to enhance credit opportunities to residents of majority-Black and Hispanic neighborhoods in the Memphis MSA. The decrease in other miscellaneous expense when the first nine months of 2021 is compared to the same time period in 2020 was principally due to property valuation adjustments recorded during the third quarter of 2021 on land and buildings at certain of Trustmark's branch locations. These branches have been closed for operations but continue to serve customers through available automated teller machines (ATMs) and interactive teller machines (ITMs).

Results of Segment Operations

For a description of the methodologies used to measure financial performance and financial information by reportable segment, please see Note 18 – Segment Information included in Part I. Item 1. – Financial Statements of this report. The following discusses changes in the results of operations of each reportable segment for the nine months ended September 30, 2021 and 2020.

General Banking

Net interest income for the General Banking Segment increased $5.7 million, or 1.8%, when the nine months ended September 30, 2021 is compared with the same time period in 2020. The increase in net interest income was principally due to the increase in interest and fees on PPP loans as a result of the $18.6 million of loan fees recognized on the sale of the PPP loans during the second quarter of 2021 and a decrease in interest on deposits, partially offset by decreases in interest and fees on LHFS and LHFI and interest on securities, primarily due to declines in interest rates in general. The PCL, net (LHFI and off-balance sheet credit exposures) for the nine months ended September 30, 2021 totaled a negative $22.9 million compared to a PCL, net of $50.6 million for the same period in 2020, a decrease of $73.4 million primarily due to improvements in the overall economy and macroeconomic factors used in the calculation of the ACL. For more information on these net interest income items, please see the sections captioned “Financial Highlights” and “Results of Operations.”

Noninterest income for the General Banking Segment decreased $42.0 million, or 28.0%, when the first nine months of 2021 is compared to the same time period in 2020, primarily due to the declines in mortgage banking, net, partially offset by an increase in bank card and other fees. Noninterest income for the General Banking Segment represented 25.4% of total revenue for this segment for the first nine months of 2021 compared to 32.5% for the same time period in 2020. Noninterest income for the General Banking Segment includes service charges on deposit accounts; bank card and other fees; mortgage banking, net and other income, net. For more information on these noninterest income items, please see the analysis included in the section captioned “Noninterest Income.”

Noninterest expense for the General Banking Segment increased $21.0 million, or 7.0%, when the first nine months of 2021 is compared with the same time period in 2020, principally due to increases in salaries and employee benefits, data processing charges related to software and the previously disclosed one-time settlement expense of $5.0 million and other commitments to enhance credit opportunities to residents of majority-Black and Hispanic neighborhoods in the Memphis MSA incurred during the third quarter of 2021. For more information on these noninterest expense items, please see the analysis included in the section captioned “Noninterest Expense.”

Wealth Management

Net income for the Wealth Management Segment for the first nine months of 2021 increased $717 thousand, or 16.5%, when compared to the same time period in 2020, primarily due to an increase in noninterest income partially offset by an increase in noninterest expense. Net interest income for the Wealth Management Segment declined $653 thousand, or 14.6%, when the first nine months of 2021 are compared to the same time period in 2020, principally due to a decline in interest and fees on loans and an increase in interest on deposits generated by the Private Banking Department. The PCL, net for the nine months ended September 30, 2021 totaled a negative $7 thousand compared to a negative PCL, net of $9 thousand for the same period in 2020, a decrease of $2 thousand primarily due to improvements in the overall economy and macroeconomic factors used in the calculation of the ACL. Noninterest income for the Wealth Management Segment, which primarily includes income related to investment management, trust and brokerage services, increased $2.8 million, or 12.0%, when the first nine months of 2021 is compared to the same time period in 2020, primarily due to increases in income from trust management and brokerage services. Noninterest expense for the Wealth Management Segment increased $1.2 million, or 5.2%, when the first nine months of 2021 is compared to the same time period in 2020, principally due to increases in salary and employee benefit expense partially offset by declines in other miscellaneous expenses.

At September 30, 2021 and 2020, Trustmark held assets under management and administration of $15.446 billion and $11.631 billion, respectively, and brokerage assets of $2.323 billion and $2.015 billion, respectively.

Insurance

Net income for the Insurance Segment for the first nine months of 2021 increased $265 thousand, or 3.7%, when compared to the same time period in 2020. Noninterest income for the Insurance Segment, which is predominately composed of insurance commissions, increased $1.8 million, or 5.1%, when the first nine months of 2021 is compared to the same time period in 2020, primarily due to new business commission volume in the property and casualty business and increases in other commission income. Noninterest expense for the Insurance Segment increased $1.3 million, or 4.9%, when the first nine months of 2021 is compared to the same time period in 2020, primarily due to increases in outside services and fees related to independent contractor expenses and salary expense resulting from modest general merit increases and associates added as a result of agencies acquired during 2020, partially offset by a decline in commission expense.

Income Taxes

For the three and nine months ended September 30, 2021, Trustmark’s combined effective tax rate was 19.6% and 16.0%, respectively, compared to 15.2% and 14.1%, respectively, for the same time periods in 2020. The increase in the effective tax rate for the three and

nine months ended September 30, 2021 compared to the same time periods in 2020 was principally due to an increase in the amount of forecasted net income for the respective years. Trustmark’s effective tax rate continues to be less than the statutory rate primarily due to various tax-exempt income items and its utilization of income tax credit programs. Trustmark invests in partnerships that provide income tax credits on a Federal and/or State basis (i.e., new market tax credits, low income housing tax credits or historical tax credits). The income tax credits related to these partnerships are utilized as specifically allowed by income tax law and are recorded as a reduction in income tax expense.

Financial Condition

Earning assets serve as the primary revenue streams for Trustmark and are comprised of securities, loans, federal funds sold and other earning assets. Average earning assets totaled $15.456 billion, or 91.2% of total average assets, for the nine months ended September 30, 2021, compared to $13.501 billion, or 90.1% of total average assets, for the nine months ended September 30, 2020, an increase of $1.955 billion, or 14.5%.

Securities

The securities portfolio is utilized by Management to manage interest rate risk, generate interest income, provide liquidity and use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering duration, composition and/or balance of the portfolio. The weighted-average life of the portfolio was 4.3 years at September 30, 2021 compared to 2.9 years at December 31, 2020. The increase in the weighted-average life of the securities portfolio was principally due to available for sale securities purchased during the period and lower projected mortgage prepayment estimates.

When compared to December 31, 2020, total investment securities increased by $922.6 million, or 36.5%, during the first nine months of 2021. This increase resulted primarily from purchases of available for sale securities, partially offset by calls, maturities and pay-downs of the loans underlying GSE guaranteed securities and a decline in the fair market value of securities available for sale. Trustmark sold no securities during the first nine months of 2021 or 2020.

During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale to securities held to maturity to mitigate the potential adverse impact of a rising interest rate environment on the fair value of the available for sale securities and the related impact on tangible common equity. The resulting net unrealized holding loss is being amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. At September 30, 2021, the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive income (loss), net of tax, (AOCI) in the accompanying consolidated balance sheets totaled $6.8 million ($5.1 million net of tax) compared to $8.9 million ($6.7 million net of tax) at December 31, 2020.

Available for sale securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in AOCI, a separate component of shareholders’ equity. At September 30, 2021, available for sale securities totaled $3.058 billion, which represented 88.6% of the securities portfolio, compared to $1.992 billion, or 78.7%, at December 31, 2020. At September 30, 2021, unrealized gains, net on available for sale securities totaled $4.3 million compared to unrealized gains, net of $32.0 million at December 31, 2020. At September 30, 2021, available for sale securities consisted of U.S. Treasury securities, obligations of states and political subdivisions, GSE guaranteed mortgage-related securities and direct obligations of government agencies and GSEs.

Held to maturity securities are carried at amortized cost and represent those securities that Trustmark both intends and has the ability to hold to maturity. At September 30, 2021, held to maturity securities totaled $394.9 million, which represented 11.4% of the total securities portfolio, compared to $538.1 million, or 21.3%, at December 31, 2020.

Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of 98.5% of the portfolio in GSE-backed obligations and other Aaa-rated securities as determined by Moody’s Investors Services (Moody’s). None of the securities owned by Trustmark are collateralized by assets which are considered sub-prime. Furthermore, outside of stock ownership in the FHLB of Dallas, FHLB of Atlanta and Federal Reserve Bank of Atlanta, Trustmark does not hold any other equity investment in a GSE or other governmental entity.

As of September 30, 2021, Trustmark did not hold securities of any one issuer with a carrying value exceeding 10% of total shareholders’ equity, other than certain GSEs 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 GSEs and held in Trustmark’s securities portfolio.

The following table presents Trustmark’s securities portfolio by amortized cost and estimated fair value and by credit rating, as determined by Moody’s, at September 30, 2021 ($ in thousands):

	September 30, 2021
	Amortized Cost					Estimated Fair Value
	Amount		%			Amount		%
Securities Available for Sale
Aaa	$	3,048,143		99.8	%	$	3,051,871		99.8	%
A1 to A3		1,051		—			1,097		—
Not Rated (1)		4,100		0.2	%		4,637		0.2	%
Total securities available for sale	$	3,053,294		100.0	%	$	3,057,605		100.0	%
Securities Held to Maturity
Aaa	$	384,222		97.3	%	$	400,375		97.4	%
Aa1 to Aa3		7,510		1.9	%		7,509		1.8	%
Not Rated (1)		3,173		0.8	%		3,248		0.8	%
Total securities held to maturity	$	394,905		100.0	%	$	411,132		100.0	%

(1)

Not rated securities primarily consist of Mississippi municipal general obligations.

The table above 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 September 30, 2021, approximately 99.8% of the available for sale securities, measured at the estimated fair value, and 97.3% of the held to maturity securities, measured at amortized cost, were rated Aaa.

LHFS

At September 30, 2021, LHFS totaled $335.3 million, consisting of $247.4 million of residential real estate mortgage loans in the process of being sold to third parties and $88.0 million of GNMA optional repurchase loans. At December 31, 2020, LHFS totaled $447.0 million, consisting of $305.8 million of residential real estate mortgage loans in the process of being sold to third parties and $141.2 million of 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.

Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first nine months of 2021 or 2020.

For additional information regarding the GNMA optional repurchase loans, please see the section captioned “Past Due LHFS” included in Note 3 – LHFI and Allowance for Credit Losses, LHFI of Part I. Item 1. – Financial Statements of this report.

LHFI

The full impact of the COVID-19 pandemic is unknown and rapidly evolving. It has caused substantial disruption in international and domestic economies, markets and employment. The pandemic has had and may continue to have a significant adverse impact on certain industries Trustmark serves, including the restaurant and food services, hotel, retail and energy industries. See the section captioned “Executive Overview” for further information and discussion regarding the current and anticipated impact of the COVID-19 pandemic.

At September 30, 2021 and December 31, 2020, LHFI consisted of the following ($ in thousands):

	September 30, 2021					December 31, 2020
	Amount		%			Amount		%
Loans secured by real estate:
Construction, land development and other land	$	559,804		5.5	%	$	514,056		5.2	%
Other secured by 1-4 family residential properties		509,195		5.0	%		524,732		5.3	%
Secured by nonfarm, nonresidential properties		2,924,953		28.7	%		2,709,026		27.6	%
Other real estate secured		986,163		9.7	%		1,065,964		10.9	%
Other loans secured by real estate:
Other construction		726,809		7.1	%		794,983		8.1	%
Secured by 1-4 family residential properties		1,382,097		13.6	%		1,216,400		12.4	%
Commercial and industrial loans		1,327,211		13.0	%		1,309,078		13.3	%
Consumer loans		160,802		1.6	%		164,386		1.7	%
State and other political subdivision loans		1,125,186		11.1	%		1,000,776		10.2	%
Other commercial loans		472,679		4.7	%		525,123		5.3	%
LHFI	$	10,174,899		100.0	%	$	9,824,524		100.0	%

LHFI increased $350.4 million, or 3.6%, compared to December 31, 2020. The increase in LHFI during the first nine months of 2021 was primarily due to net growth in LHFI secured by real estate in Trustmark’s Mississippi and Alabama market regions and state and other political subdivision loans in the Mississippi, Texas, Florida and Alabama market regions, partially offset by net declines in LHFI secured by real estate in the Texas and Florida market regions and other commercial LHFI in the Mississippi market region.

LHFI secured by real estate increased $263.9 million, or 3.9%, during the first nine months of 2021 primarily due to net growth in LHFI secured by nonfarm, nonresidential properties (NFNR LHFI), LHFI secured by 1-4 family residential properties, and LHFI secured by construction, land development and other land, partially offset by net declines in other construction LHFI and LHFI secured by other real estate. NFNR LHFI increased $215.9 million, or 8.0%, during the first nine months of 2021, principally due to movement from the other construction loans category. Excluding other construction loan reclassifications, the NFNR LHFI portfolio decreased $137.9 million, or 5.1%, during the first nine months of 2021 primarily due to declines in nonowner-occupied loans in the Texas, Alabama, Florida and Tennessee market regions and owner-occupied loans in the Alabama and Texas market regions, partially offset by growth in both nonowner-occupied and owner-occupied loans in the Mississippi market region. LHFI secured by 1-4 family residential properties increased $165.7 million, or 13.6%, during the first nine months of 2021 primarily due to growth in the Mississippi market region, reflecting increases in home sales as a result of lower interest rates and higher home values. LHFI secured by construction, land development and other land increased $45.7 million, or 8.9%, during the first nine months of 2021 primarily due to growth in land development across all five market regions and 1-4 family construction loans in Trustmark’s Alabama and Tennessee market regions. LHFI secured by other real estate decreased $79.8 million, or 7.5%, during the first nine months of 2021, primarily due to declines in the Alabama, Mississippi and Texas market regions, partially offset by other construction loans that moved to LHFI secured by multi-family residential properties in the Texas, Alabama and Mississippi market regions. Excluding other construction loan reclassifications, LHFI secured by other real estate decreased $372.9 million, or 35.0%, during the first nine months of 2021. Other construction loans decreased $68.2 million, or 8.6%, during the first nine months of 2021 primarily due to other construction loans moved to other loan categories upon the completion of the related construction project, which were largely offset by new construction loans across all five market regions. During the first nine months of 2021, $648.4 million loans were moved from other construction to other loan categories, including $293.1 million to multi-family residential loans, $268.5 million to nonowner-occupied loans and $85.3 million to owner-occupied loans. Excluding all reclassifications between loan categories, growth in other construction loans across all five market regions totaled $573.4 million, or 72.1%, during the first nine months of 2021.

State and other political subdivision loans increased $124.4 million, or 12.4%, during the first nine months of 2021 primarily due to growth in the Mississippi, Texas, Florida and Alabama market regions. Other commercial LHFI, which include loans to financial intermediaries, decreased $52.4 million, or 10.0%, during the first nine months of 2021, primarily due to declines in the Mississippi market region.

Trustmark’s exposure to the energy sector is primarily included in the commercial and industrial loan portfolio in Trustmark’s Mississippi and Texas market regions. At September 30, 2021 and December 31, 2020, energy-related LHFI had outstanding balances

of $101.2 million and $102.3 million, respectively, which represented 1.0% of Trustmark’s total LHFI portfolio at both September 30, 2021 and December 31, 2020. Trustmark has no loan exposure where the source of repayment, or the underlying security of such exposure, is tied to the realization of value from energy reserves. Should oil prices fall below current levels for a prolonged period of time, there is potential for downgrades to occur. Management will continue to monitor this exposure.

The following table provides information regarding Trustmark’s home equity loans and home equity lines of credit which are included in the LHFI secured by 1-4 family residential properties for the periods presented ($ in thousands):

	September 30, 2021			December 31, 2020
Home equity loans	$	36,259		$	40,730
Home equity lines of credit		344,470			352,309
Percentage of loans and lines for which Trustmark holds first lien		58.3	%		59.5	%
Percentage of loans and lines for which Trustmark does not hold first lien		41.7	%		40.5	%

Due to the increased risk associated with second liens, loan terms and underwriting guidelines differ from those used for products secured by first liens. Loan amounts and loan-to-value ratios are limited and are lower for second liens than first liens. Also, interest rates and maximum amortization periods are adjusted accordingly. In addition, regardless of lien position, the passing credit score for approval of all home equity lines of credit is generally higher than that of term loans. The ACL on LHFI is also reflective of the increased risk related to second liens through application of a greater loss factor to this portion of the portfolio.

The following tables provide information regarding the interest rate terms of Trustmark’s LHFI as of September 30, 2021 and December 31, 2020 ($ in thousands). Trustmark’s variable rate LHFI are based primarily on various prime and LIBOR interest rate bases.

	September 30, 2021
	Fixed		Variable		Total
Loans secured by real estate:
Construction, land development and other land	$	166,088	$	393,716	$	559,804
Other secured by 1- 4 family residential properties		4,633		504,562		509,195
Secured by nonfarm, nonresidential properties		1,555,001		1,369,952		2,924,953
Other real estate secured		347,353		638,810		986,163
Other loans secured by real estate:
Other construction		95,610		631,199		726,809
Secured by 1- 4 family residential properties		853,131		528,966		1,382,097
Commercial and industrial loans		638,745		688,466		1,327,211
Consumer loans		133,379		27,423		160,802
State and other political subdivision loans		1,097,414		27,772		1,125,186
Other commercial loans		248,388		224,291		472,679
LHFI	$	5,139,742	$	5,035,157	$	10,174,899
	December 31, 2020
---	---	---	---	---	---	---
	Fixed		Variable		Total
Loans secured by real estate:
Construction, land development and other land	$	147,640	$	366,416	$	514,056
Other secured by 1- 4 family residential properties		17,751		506,981		524,732
Secured by nonfarm, nonresidential properties		1,506,066		1,202,960		2,709,026
Other real estate secured		292,878		773,086		1,065,964
Other loans secured by real estate:
Other construction		134,114		660,869		794,983
Secured by 1- 4 family residential properties		732,050		484,350		1,216,400
Commercial and industrial loans		752,502		556,576		1,309,078
Consumer loans		138,989		25,397		164,386
State and other political subdivision loans		970,500		30,276		1,000,776
Other commercial loans		248,860		276,263		525,123
LHFI	$	4,941,350	$	4,883,174	$	9,824,524

In the following tables, LHFI reported by region (along with related nonperforming assets and net charge-offs) are associated with location of origination except for loans secured by 1-4 family residential properties (representing traditional mortgages) and credit cards. These loans are included in the Mississippi Region because they are centrally analyzed and approved as part of a specific line of business located at Trustmark’s headquarters in Jackson, Mississippi.

The following table presents the LHFI composition by region at September 30, 2021 and reflects each region’s diversified mix of loans ($ in thousands):

	September 30, 2021
LHFI Composition by Region	Total		Alabama		Florida		Mississippi		Tennessee		Texas
Loans secured by real estate:
Construction, land development and other land	$	559,804	$	250,874	$	40,919	$	163,343	$	37,636	$	67,032
Other secured by 1-4 family residential<br> properties		509,195		109,986		39,699		284,243		61,072		14,195
Secured by nonfarm, nonresidential properties		2,924,953		834,328		259,997		1,089,333		174,338		566,957
Other real estate secured		986,163		221,832		6,154		303,760		19,850		434,567
Other loans secured by real estate:
Other construction		726,809		303,333		4,416		210,721		947		207,392
Secured by 1-4 family residential properties		1,382,097		—		—		1,375,046		7,051		—
Commercial and industrial loans		1,327,211		230,698		23,678		597,197		276,876		198,762
Consumer loans		160,802		22,100		8,381		103,932		19,383		7,006
State and other political subdivision loans		1,125,186		101,679		54,619		734,853		37,408		196,627
Other commercial loans		472,679		74,728		11,925		286,841		69,740		29,445
LHFI	$	10,174,899	$	2,149,558	$	449,788	$	5,149,269	$	704,301	$	1,721,983
Construction, Land Development and Other Land Loans by Region
Lots	$	60,804	$	27,014	$	8,676	$	17,782	$	905	$	6,427
Development		124,213		48,692		612		46,452		13,016		15,441
Unimproved land		93,283		28,095		12,146		28,601		11,187		13,254
1-4 family construction		281,504		147,073		19,485		70,508		12,528		31,910
Construction, land development and<br> other land loans	$	559,804	$	250,874	$	40,919	$	163,343	$	37,636	$	67,032
Loans Secured by Nonfarm, Nonresidential Properties by Region
Nonowner-occupied:
Retail	$	384,940	$	155,375	$	32,778	$	105,444	$	18,285	$	73,058
Office		215,297		52,628		23,835		67,094		11,714		60,026
Hotel/motel		347,023		176,352		76,664		47,229		32,638		14,140
Mini-storage		130,853		22,757		2,227		76,790		632		28,447
Industrial		246,576		57,901		20,755		62,071		137		105,712
Health care		59,676		39,225		1,140		16,755		370		2,186
Convenience stores		23,047		8,010		683		3,627		1,194		9,533
Nursing homes/senior living		204,678		106,572		—		71,672		6,434		20,000
Other		76,742		16,021		7,388		31,370		10,939		11,024
Total nonowner-occupied loans		1,688,832		634,841		165,470		482,052		82,343		324,126
Owner-occupied:
Office		167,713		37,485		42,334		49,810		9,794		28,290
Churches		96,810		19,892		6,089		48,537		9,352		12,940
Industrial warehouses		178,394		11,807		2,989		50,594		18,686		94,318
Health care		143,180		12,033		6,915		107,190		2,296		14,746
Convenience stores		141,490		16,155		13,945		68,325		489		42,576
Retail		75,640		13,214		13,577		20,040		12,035		16,774
Restaurants		56,892		3,750		4,545		31,612		13,585		3,400
Auto dealerships		56,403		6,358		261		25,240		24,544		—
Nursing homes/senior living		211,190		73,078		—		138,112		—		—
Other		108,409		5,715		3,872		67,821		1,214		29,787
Total owner-occupied loans		1,236,121		199,487		94,527		607,281		91,995		242,831
Loans secured by nonfarm, nonresidential<br> properties	$	2,924,953	$	834,328	$	259,997	$	1,089,333	$	174,338	$	566,957

Allowance for Credit Losses

LHFI

Trustmark’s ACL methodology for LHFI is based upon guidance within FASB ASC Subtopic 326-20, “Financial Instruments – Credit Losses – Measured at Amortized Cost,” as well as applicable regulatory guidance. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the LHFI portfolio is continuously monitored by Management and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within Trustmark’s existing LHFI portfolio. The ACL on LHFI is adjusted through the provision for credit losses and reduced by the charge off of loan amounts, net of recoveries.

The loan loss estimation process involves procedures to appropriately consider the unique characteristics of Trustmark’s LHFI portfolio segments. These segments are further disaggregated into loan classes, the level at which credit risk is estimated. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Evaluations of the portfolio and individual credits are inherently subjective, as they require estimates, assumptions and judgments as to the facts and circumstances of particular situations.

The econometric models currently in production reflect segment or pool level sensitivities of probability of default (PD) to changes in macroeconomic variables. By measuring the relationship between defaults and changes in the economy, the quantitative reserve incorporates reasonable and supportable forecasts of future conditions that will affect the value of its assets, as required by FASB ASC Topic 326. Under stable forecasts, these linear regressions will reasonably predict a pool’s PD. However, due to the COVID-19 pandemic, the macroeconomic variables used for reasonable and supportable forecasting have changed rapidly. At the current levels, it is not clear that the models currently in production will produce reasonably representative results since the models were originally estimated using data beginning in 2004 through 2019. During this period, a traditional, albeit severe, economic recession occurred. Thus, econometric models are sensitive to similar future levels of PD.

In order to prevent the econometric models from extrapolating beyond reasonable boundaries of their input variables, Trustmark chose to establish an upper and lower limit process when applying the periodic forecasts. In this way, Management will not rely upon unobserved and untested relationships in the setting of the quantitative reserve. This approach applies to all input variables, including: Southern Unemployment, National Unemployment, National GDP, Southern Vacancy Rate and the Prime Rate. The upper and lower limits are based on the distribution of the macroeconomic variable by selecting extreme percentiles at the upper and lower limits of the distribution, the 1st and 99th percentiles, respectively. These upper and lower limits are then used to calculate the PD for the forecast time period in which the forecasted values are outside of the upper and lower limit range. For the current period, the forecast related to the macroeconomic variables used in the quantitative modeling process were positively impacted due to the updated forecast effects. However, due to multiple periods in the second quarter of 2021 having a PD or LGD at or near zero as a result of the improving macroeconomic forecasts, Management implemented PD and LGD floors to account for the risk associated with each portfolio. The PD and LGD floors are based on Trustmark’s historical loss experience and applied at a portfolio level.

The external factors qualitative factor is Management’s best judgement on the loan or pool level impact of all factors that affect the portfolio that are not accounted for using any other part of the ACL methodology (i.e., natural disasters, changes in legislation, impacts due to technology and pandemics). During the third quarter of 2020, Trustmark activated the External Factor – Pandemic to ensure reserve adequacy for collectively evaluated loans most likely to be impacted by the unique economic and behavioral conditions created by the COVID-19 pandemic. Additional qualitative reserves are derived based on two principles. The first is the disconnect of economic factors to Trustmark’s modeled PD (derived from the econometric models underpinning the quantitative pooled reserves). During the pandemic, extraordinary measures by the federal government were made available to consumers and businesses, including COVID-19 loan payment concessions, direct transfer payments to households, tax deferrals and reduced interest rates, among others. These government interventions may have extended the lag between economic conditions and default, relative to what was captured in the model development data. Because Trustmark’s econometric PD models rely on the observed relationship from the economic downturn from 2007 to 2009 in both timing and severity, Management does not expect the models to reflect these current conditions. For example, while the models would predict contemporaneous unemployment peaks and loan defaults, this may not occur when borrowers can request payment deferrals. Thus, for the affected population, economic conditions are not fully considered as a part of Trustmark’s quantitative reserve. The second principle is the change in risk that is identified by rating changes. As a part of Trustmark’s credit review process, loans in the affected population have been given more frequent screening to ensure accurate ratings are maintained through this dynamic period. Trustmark’s quantitative reserve does not directly address changes in ratings; thus, a migration qualitative factor was designed to work in concert with the quantitative reserve. In a downturn, the qualitative factor is inactive for most pools because changes in ratings are congruent with changes in macroeconomic conditions, which directly influence the PD models in the quantitative reserve.

As discussed above, the disconnect of economic factors means that changes in rating caused by deteriorating and weak economic conditions as a result of the pandemic are not being captured in the quantitative reserve. During the fourth quarter of 2020, due to unforeseen pandemic conditions that varied from Management’s expectations during the third quarter of 2020, additional reserves were further dimensioned in order to appropriately reflect the risk within the portfolio related to the COVID-19 pandemic. In an effort to ensure the External Factor – Pandemic qualitative factor is reasonable and supportable, historical Trustmark loss data was leveraged to construct a framework that is quantitative in nature. To dimension the additional reserve, Management uses the sensitivity of the quantitative commercial loan reserve to changes in macroeconomic conditions to apply to loans rated acceptable or better (risk rates 1-4). In addition, to account for the known changes in risk, a weighted average of the commercial loan portfolio loss rate, derived from the performance trends qualitative factor, is used to dimension additional reserves for downgraded credits. Loans rated acceptable with risk (risk rate 5) or watch (risk rate 6) received the additional reserves based on the average of the macroeconomic conditions and

weighted average of the commercial loan portfolio loss rate while the loans rated special mention (risk rate 7) and substandard (risk rate 8) received additional reserves based on the weighted-average described above.

Determining the appropriateness of the allowance is complex and requires judgement by Management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall LHFI portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense.

For a complete description of Trustmark’s ACL methodology and the quantitative and qualitative factors included in the calculation, please see Note 3 – LHFI and Allowance for Credit Losses, LHFI included in Part I. Item 1. – Financial Statements of this report.

At September 30, 2021, the ACL on LHFI was $104.1 million, a decrease of $13.2 million, or 11.3%, when compared with December 31, 2020. The decrease in the ACL during the first nine months of 2021 was principally due to improvements in the overall economy and macroeconomic factors used in the calculation of the ACL. Allocation of Trustmark’s $104.1 million ACL on LHFI, represented 1.05% of commercial LHFI and 0.91% of consumer and home mortgage LHFI, resulting in an ACL to total LHFI of 1.02% as of September 30, 2021. This compares with an ACL to total LHFI of 1.19% at December 31, 2020, which was allocated to commercial LHFI at 1.20% and to consumer and mortgage LHFI at 1.16%.

The following table presents changes in the ACL on LHFI for the periods presented ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Balance at beginning of period	$	104,032		$	119,188		$	117,306		$	84,277
FASB ASU 2016-13 adoption adjustments:
LHFI		—			—			—			(3,039	)
Allowance for loan losses, acquired loans transfer		—			—			—			815
Acquired loans ACL adjustment		—			—			—			1,007
Provision for credit losses, LHFI		(2,492	)		1,760			(16,984	)		40,526
LHFI charged-off		(1,586	)		(1,263	)		(7,659	)		(8,678	)
Recoveries		4,119			2,325			11,410			7,102
Net (charge-offs) recoveries		2,533			1,062			3,751			(1,576	)
Balance at end of period	$	104,073		$	122,010		$	104,073		$	122,010

Net recoveries for the three months ended September 30, 2021 increased $1.5 million when compared to the same time period in 2020. The increase in net recoveries when the third quarter of 2021 is compared to the same time period in 2020, was primarily due to an increase in recoveries in the Mississippi market region. Net recoveries for the first nine months of 2021 increased $5.3 million when compared to net charge-offs for the first nine months of 2020. The increase in net recoveries when the first nine months of 2021 is compared to the same time period in 2020 was primarily due to increases in recoveries in the Mississippi, Tennessee and Texas market regions as well as declines in charge-offs in the Tennessee and Alabama market regions partially offset by an increase in charge-offs in the Mississippi market region.

The following table presents the net (charge-offs) recoveries by geographic market region for the periods presented ($ in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021			2020		2021		2020
Alabama	$	247		$	117	$	552	$	(437	)
Florida		356			387		553		324
Mississippi		1,436			442		572		482
Tennessee		(8	)		42		1,070		(2,078	)
Texas		502			74		1,004		133
Total net (charge-offs) recoveries	$	2,533		$	1,062	$	3,751	$	(1,576	)

The PCL, LHFI for the three and nine months ended September 30, 2021 totaled -0.10% and -0.22% of average loans (LHFS and LHFI), respectively, compared to 0.07% and 0.55% of average loans (LHFS and LHFI) for the same time periods in 2020, respectively. The negative PCL on LHFI for the third quarter of 2021 primarily reflected a decline in required reserves as a result of risk rate upgrades resulting from improved credit quality and improvements in the overall economy and macroeconomic forecasting variables used in the ACL modeling, partially offset by an increase in specific reserves for individually analyzed credits. The negative PCL on LHFI for the first nine months of 2021 primarily reflected declines in required reserves as a result of improvements in the overall economy and macroeconomic factors used in the calculation of the ACL.

Off-Balance Sheet Credit Exposures

Trustmark maintains a separate ACL on off-balance sheet credit exposures, including unfunded loan commitments and letters of credit, which is included on the accompanying consolidated balance sheet. Expected credit losses for off-balance sheet credit exposures are estimated by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by Trustmark. Trustmark calculates a loan pool level unfunded amount for the period. Trustmark calculates an expected funding rate each period which is applied to each pool’s unfunded commitment balances to ensure that reserves will be applied to each pool based upon balances expected to be funded based upon historical levels. Additionally, a reserve rate is applied to the unfunded commitment balance, which incorporates both quantitative and qualitative aspects of the current period’s expected credit loss rate. The reserve rate is loan pool specific and is applied to the unfunded amount to ensure loss factors, both quantitative and qualitative, are being considered on the unfunded portion of the loan pool, consistent with the methodology applied to the funded loan pools. See the section captioned “Lending Related” in Note 12 – Contingencies included in Part I. Item 1. – Financial Statements of this report for complete description of Trustmark’s ACL methodology on off-balance sheet credit exposures.

Adjustments to the ACL on off-balance sheet credit exposures are recorded to the PCL, off-balance sheet credit exposures. At September 30, 2021, the ACL on off-balance sheet credit exposures totaled $32.7 million compared to $38.6 million at December 31, 2020, a decrease of $5.9 million, or 15.3%. The PCL, off-balance sheet credit exposures totaled a negative $1.0 million and a negative $5.9 million for the three and nine months ended September 30, 2021, respectively, compared to a negative $3.0 million and $10.0 million for the same time periods in 2020, respectively. The negative PCL on off-balance sheet credit exposures for the third quarter of 2021 primarily reflected a decline in required reserves as a result of decreases in the total reserve rate used in the calculation of the ACL on off-balance sheet credit exposures. The negative PCL on off-balance sheet credit exposures for the first nine months of 2021 primarily reflected declines in required reserves as a result of improvements in the overall economy and macroeconomic factors used in the calculation of the ACL on off-balance sheet credit exposures.

Nonperforming Assets

The table below provides the components of nonperforming assets by geographic market region at September 30, 2021 and December 31, 2020 ($ in thousands):

	September 30, 2021			December 31, 2020
Nonaccrual LHFI
Alabama	$	9,223		$	9,221
Florida		381			572
Mississippi		22,898			35,015
Tennessee		10,356			12,572
Texas		23,382			5,748
Total nonaccrual LHFI		66,240			63,128
Other real estate
Alabama		613			3,271
Mississippi		5,600			8,330
Tennessee		—			50
Total other real estate		6,213			11,651
Total nonperforming assets	$	72,453		$	74,779
Nonperforming assets/total loans (LHFS and LHFI) and ORE		0.69	%		0.73	%
Loans past due 90 days or more
LHFI	$	625		$	1,576
LHFS - Guaranteed GNMA serviced loans (1)	$	75,091		$	119,409

(1)

No obligation to repurchase.

See the previous discussion of LHFS for more information on Trustmark’s serviced GNMA loans eligible for repurchase and the impact of Trustmark’s repurchases of delinquent mortgage loans under the GNMA optional repurchase program.

Nonaccrual LHFI

At September 30, 2021, nonaccrual LHFI totaled $66.2 million, or 0.63% of total LHFS and LHFI, reflecting an increase of $3.1 million, or 4.9%, relative to December 31, 2020. The increase in nonaccrual LHFI during the first nine months of 2021 was primarily due to

one large commercial credit in the Texas market region totaling $16.7 million that was placed on nonaccrual status during the third quarter of 2021, partially offset by the pay down and charge off of one large energy-related commercial credit of $8.5 million as well as a $2.8 million commercial credit which was returned to accrual status in Trustmark’s Mississippi market region.

As of September 30, 2021, nonaccrual energy-related LHFI totaled $1.4 million and represented 1.3% of Trustmark’s total energy-related portfolio, compared to $10.4 million, or 10.2% of Trustmark’s total energy-related portfolio, as of December 31, 2020. The decline in nonaccrual energy-related LHFI was primarily due to the $8.5 million pay down and charge off of one large credit in the Mississippi market region. For additional information regarding nonaccrual LHFI, see the section captioned “Nonaccrual and Past Due LHFI” included in Note 3 – LHFI and Allowance for Credit Losses, LHFI in Part I. Item 1. – Financial Statements of this report.

Other Real Estate

Other real estate at September 30, 2021 decreased $5.4 million, or 46.7%, when compared with December 31, 2020. The decrease in other real estate was principally due to properties sold in the Alabama and Mississippi market regions as well as an increase in reserves for other real estate write-downs in Trustmark’s Mississippi market region.

The following tables illustrate changes in other real estate by geographic market region for the periods presented ($ in thousands):

	Three Months Ended September 30, 2021
	Total			Alabama			Florida		Mississippi			Tennessee			Texas
Balance at beginning of period	$	9,439		$	2,830		$	—	$	6,550		$	59		$	—
Additions		388			—			—		379			9			—
Disposals		(3,177	)		(2,296	)		—		(813	)		(68	)		—
Write-downs		(437	)		79			—		(516	)		—			—
Balance at end of period	$	6,213		$	613		$	—	$	5,600		$	—		$	—
	Three Months Ended September 30, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Total			Alabama			Florida		Mississippi			Tennessee			Texas
Balance at beginning of period	$	18,276		$	4,766		$	3,665	$	9,408		$	437		$	—
Additions		90			—			—		136			(46	)		—
Disposals		(1,289	)		(860	)		—		(183	)		(246	)		—
Write-downs		(829	)		(181	)		—		(643	)		(5	)		—
Balance at end of period	$	16,248		$	3,725		$	3,665	$	8,718		$	140		$	—
	Nine Months Ended September 30, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Total			Alabama			Florida		Mississippi			Tennessee			Texas
Balance at beginning of period	$	11,651		$	3,271		$	—	$	8,330		$	50		$	—
Additions		770			—			—		717			53			—
Disposals		(4,326	)		(2,525	)		—		(1,673	)		(128	)		—
Write-downs		(1,882	)		(133	)		—		(1,774	)		25			—
Balance at end of period	$	6,213		$	613		$	—	$	5,600		$	—		$	—
	Nine Months Ended September 30, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Total			Alabama			Florida			Mississippi			Tennessee			Texas
Balance at beginning of period	$	29,248		$	8,133		$	5,877		$	14,919		$	319		$	—
Additions		496			77			—			220			199			—
Disposals		(11,823	)		(3,558	)		(2,196	)		(5,712	)		(357	)		—
Write-downs		(1,673	)		(927	)		(16	)		(709	)		(21	)		—
Balance at end of period	$	16,248		$	3,725		$	3,665		$	8,718		$	140		$	—

Other real estate is revalued on an annual basis or more often if market conditions necessitate. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged against the reserve for other real estate write-downs or net income in other real estate expense, if a reserve does not exist. Write-downs of other real estate increased $209 thousand, or 12.5%, when the first nine months of 2021 is compared to the same time period in 2020, primarily due to an increase in reserves for other real estate write-downs in the Mississippi market region partially offset by decreases in write-downs of other real estate properties in the Alabama and Mississippi market regions.

For additional information regarding other real estate, please see Note 5 – Other Real Estate included in Part I. Item 1. – Financial Statements of this report.

Deposits

Trustmark’s deposits are its primary source of funding and consist of core deposits from the communities Trustmark serves. Deposits include interest-bearing and noninterest-bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. Total deposits were $14.923 billion at September 30, 2021 compared to $14.049 billion at December 31, 2020, an increase of $874.1 million, or 6.2%, reflecting increases in deposit accounts as customers deposited proceeds from line draws, PPP loans and other COVID-19 related stimulus programs. During the first nine months of 2021, noninterest-bearing deposits increased $638.9 million, or 14.7%, reflecting growth in all categories of noninterest-bearing demand deposit accounts. Interest-bearing deposits increased $235.2 million, or 2.4%, during the first nine months of 2021, primarily due to growth in consumer and commercial interest checking and MMDAs as well as consumer savings accounts, partially offset by declines in all categories of certificates of deposits and public interest checking accounts.

Borrowings

Trustmark uses short-term borrowings, such as federal funds purchased, securities sold under repurchase agreements and short-term FHLB advances, to fund growth of earning assets in excess of deposit growth. See the section captioned “Liquidity” for further discussion of the components of Trustmark’s excess funding capacity.

Federal funds purchased and securities sold under repurchase agreements totaled $146.4 million at September 30, 2021 compared to $164.5 million at December 31, 2020, a decrease of $18.1 million, or 11.0%, and represented customer related transactions, such as commercial sweep repurchase balances. Trustmark had no upstream federal funds purchased at September 30, 2021 or December 31, 2020.

Other borrowings totaled $94.9 million at September 30, 2021, a decrease of $73.4 million, or 43.6%, when compared with $168.3 million at December 31, 2020, primarily due to the decrease in the amount of GNMA loans eligible for repurchase and the pay-off of the SERP policy loan during the third quarter of 2021.

Legal Environment

Information required in this section is set forth under the heading “Legal Proceedings” of Note 12 – Contingencies included in Part I. Item 1. – Financial Statements of this report.

Off-Balance Sheet Arrangements

Information required in this section is set forth under the heading “Lending Related” of Note 12 – Contingencies included in Part I. Item 1. – Financial Statements of this report.

Contractual Obligations

Payments due from Trustmark under specified long-term and certain other binding contractual obligations were scheduled in Trustmark’s 2020 Annual Report. The most significant obligations, other than obligations under deposit contracts and short-term borrowings, were for operating leases for banking facilities. There have been no material changes in Trustmark’s contractual obligations since year-end.

Capital Resources

At September 30, 2021, Trustmark’s total shareholders’ equity was $1.769 billion, an increase of $27.8 million, or 1.6%, when compared to December 31, 2020. During the first nine months of 2021, shareholders’ equity increased primarily as a result of net income of $121.1 million, partially offset by common stock dividends of $43.8 million, common stock repurchases of $34.7 million and a decline in the fair market value of securities available for sale, net of tax, of $20.8 million. 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 and protect the balance sheet against sudden adverse market conditions, while maintaining an attractive return on equity to shareholders.

Regulatory Capital

of assets, liabilities and certain off-balance sheet instruments. Trustmark’s and TNB’s minimum risk-based capital requirements include a capital conservation buffer of 2.50% at September 30, 2021 and December 31, 2020. AOCI is not included in computing regulatory capital. Trustmark has elected the five-year phase-in transition period (through December 31, 2024) related to adopting FASB ASU 2016-13 for regulatory capital purposes. Failure to meet minimum capital requirements can result in 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 and limit Trustmark’s and TNB’s ability to pay dividends. As of September 30, 2021, Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered well-capitalized at September 30, 2021. To be categorized in this manner, Trustmark and TNB maintained, as applicable, minimum common equity Tier 1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and Tier 1 leverage ratios, and were not subject to any written agreement, order or capital directive, or prompt corrective action directive issued by their primary federal regulators to meet and maintain a specific capital level for any capital measures. There are no significant conditions or events that have occurred since September 30, 2021, which Management believes have affected Trustmark’s or TNB’s present classification.

During the fourth quarter of 2020, Trustmark enhanced its capital structure with the issuance of $125.0 million of subordinated notes. The subordinated notes were sold at an underwriting discount of 1.2%, resulting in net proceeds to Trustmark of $123.5 million before deducting offering expenses. At September 30, 2021 the carrying amount of the subordinated notes was $123.0 million compared to $122.9 million at December 31, 2020. The subordinated notes mature December 1, 2030 and are redeemable at Trustmark’s option under certain circumstances. For regulatory capital purposes, the subordinated notes qualify as Tier 2 capital for Trustmark at December 31, 2020. Trustmark may utilize the full carrying value of the subordinated notes as Tier 2 capital until December 1, 2025 (five years prior to maturity). Beginning December 1, 2025, the subordinated notes will phase out of Tier 2 capital at a rate of 20.0% each year until maturity.

In 2006, Trustmark enhanced its capital structure with the issuance of trust preferred securities. For regulatory capital purposes, the trust preferred securities currently qualify as Tier 1 capital. Trustmark intends to continue to utilize $60.0 million in trust preferred securities issued by Trustmark Preferred Capital Trust I (the Trust) as Tier 1 capital up to the regulatory limit, as permitted by the grandfather provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III capital rules adopted by the federal banking agencies.

Refer to the section captioned “Regulatory Capital” included in Note 15 – Shareholders’ Equity in Part I. Item 1. – Financial Statements of this report for an illustration of Trustmark’s and TNB’s actual regulatory capital amounts and ratios under regulatory capital standards in effect at September 30, 2021 and December 31, 2020.

Dividends on Common Stock

Dividends per common share for the nine months ended September 30, 2021 and 2020 were $0.69. Trustmark’s indicated dividend for 2021 is $0.92 per common share, which is the same as dividends per common share declared in 2020.

Stock Repurchase Program

The Board of Directors of Trustmark authorized a stock repurchase program effective April 1, 2019, under which $100.0 million of Trustmark’s outstanding common shares could be acquired through March 31, 2020. Trustmark repurchased approximately 887 thousand shares of its outstanding common stock valued at $27.5 million during the three months ended March 31, 2020. Under this authority, Trustmark repurchased approximately 1.5 million shares valued at $47.2 million.

On January 28, 2020, the Board of Directors of Trustmark authorized a new stock repurchase program, effective April 1, 2020, under which $100.0 million of Trustmark’s outstanding common stock may be acquired through December 31, 2021. On March 9, 2020, Trustmark suspended its share repurchase programs to preserve capital to support customers during the COVID-19 pandemic. Trustmark resumed the repurchase of its shares in January 2021. Under this authority, Trustmark repurchased approximately 319 thousand shares of its outstanding common stock valued at $9.7 million during the three months ended September 30, 2021. During the first nine months of 2021, Trustmark repurchased approximately 1.1 million shares of its outstanding common stock valued at $34.7 million. The shares may be purchased from time to time at prevailing market prices, through open market or private transactions, depending on market conditions, and in conjunction with its disciplined share repurchase framework. There is no guarantee as to the number of shares that may be repurchased by Trustmark, and Trustmark may discontinue repurchases at any time at Management’s discretion.

Liquidity

Liquidity is the 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. 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, FHLB advances, securities sold under repurchase agreements as well as the Federal Reserve Discount Window (Discount Window) and, on a limited basis as discussed below, brokered deposits 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 $14.437 billion for the first nine months of 2021 and represented approximately 85.2% of average liabilities and shareholders’ equity, compared to average deposits of $12.707 billion, which represented 84.8% of average liabilities and shareholders’ equity for the first nine months of 2020.

Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. At September 30, 2021, brokered sweep MMDA deposits totaled $29.0 million compared to $28.1 million at December 31, 2020.

At both September 30, 2021 and December 31, 2020, Trustmark had no upstream federal funds purchased. Trustmark maintains adequate federal funds lines to provide sufficient short-term liquidity.

Trustmark maintains a relationship with the FHLB of Dallas, which provided no outstanding short-term or long-term advances at September 30, 2021 and December 31, 2020. Trustmark had a $350.0 million letter of credit outstanding with the FHLB of Dallas at September 30, 2021 compared to $600.0 million in letters of credit outstanding at December 31, 2020. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances or letters of credit with the FHLB of Dallas by $3.046 billion at September 30, 2021.

In addition, at September 30, 2021, Trustmark had no short-term and $102 thousand in long-term FHLB advances outstanding with the FHLB of Atlanta, which were acquired in the BancTrust merger in 2013, compared to $625 thousand in short-term and $116 thousand in long-term FHLB advances at December 31, 2020. Trustmark has non-member status and thus no additional borrowing capacity with the FHLB of Atlanta.

Additionally, Trustmark has the ability to leverage its unencumbered investment securities as collateral. At September 30, 2021, Trustmark had approximately $874.0 million available in unencumbered agency securities compared to $560.0 million at December 31, 2020.

Another borrowing source is the Discount Window. At September 30, 2021, Trustmark had approximately $894.2 million available in collateral capacity at the Discount Window primarily from pledges of commercial and industrial LHFI, compared with $893.5 million at December 31, 2020.

Additionally, on March 15, 2020, in response to the COVID-19 pandemic, the FRB reduced reserve requirements for insured depository institutions to zero percent, which increased TNB’s available liquidity.

During the fourth quarter of 2020, Trustmark agreed to issue and sell $125.0 million aggregate principal amount of its 3.625% fixed-to-floating rate subordinated notes. The subordinated notes were sold at an underwriting discount of 1.2%, resulting in net proceeds to Trustmark of $123.5 million before deducting offering expenses. At September 30, 2021 the carrying amount of the subordinated notes was $123.0 million compared to $122.9 million at December 31, 2020. The subordinated notes mature December 1, 2030 and are redeemable at Trustmark’s option under certain circumstances. The subordinated notes are unsecured obligations and are subordinated in right of payment to all of Trustmark’s existing and future senior indebtedness, whether secured or unsecured. The subordinated notes are obligations of Trustmark only and are not obligations of, and are not guaranteed by, any of its subsidiaries, including TNB. Trustmark intends to use the net proceeds for general corporate purposes.

During 2006, Trustmark completed a private placement of $60.0 million of trust preferred securities through a newly formed Delaware trust affiliate, the Trust. The trust preferred securities mature September 30, 2036 and are redeemable at Trustmark’s option. 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 Board of Directors of Trustmark 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. At September 30, 2021, Trustmark had no shares of preferred stock issued and outstanding.

Liquidity position and strategy are reviewed regularly by Management 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.

On March 5, 2021, the United Kingdom’s FCA, which regulates LIBOR, confirmed that the publication of most LIBOR term rates will end on June 30, 2023 (excluding one-week U.S. LIBOR and two-month U.S. LIBOR, the publication of which will end on December 31, 2021). Trustmark has a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Trustmark cannot predict what the ultimate impact of the transition from LIBOR will be; however, failure to adequately manage the transition could have a material adverse effect on Trustmark’s business, financial condition and results of operations. Trustmark has organized an internal LIBOR Transition Working Group to identify operational and contractual best practices, assess its risk, manage the transition, facilitate communication with its customers and monitor the impacts. For additional information regarding the transition from LIBOR and Trustmark’s management of this transition, please see the respective risk factor included in Part I. Item 1A. – Risk Factors, of Trustmark’s 2020 Annual Report.

Management continually develops and applies cost-effective strategies to manage these risks. Management’s 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 of Trustmark. 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. Management’s 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 a general matter, the values of these instruments are designed to be inversely related to the values of the assets that they hedge (i.e., if the value of the hedged asset falls, the value of the related hedge rises). In addition, Trustmark has entered into derivatives contracts as counterparty to one or more customers in connection with loans extended to those customers. These transactions are designed to hedge interest rate, currency or other exposures of the customers and are not entered into by Trustmark for speculative purposes. Increased federal regulation of the derivatives markets may increase the cost to Trustmark to administer derivatives programs.

Derivatives Not Designated as Hedging Instruments

As part of Trustmark’s risk management strategy in the mortgage banking business, 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. The gross notional amount of Trustmark’s off-balance sheet obligations under these derivative instruments totaled $499.5 million at September 30, 2021, with a positive valuation adjustment of $3.3 million, compared to $706.8 million, with a positive valuation adjustment of $6.4 million at December 31, 2020.

are considered freestanding derivatives that do not otherwise qualify for hedge accounting under GAAP. The total notional amount of these derivative instruments was $320.5 million at September 30, 2021 compared to $326.5 million at December 31, 2020. These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value recorded as noninterest income in mortgage banking, net and are offset by the changes in the fair value of the MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net positive ineffectiveness of $144 thousand and $815 thousand for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, the impact was a net positive ineffectiveness of $1.7 million and $8.7 million, respectively.

Trustmark offers certain interest rate derivatives products directly to qualified commercial lending clients seeking to manage their interest rate risk under loans they have entered into with TNB. Trustmark economically hedges interest rate swap transactions executed with commercial lending clients by entering into offsetting interest rate swap transactions with institutional derivatives market participants. Derivatives transactions executed as part of this program are not designated as qualifying hedging relationships under GAAP and are, therefore, carried on Trustmark’s financial statements at fair value with the change in fair value recorded as noninterest income in bank card and other fees. Because these derivatives have mirror-image contractual terms, in addition to collateral provisions which mitigate the impact of non-performance risk, the changes in fair value are expected to substantially offset. The Chicago Mercantile Exchange rules legally characterize variation margin collateral payments made or received for centrally cleared interest rate swaps as settlements rather than collateral. As a result, centrally cleared interest rate swaps included in other assets and other liabilities are presented on a net basis in the accompanying consolidated balance sheets. As of September 30, 2021, Trustmark had interest rate swaps with an aggregate notional amount of $1.216 billion related to this program, compared to $1.125 billion as of December 31, 2020.

Credit-Risk-Related Contingent Features

At September 30, 2021, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $846 thousand compared to $1.3 million at December 31, 2020. At September 30, 2021, Trustmark had posted collateral of $1.1 million against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at September 30, 2021, it could have been required to settle its obligations under the agreements at the termination value (which is expected to approximate fair market value).

Credit risk participation agreements arise when Trustmark contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third-party default on the underlying swap. At September 30, 2021, Trustmark had entered into six risk participation agreements as a beneficiary with an aggregate notional amount of $51.2 million, compared to three risk participation agreements as a beneficiary with an aggregate notional amount of $41.1 million at December 31, 2020. At both September 30, 2021 and December 31, 2020, Trustmark had entered into 24 risk participation agreements as a guarantor with an aggregate notional amount of $173.8 million and $172.0 million, respectively. The aggregate fair values of these risk participation agreements were immaterial at both September 30, 2021 and December 31, 2020.

Trustmark’s participation in the derivatives markets is subject to increased federal regulation of these markets. Trustmark believes that it may continue to use financial derivatives to manage interest rate risk and also to offer derivatives products to certain qualified commercial lending clients in compliance with the Volcker Rule. However, the increased federal regulation of the derivatives markets has increased the cost to Trustmark of administering its derivatives programs. Some of these costs (particularly compliance costs related to the Volcker Rule and other federal regulations) are expected to recur in the future.

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 Management’s Asset/Liability Committee to measure interest rate exposure. Using a wide range of scenarios, Management is provided with extensive information on the potential impact on 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, the table below summarizes the effect various one-year interest rate shift scenarios would have on net interest income compared to a base case, flat scenario at September 30, 2021 and 2020. At September 30, 2021 and 2020, the impact of a 200-basis point drop scenario was excluded from the table below due to the low interest rate environment.

	Estimated % Change<br>in Net Interest Income
Change in Interest Rates	2021			2020
+200 basis points		21.7	%		13.8	%
+100 basis points		10.7	%		7.3	%
-100 basis points		-6.7	%		-5.7	%

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 2021 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 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 economic value of equity (EVE), also known as net portfolio value, is defined as the difference between the present value of asset cash flows and the present value of liability cash flows. The resulting change in EVE in different market rate environments, from the base case scenario, is the amount of EVE at risk from those rate environments.

The following table summarizes the effect that various interest rate shifts would have on net portfolio value at September 30, 2021 and 2020. Based upon quarter-end current and implied market rates, scenarios reflecting lower rates could result in negative interest rates. The U.S. has never experienced an interest rate environment where the FRB has a negative interest rate policy. While the impact of negative interest rates on earnings-at-risk would vary by scenario, a parallel shift downward would be expected to negatively impact net interest income. However, in a negative interest rate environment, the modeling assumptions used for certain assets and liabilities require additional management judgment and therefore, the actual outcomes may differ from the modeled assumptions. At September 30, 2021 and 2020, the results of the 100-basis point drop scenario and the 200-basis point drop scenario were excluded from the table below due to the low interest rate environment.

	Estimated % Change<br>in Net Portfolio Value
Change in Interest Rates	2021			2020
+200 basis points		11.5	%		18.6	%
+100 basis points		6.6	%		10.8	%

Trustmark determines the fair value of the MSR using a valuation model administered by a third party 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 and other ancillary income such as late fees. Management reviews all significant assumptions quarterly. Mortgage loan prepayment speeds, 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 the MSR requires significant management judgment.

At September 30, 2021, the MSR fair value was $84.1 million, compared to $61.6 million at September 30, 2020. The impact on the MSR fair value of a 10% adverse change in prepayment speed or a 100 basis point increase in discount rate at September 30, 2021, would be a decline in fair value of approximately $4.4 million and $3.2 million, respectively, compared to a decline in fair value of approximately $4.2 million and $2.2 million, respectively, at September 30, 2020. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts.

Critical Accounting Policies

For an overview of Trustmark’s critical accounting policies, see the section captioned “Critical Accounting Policies” included in Part II. Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations, of Trustmark’s 2020 Annual Report. There have been no significant changes in Trustmark’s critical accounting policies during the first nine months of 2021.

For additional information regarding Trustmark’s basis of presentation and accounting policies, see Note 1 – Business, Basis of Financial Statement Presentation and Principles of Consolidation included in Part I. Item 1. – Financial Statements of this report.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

For a complete list of recently adopted and pending accounting policies and the impact on Trustmark, see Note 19 – Accounting Policies Recently Adopted and Pending Accounting Pronouncements included in Part I. Item 1. – Financial Statements of this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is included in the discussion of Market/Interest Rate Risk Management found in Management’s Discussion and Analysis.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 on that evaluation, the Chief Executive Officer and the Principal Financial Officer concluded that Trustmark’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There has been no change in Trustmark’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Trustmark’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information required in this section is set forth under the heading “Legal Proceedings” of Note 12 – Contingencies in Part I. Item 1 – Financial Statements of this report.

In accordance with FASB Accounting Standards Codification (ASC) Topic 450-20, “Loss Contingencies,” Trustmark will establish an accrued liability for litigation matters when those matters present loss contingencies that are both probable and reasonably estimable. At the present time, Trustmark believes, based on its evaluation and the advice of legal counsel, that a loss in any such proceeding is not probable and reasonably estimable. All matters will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. In view of the inherent difficulty of predicting the outcome of legal proceedings, Trustmark cannot predict the eventual outcomes of the currently pending matters or the timing of their ultimate resolution. Trustmark currently believes, however, based upon the advice of legal counsel and Management’s evaluation and after taking into account its current insurance coverage, that the legal proceedings currently pending should not have a material adverse effect on Trustmark’s consolidated financial condition.

ITEM 1A. RISK FACTORS

There has been no material change in the risk factors previously disclosed in Trustmark’s 2020 Annual Report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On January 28, 2020, the Board of Directors of Trustmark authorized a new stock repurchase program, effective April 1, 2020, under which $100.0 million of Trustmark’s outstanding common stock may be acquired through December 31, 2021. On March 9, 2020, Trustmark suspended its share repurchase programs to preserve capital to support customers during the COVID-19 pandemic. Trustmark resumed the repurchase of its shares in January 2021. The shares may be purchased from time to time at prevailing market prices, through open market or private transactions, depending on market conditions, and in conjunction with its disciplined share repurchase framework. There is no guarantee as to the number of shares that may be repurchased by Trustmark, and Trustmark may discontinue repurchases at any time at Management’s discretion.

The following table provides information with respect to purchases by Trustmark or made on behalf of Trustmark of its common stock during the three months ended September 30, 2021 ($ in thousands, except per share amounts):

Period		Average Price Paid Per Share			Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan at the End of the Period
July 1, 2021 to July 31, 2021	318,730	$	30.31	318,730	$	65,360
August 1, 2021 to August 31, 2021	—		—	—		65,360
September 1, 2021 to September 30, 2021	—		—	—		65,360
Total	318,730			318,730

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The exhibits listed in the Exhibit Index are filed herewith or are incorporated herein by reference.

EXHIBIT INDEX

31-a	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31-b	Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32-a	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.
32-b	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.
101	Inline XBRL Interactive Data.
104	Cover Page Interactive Data File (embedded within the Inline XBRL document).

All other exhibits are omitted, as they are inapplicable or not required by the related instructions.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TRUSTMARK CORPORATION

BY:	/s/ Duane A. Dewey	BY:	/s/ Thomas C. Owens
	Duane A. Dewey		Thomas C. Owens
	President and Chief Executive Officer		Treasurer and Principal Financial Officer
DATE:	November 4, 2021	DATE:	November 4, 2021

EX-31.a

Exhibit 31-a

TRUSTMARK CORPORATION

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Duane A. Dewey, certify that:

1) I have reviewed this Quarterly Report on Form 10-Q of Trustmark Corporation;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

BY:	/s/ Duane A. Dewey
	Duane A. Dewey
	President and Chief Executive Officer
DATE:	November 4, 2021

EX-31.b

Exhibit 31-b

TRUSTMARK CORPORATION

CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas C. Owens, certify that:

1) I have reviewed this Quarterly Report on Form 10-Q of Trustmark Corporation;

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

BY:	/s/ Thomas C. Owens
	Thomas C. Owens
	Treasurer and Principal Financial Officer
DATE:	November 4, 2021

EX-32.a

Exhibit 32-a

TRUSTMARK CORPORATION

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Trustmark Corporation (Trustmark) on Form 10-Q for the quarter ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Duane A. Dewey, President and Chief Executive Officer of Trustmark, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Trustmark.

BY:	/s/ Duane A. Dewey
	Duane A. Dewey
	President and Chief Executive Officer
DATE:	November 4, 2021

EX-32.b

Exhibit 32-b

TRUSTMARK CORPORATION

CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Trustmark Corporation (Trustmark) on Form 10-Q for the quarter ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Thomas C. Owens, Treasurer and Principal Financial Officer of Trustmark, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Trustmark.

BY:	/s/ Thomas C. Owens
	Thomas C. Owens
	Treasurer and Principal Financial Officer
DATE:	November 4, 2021