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 June 30, 2022

☐	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 July 29, 2022, there were 61,201,123 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, 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 recent heightened levels of inflation and the reactions of the FRB and other governmental departments and agencies in response thereto, 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, 2021
Assets
Cash and due from banks	742,461		$	2,266,829
Securities available for sale, at fair value (amortized cost: 2,861,976 - 2022 3,256,289 - 2021; allowance for credit losses (ACL): 0)	2,644,364			3,238,877
Securities held to maturity, net of ACL of 0 (fair value: 1,102,459 - 2022; 353,511 - 2021)	1,137,754			342,537
Paycheck Protection Program (PPP) loans	12,549			33,336
Loans held for sale (LHFS)	190,186			275,706
Loans held for investment (LHFI)	10,944,840			10,247,829
Less ACL, LHFI	103,140			99,457
Net LHFI	10,841,700			10,148,372
Premises and equipment, net	207,914			205,644
Mortgage servicing rights (MSR)	121,014			87,687
Goodwill	384,237			384,237
Identifiable intangible assets, net	4,264			5,074
Other real estate, net	3,034			4,557
Operating lease right-of-use assets	34,684			34,603
Other assets	627,349			568,177
Total Assets	16,951,510		$	17,595,636
Liabilities
Deposits:
Noninterest-bearing	4,509,472		$	4,771,065
Interest-bearing	10,260,696			10,316,095
Total deposits	14,770,168			15,087,160
Federal funds purchased and securities sold under repurchase agreements	70,157			238,577
Other borrowings	72,553			91,025
Subordinated notes	123,152			123,042
Junior subordinated debt securities	61,856			61,856
ACL on off-balance sheet credit exposures	32,949			35,623
Operating lease liabilities	37,108			36,468
Other liabilities	196,871			180,574
Total Liabilities	15,364,814			15,854,325
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares Issued and outstanding: 61,201,123 shares - 2022; 61,648,679 shares - 2021	12,752			12,845
Capital surplus	160,876			175,913
Retained earnings	1,620,210			1,585,113
Accumulated other comprehensive income (loss), net of tax	(207,142	)		(32,560	)
Total Shareholders' Equity	1,586,696			1,741,311
Total Liabilities and Shareholders' Equity	16,951,510		$	17,595,636

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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Interest Income
Interest and fees on LHFS & LHFI	$	100,139		$	90,772		$	190,414		$	181,333
Interest and fees on PPP loans		184			25,555			352			34,796
Interest on securities:
Taxable		14,561			8,991			26,918			17,929
Tax exempt		85			118			181			347
Interest on federal funds sold and securities purchased under reverse<br> repurchase agreements		1			—			1			—
Other interest income		2,214			489			3,031			992
Total Interest Income		117,184			125,925			220,897			235,397
Interest Expense
Interest on deposits		2,774			4,630			5,534			9,853
Interest on federal funds purchased and securities sold under<br> repurchase agreements		70			59			140			115
Other interest expense		1,664			1,813			3,203			3,670
Total Interest Expense		4,508			6,502			8,877			13,638
Net Interest Income		112,676			119,423			212,020			221,759
Provision for credit losses (PCL), LHFI		2,716			(3,991	)		1,856			(14,492	)
PCL, off-balance sheet credit exposures		(1,568	)		4,528			(2,674	)		(4,839	)
Net Interest Income After PCL		111,528			118,886			212,838			241,090
Noninterest Income
Service charges on deposit accounts		10,226			7,613			19,677			14,969
Bank card and other fees		10,167			8,301			18,609			17,773
Mortgage banking, net		8,149			17,333			18,022			38,137
Insurance commissions		13,702			12,217			27,791			24,662
Wealth management		9,102			8,946			18,156			17,362
Other, net		1,907			2,001			5,113			4,091
Total Noninterest Income		53,253			56,411			107,368			116,994
Noninterest Expense
Salaries and employee benefits		71,679			70,115			141,264			141,277
Services and fees		24,538			21,769			48,991			44,253
Net occupancy - premises		6,892			6,578			13,971			13,373
Equipment expense		6,047			5,567			12,108			11,811
Other expense (1)		14,611			14,650			28,952			29,513
Total Noninterest Expense		123,767			118,679			245,286			240,227
Income Before Income Taxes		41,014			56,618			74,920			117,857
Income taxes		6,730			8,637			11,425			17,914
Net Income	$	34,284		$	47,981		$	63,495		$	99,943
Earnings Per Share
Basic	$	0.56		$	0.76		$	1.03		$	1.58
Diluted	$	0.56		$	0.76		$	1.03		$	1.57

(1)

During the first quarter of 2022, Trustmark reclassified its other real estate expense, net to other expense. The prior period has been reclassified accordingly.

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

($ in thousands)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2022			2021		2022			2021
Net income per consolidated statements of income	$	34,284		$	47,981	$	63,495		$	99,943
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		(33,397	)		4,959		(150,150	)		(11,391	)
Change in net unrealized holding loss on securities<br> transferred to held to maturity		(25,338	)		552		(24,938	)		1,085
Pension and other postretirement benefit plans:
Reclassification adjustments for changes realized in net<br> income:
Net change in prior service costs		21			21		41			42
Change in net actuarial loss		228			333		465			674
Other comprehensive income (loss), net of tax		(58,486	)		5,865		(174,582	)		(9,590	)
Comprehensive income (loss)	$	(24,202	)	$	53,846	$	(111,087	)	$	90,353

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, 2022	61,648,679		$	12,845		$	175,913		$	1,585,113		$	(32,560	)	$	1,741,311
Net income per consolidated statements of income	—			—			—			29,211			—			29,211
Other comprehensive income (loss), net of tax	—			—			—			—			(116,096	)		(116,096	)
Common stock dividends paid (0.23 per share)	—			—			—			(14,186	)		—			(14,186	)
Shares withheld to pay taxes, long-term incentive plan	93,944			19			(1,028	)		—			—			(1,009	)
Repurchase and retirement of common stock	(279,231	)		(58	)		(9,036	)		—			—			(9,094	)
Compensation expense, long-term incentive plan	—			—			1,245			—			—			1,245
Balance, March 31, 2022	61,463,392			12,806			167,094			1,600,138			(148,656	)		1,631,382
Net income per consolidated statements of income	—			—			—			34,284			—			34,284
Other comprehensive income (loss), net of tax	—			—			—			—			(58,486	)		(58,486	)
Common stock dividends paid (0.23 per share)	—			—			—			(14,212	)		—			(14,212	)
Shares withheld to pay taxes, long-term incentive plan	513			—			(7	)		—			—			(7	)
Repurchase and retirement of common stock	(262,782	)		(54	)		(7,451	)		—			—			(7,505	)
Compensation expense, long-term incentive plan	—			—			1,240			—			—			1,240
Balance, June 30, 2022	61,201,123		$	12,752		$	160,876		$	1,620,210		$	(207,142	)	$	1,586,696

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, 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

All values are in US Dollars.

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited)

	Six Months Ended June 30,
	2022			2021
Operating Activities
Net income per consolidated statements of income	$	63,495		$	99,943
Adjustments to reconcile net income to net cash provided by operating activities:
PCL		(818	)		(19,331	)
Depreciation and amortization		20,685			22,428
Net amortization of securities		6,672			10,780
Gains on sales of loans, net		(14,971	)		(45,625	)
Compensation expense, long-term incentive plan		2,485			3,395
Deferred income tax provision		9,100			12,500
Proceeds from sales of loans held for sale		726,028			1,334,752
Purchases and originations of loans held for sale		(643,267	)		(1,220,055	)
Originations of mortgage servicing rights		(10,159	)		(15,201	)
Earnings on bank-owned life insurance		(2,417	)		(2,418	)
Net change in other assets		982			23,623
Net change in other liabilities		23,876			(9,802	)
Other operating activities, net		(31,022	)		(6,871	)
Net cash from operating activities		150,669			188,118
Investing Activities
Proceeds from maturities, prepayments and calls of securities held to maturity		69,807			105,814
Proceeds from maturities, prepayments and calls of securities available for sale		253,655			442,450
Purchases of securities held to maturity		(555,191	)		—
Purchases of securities available for sale		(209,100	)		(1,024,649	)
Net proceeds from bank-owned life insurance		307			1,791
Net change in federal funds sold and securities purchased <br> under reverse repurchase agreements		—			50
Net change in member bank stock		(112	)		(1,037	)
Net change in LHFI and PPP loans		(674,854	)		(237,666	)
Proceeds from sales of PPP loans		—			353,287
Purchases of premises and equipment		(13,881	)		(13,920	)
Proceeds from sales of premises and equipment		4,926			—
Proceeds from sales of other real estate		1,413			1,167
Purchases of software		(3,664	)		(2,336	)
Investments in tax credit and other partnerships		(16,176	)		(13,396	)
Net cash from investing activities		(1,142,870	)		(388,445	)
Financing Activities
Net change in deposits		(316,992	)		583,320
Net change in federal funds purchased and securities sold under repurchase agreements		(168,420	)		(7,343	)
Net change in short-term borrowings		—			(4,653	)
Payments on long-term FHLB advances		(9	)		(9	)
Payments under finance lease obligations		(733	)		(712	)
Common stock dividends		(28,398	)		(29,325	)
Repurchase and retirement of common stock		(16,599	)		(24,990	)
Shares withheld to pay taxes, long-term incentive plan		(1,016	)		(1,241	)
Net cash from financing activities		(532,167	)		515,047
Net change in cash and cash equivalents		(1,524,368	)		314,720
Cash and cash equivalents at beginning of period		2,266,829			1,952,504
Cash and cash equivalents at end of period	$	742,461		$	2,267,224

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 offices in Alabama (includes the Georgia Loan Production Office), 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, 2021 (2021 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 2022 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.

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 June 30, 2022 and December 31, 2021 ($ in thousands):

	Securities Available for Sale									Securities Held to Maturity
June 30, 2022	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	$	448,403	$	—	$	(28,707	)	$	419,696	$	—	$	—	$	—		$	—
U.S. Government agency<br> obligations		12,439		—		(492	)		11,947		—		—		—			—
Obligations of states and political<br> subdivisions		5,102		77		—			5,179		5,320		20		(2	)		5,338
Mortgage-backed securities
Residential mortgage pass-<br> through securities
Guaranteed by GNMA		34,534		41		(2,335	)		32,240		4,624		6		(179	)		4,451
Issued by FNMA and<br> FHLMC		2,068,850		8		(180,312	)		1,888,546		185,554		—		(11,152	)		174,402
Other residential mortgage-<br> backed securities
Issued or guaranteed by<br> FNMA, FHLMC or<br> GNMA		148,843		1		(4,686	)		144,158		210,479		6		(6,217	)		204,268
Commercial mortgage-backed<br> securities
Issued or guaranteed by<br> FNMA, FHLMC or<br> GNMA		143,805		57		(1,264	)		142,598		731,777		436		(18,213	)		714,000
Total	$	2,861,976	$	184	$	(217,796	)	$	2,644,364	$	1,137,754	$	468	$	(35,763	)	$	1,102,459

	Securities Available for Sale									Securities Held to Maturity
December 31, 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	$	349,562	$	16	$	(4,938	)	$	344,640	$	—	$	—	$	—		$	—
U.S. Government agency<br> obligations		14,044		20		(337	)		13,727		—		—		—			—
Obligations of states and political<br> subdivisions		5,134		580		—			5,714		7,328		64		(3	)		7,389
Mortgage-backed securities
Residential mortgage pass-<br> through securities
Guaranteed by GNMA		38,942		665		(34	)		39,573		5,005		187		(3	)		5,189
Issued by FNMA and<br> FHLMC		2,230,498		8,945		(21,014	)		2,218,429		43,444		962		—			44,406
Other residential mortgage-<br> backed securities
Issued or guaranteed by<br> FNMA, FHLMC or<br> GNMA		193,908		2,879		(97	)		196,690		241,934		9,015		(31	)		250,918
Commercial mortgage-backed<br> securities
Issued or guaranteed by<br> FNMA, FHLMC or<br> GNMA		424,201		404		(4,501	)		420,104		44,826		783		—			45,609
Total	$	3,256,289	$	13,509	$	(30,921	)	$	3,238,877	$	342,537	$	11,011	$	(37	)	$	353,511

The securities were transferred at fair value, which became the cost basis for the securities held to maturity. 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 either transfer. At June 30, 2022, the net unamortized, unrealized loss on transferred securities included in accumulated other comprehensive income (loss) in the accompanying balance sheet totaled approximately $39.5 million ($29.7 million, net of tax) compared to approximately $6.3 million ($4.7 million, net of tax) at December 31, 2021.

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 recorded by Trustmark is 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 June 30, 2022 and December 31, 2021, 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 June 30, 2022, accrued interest receivable totaled $4.8 million for securities available for sale compared to $5.1 million at December 31, 2021 and was reported in other assets on the accompanying consolidated balance sheet.

Securities Held to Maturity

At June 30, 2022 and December 31, 2021, $5.3 million and $7.3 million, respectively, of securities had a potential for credit loss exposure and all 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 June 30, 2022 and December 31, 2021.

Accrued interest receivable is excluded from the estimate of credit losses for securities held to maturity. At June 30, 2022 accrued interest receivable totaled $2.1 million for securities held to maturity compared to $670 thousand at December 31, 2021 and was reported in other assets on the accompanying consolidated balance sheet.

At both June 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021.

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 June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022		December 31, 2021
Aaa	$	1,132,434	$	335,208
Aa1 to Aa3		3,004		5,007
Not Rated (1)		2,316		2,322
Total	$	1,137,754	$	342,537

(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 June 30, 2022 and December 31, 2021 ($ in thousands):

	Less than 12 Months					12 Months or More					Total
June 30, 2022	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	$	419,696	$	(28,707	)	$	—	$	—		$	419,696	$	(28,707	)
U.S. Government agency obligations		3,794		(210	)		7,911		(282	)		11,705		(492	)
Obligations of states and political subdivisions		—		—			3,669		(2	)		3,669		(2	)
Mortgage-backed securities
Residential mortgage pass-through<br> securities
Guaranteed by GNMA		34,004		(2,372	)		1,024		(142	)		35,028		(2,514	)
Issued by FNMA and FHLMC		1,538,004		(130,441	)		524,112		(61,023	)		2,062,116		(191,464	)
Other residential mortgage-backed<br> securities
Issued or guaranteed by FNMA,<br> FHLMC or GNMA		345,035		(10,891	)		784		(12	)		345,819		(10,903	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA,<br> FHLMC or GNMA		755,011		(19,108	)		23,890		(369	)		778,901		(19,477	)
Total	$	3,095,544	$	(191,729	)	$	561,390	$	(61,830	)	$	3,656,934	$	(253,559	)
December 31, 2021
U.S. Treasury Securities	$	315,123	$	(4,938	)	$	—	$	—		$	315,123	$	(4,938	)
U.S. Government agency obligations		1,312		(5	)		8,619		(332	)		9,931		(337	)
Obligations of states and political subdivisions		3,006		(1	)		667		(2	)		3,673		(3	)
Mortgage-backed securities
Residential mortgage pass-through<br> securities
Guaranteed by GNMA		6,040		(37	)		—		—			6,040		(37	)
Issued by FNMA and FHLMC		1,734,921		(19,980	)		55,303		(1,034	)		1,790,224		(21,014	)
Other residential mortgage-backed<br> securities
Issued or guaranteed by FNMA,<br> FHLMC or GNMA		19,038		(99	)		2,647		(29	)		21,685		(128	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA,<br> FHLMC or GNMA		344,025		(4,492	)		639		(9	)		344,664		(4,501	)
Total	$	2,423,465	$	(29,552	)	$	67,875	$	(1,406	)	$	2,491,340	$	(30,958	)

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 six months ended June 30, 2022 and 2021, 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 $2.546 billion and $2.831 billion at June 30, 2022 and December 31, 2021, respectively, were pledged to collateralize public deposits and securities sold under repurchase agreements and for other purposes as permitted by law. At both June 30, 2022 and December 31, 2021, 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 June 30, 2022, 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	$	21,066	$	21,057	$	4,135	$	4,137
Due after one year through five years		336,659		317,550		1,185		1,201
Due after five years through ten years		98,549		88,969		—		—
Due after ten years		9,670		9,246		—		—
		465,944		436,822		5,320		5,338
Mortgage-backed securities		2,396,032		2,207,542		1,132,434		1,097,121
Total	$	2,861,976	$	2,644,364	$	1,137,754	$	1,102,459

Note 3 – LHFI and ACL, LHFI

At June 30, 2022 and December 31, 2021, LHFI consisted of the following ($ in thousands):

	June 30, 2022		December 31, 2021
Loans secured by real estate:
Construction, land development and other land	$	664,817	$	596,968
Other secured by 1-4 family residential properties		540,950		517,683
Secured by nonfarm, nonresidential properties		3,178,079		2,977,084
Other real estate secured		555,311		726,043
Other loans secured by real estate:
Other construction		775,241		711,813
Secured by 1-4 family residential properties		1,884,012		1,460,310
Commercial and industrial loans		1,551,001		1,414,279
Consumer loans		164,001		162,555
State and other political subdivision loans		1,110,795		1,146,251
Other commercial loans		520,633		534,843
LHFI		10,944,840		10,247,829
Less ACL		103,140		99,457
Net LHFI	$	10,841,700	$	10,148,372

Accrued interest receivable is not included in the amortized cost basis of Trustmark’s LHFI. At June 30, 2022 and December 31, 2021, accrued interest receivable for LHFI totaled $30.6 million and $26.7 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 June 30, 2022, 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 June 30, 2022 and 2021.

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 June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022
	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	$	146	$	4,399	$	—
Other secured by 1-4 family residential properties		493		3,547		644
Secured by nonfarm, nonresidential properties		9,580		11,668		—
Other real estate secured		—		782		—
Other loans secured by real estate:
Other construction		—		7,620		—
Secured by 1-4 family residential properties		1,274		13,618		449
Commercial and industrial loans		421		16,869		50
Consumer loans		—		126		204
State and other political subdivision loans		—		3,196		—
Other commercial loans		—		227		—
Total	$	11,914	$	62,052	$	1,347
	December 31, 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	$	4,784	$	5,878	$	7
Other secured by 1-4 family residential properties		1,319		3,418		148
Secured by nonfarm, nonresidential properties		10,842		12,508		—
Other real estate secured		56		150		—
Other loans secured by real estate:
Other construction		—		—		—
Secured by 1-4 family residential properties		—		12,775		1,655
Commercial and industrial loans		1,363		19,328		—
Consumer loans		—		117		304
State and other political subdivision loans		—		3,664		—
Other commercial loans		4,405		4,860		—
Total	$	22,769	$	62,698	$	2,114

The following tables provide an aging analysis of the amortized cost basis of past due LHFI (including nonaccrual LHFI) at June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022
	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	$	581	$	164	$	47	$	792	$	664,025	$	664,817
Other secured by 1-4 family residential<br> properties		2,530		368		1,060		3,958		536,992		540,950
Secured by nonfarm, nonresidential<br> properties		4,923		3,713		419		9,055		3,169,024		3,178,079
Other real estate secured		196		7		—		203		555,108		555,311
Other loans secured by real estate:
Other construction		—		—		—		—		775,241		775,241
Secured by 1-4 family residential properties		3,384		2,605		4,630		10,619		1,873,393		1,884,012
Commercial and industrial loans		994		264		269		1,527		1,549,474		1,551,001
Consumer loans		966		247		204		1,417		162,584		164,001
State and other political subdivision loans		—		—		177		177		1,110,618		1,110,795
Other commercial loans		200		40		59		299		520,334		520,633
Total	$	13,774	$	7,408	$	6,865	$	28,047	$	10,916,793	$	10,944,840

	December 31, 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	$	323	$	11	$	5,241	$	5,575	$	591,393	$	596,968
Other secured by 1-4 family residential<br> properties		1,811		368		567		2,746		514,937		517,683
Secured by nonfarm, nonresidential<br> properties		845		—		1,442		2,287		2,974,797		2,977,084
Other real estate secured		—		—		142		142		725,901		726,043
Other loans secured by real estate:
Other construction		—		—		—		—		711,813		711,813
Secured by 1-4 family residential properties		2,799		531		6,720		10,050		1,450,260		1,460,310
Commercial and industrial loans		607		41		1,107		1,755		1,412,524		1,414,279
Consumer loans		1,673		182		305		2,160		160,395		162,555
State and other political subdivision loans		32		—		177		209		1,146,042		1,146,251
Other commercial loans		220		32		118		370		534,473		534,843
Total	$	8,310	$	1,165	$	15,819	$	25,294	$	10,222,535	$	10,247,829

Troubled Debt Restructurings (TDRs)

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 June 30, 2022 and 2021, LHFI classified as TDRs totaled $19.9 million and $25.1 million, respectively. At June 30, 2022, TDRs were primarily comprised of bankruptcies, payment concessions and credits with interest-only payments for an extended period of time which totaled $17.8 million. At June 30, 2021, TDRs were primarily comprised of payment concessions, 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 $16.4 million. Trustmark had $271 thousand in unused commitments on TDRs at June 30, 2022, compared to $2.0 million at June 30, 2021.

At June 30, 2022 and 2021, TDRs had a related ACL, LHFI of $1.7 million and $3.9 million, respectively. Trustmark had $9 thousand in charge-offs on TDRs for the six months ended June 30, 2022, compared to $3.7 million for the six months ended June 30, 2021.

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

	Three Months Ended June 30,
	2022						2021
	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		1	$	146	$	146		5	$	5,582	$	5,582
Other secured by 1-4 family<br> residential properties		1		42		42		3		37		37
Secured by nonfarm,<br> nonresidential properties		1		895		895		1		377		377
Other real estate secured		1		85		85		—		—		—
Other loans secured by real estate:
Secured by 1-4 family residential<br> properties		5		957		977		1		123		123
Commercial and industrial loans		—		—		—		1		1,000		1,000
Other commercial loans		—		—		—		2		4,929		4,929
Total		9	$	2,125	$	2,145		13	$	12,048	$	12,048
	Six Months Ended June 30,
---	---	---	---	---	---	---	---	---	---	---	---	---
	2022						2021
	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		1	$	146	$	146		5	$	5,582	$	5,582
Other secured by 1-4 family<br> residential properties		2		73		73		3		37		37
Secured by nonfarm,<br> nonresidential properties		3		6,004		6,004		1		377		377
Other real estate secured		1		85		85		—		—		—
Other loans secured by real estate:
Secured by 1-4 family residential<br> properties		6		1,024		1,043		3		249		249
Commercial and industrial loans		1		500		500		2		1,014		1,014
Other commercial loans		—		—		—		2		4,929		4,929
Total		14	$	7,832	$	7,851		16	$	12,188	$	12,188

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):

	Six Months Ended June 30,
	2022				2021
	Number of <br>Contracts		Recorded <br>Investment		Number of <br>Contracts		Recorded <br>Investment
Other loans secured by real estate:
Secured by 1-4 family residential properties		—	$	—		1	$	78
Other commercial loans		—		—		2		4,929
Total		—	$	—		3	$	5,007

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 June 30, 2022 and 2021 ($ in thousands):

	June 30, 2022
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	3,981	$	3,981
Other secured by 1-4 family residential properties		40		873		913
Secured by nonfarm, nonresidential properties		—		7,892		7,892
Other real estate secured		—		85		85
Other loans secured by real estate:
Secured by 1-4 family residential properties		100		3,361		3,461
Commercial and industrial loans		500		54		554
Consumer loans		—		2		2
State and other political subdivision loans		—		3,019		3,019
Other commercial loans		—		36		36
Total TDRs	$	640	$	19,303	$	19,943
	June 30, 2021
---	---	---	---	---	---	---
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	5,593	$	5,593
Other secured by 1-4 family residential properties		—		1,160		1,160
Secured by nonfarm, nonresidential properties		—		3,090		3,090
Other loans secured by real estate:
Secured by 1-4 family residential properties		52		2,414		2,466
Commercial and industrial loans		2,500		1,608		4,108
Consumer loans		—		12		12
State and other political subdivision loans		—		3,677		3,677
Other commercial loans		—		5,009		5,009
Total TDRs	$	2,552	$	22,563	$	25,115

Collateral-Dependent Loans

The following tables present the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022
	Real Estate		Equipment and<br> Machinery		Inventory and Receivables		Vehicles		Miscellaneous		Total
Loans secured by real estate:
Construction, land development and<br> other land	$	4,280	$	—	$	—	$	—	$	—	$	4,280
Other secured by 1-4 family<br> residential properties		493		—		—		—		—		493
Secured by nonfarm, nonresidential<br> properties		5,622		—		—		—		4,188		9,810
Other loans secured by real estate:
Other construction		7,620		—		—		—		—		7,620
Secured by 1-4 family residential<br> properties		1,274		—		—		—		—		1,274
Commercial and industrial loans		41		—		363		398		15,134		15,936
State and other political subdivision loans		3,196		—		—		—		—		3,196
Other commercial loans		—		—		—		—		36		36
Total	$	22,526	$	—	$	363	$	398	$	19,358	$	42,645

	December 31, 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	$	5,198	$	—	$	—	$	—	$	—	$	5,198
Secured by nonfarm, nonresidential<br> properties		11,072		—		—		—		—		11,072
Other real estate secured		56		—		—		—		—		56
Other loans secured by real estate:
Secured by 1-4 family residential<br> properties		1,319		—		—		—		—		1,319
Commercial and industrial loans		42		349		1,253		370		16,430		18,444
State and other political subdivision loans		3,664		—		—		—		—		3,664
Other commercial loans		4,572		—		—		—		36		4,608
Total	$	25,923	$	349	$	1,253	$	370	$	16,466	$	44,361

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 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 the 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 certain loans will be individually assessed, and a formal analysis will be performed and based upon the analysis the loan will be written down to the 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 June 30, 2022 and December 31, 2021 ($ in thousands):

	Term Loans by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
As of June 30, 2022	Commercial LHFI
Loans secured by real estate:
Construction, land<br> development and other<br> land:
Pass - RR 1 through RR 6	$	225,827	$	236,979	$	49,624	$	8,406	$	1,626	$	3,198	$	48,155	$	573,815
Special Mention - RR 7		—		—		—		—		—		—		—		—
Substandard - RR 8		146		446		—		3,700		—		4		—		4,296
Doubtful - RR 9		—		—		—		—		—		42		—		42
Total		225,973		237,425		49,624		12,106		1,626		3,244		48,155		578,153
Other secured by 1-4 family<br> residential properties:
Pass - RR 1 through RR 6	$	30,424	$	37,379	$	18,886	$	10,673	$	7,645	$	5,791	$	8,329	$	119,127
Special Mention - RR 7		—		102		20		—		—		—		—		122
Substandard - RR 8		355		221		129		5		163		413		—		1,286
Doubtful - RR 9		—		18		—		—		—		—		—		18
Total		30,779		37,720		19,035		10,678		7,808		6,204		8,329		120,553
Secured by nonfarm,<br> nonresidential properties:
Pass - RR 1 through RR 6	$	497,133	$	704,378	$	604,576	$	536,749	$	301,486	$	361,740	$	110,995	$	3,117,057
Special Mention - RR 7		943		—		—		277		—		—		—		1,220
Substandard - RR 8		14,687		6,666		10,883		951		4,673		21,521		250		59,631
Doubtful - RR 9		38		—		—		90		—		19		—		147
Total		512,801		711,044		615,459		538,067		306,159		383,280		111,245		3,178,055
Other real estate secured:
Pass - RR 1 through RR 6	$	137,973	$	118,364	$	121,143	$	130,133	$	12,467	$	20,980	$	13,119	$	554,179
Special Mention - RR 7		—		—		—		—		—		—		—		—
Substandard - RR 8		—		—		65		—		7		775		—		847
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		137,973		118,364		121,208		130,133		12,474		21,755		13,119		555,026

	Term Loans by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
As of June 30, 2022	Commercial LHFI
Other loans secured by real<br> estate:
Other construction:
Pass - RR 1 through RR 6	$	115,764	$	288,140	$	361,982	$	1,618	$	—	$	—	$	117	$	767,621
Special Mention - RR 7		—		—		—		—		—		—		—		—
Substandard - RR 8		—		7,620		—		—		—		—		—		7,620
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		115,764		295,760		361,982		1,618		—		—		117		775,241
Commercial and industrial<br> loans:
Pass - RR 1 through RR 6	$	307,184	$	380,638	$	182,033	$	58,698	$	20,571	$	74,552	$	481,404	$	1,505,080
Special Mention - RR 7		—		—		11		—		—		—		—		11
Substandard - RR 8		13,300		3,990		1,065		455		601		7,352		18,902		45,665
Doubtful - RR 9		110		37		34		17		40		4		3		245
Total		320,594		384,665		183,143		59,170		21,212		81,908		500,309		1,551,001
State and other political<br> subdivision loans:
Pass - RR 1 through RR 6	$	161,541	$	274,400	$	132,145	$	45,920	$	23,410	$	464,353	$	3,130	$	1,104,899
Special Mention - RR 7		—		—		—		—		—		2,700		—		2,700
Substandard - RR 8		—		—		—		—		—		3,196		—		3,196
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		161,541		274,400		132,145		45,920		23,410		470,249		3,130		1,110,795
Other commercial loans:
Pass - RR 1 through RR 6	$	38,561	$	78,844	$	32,461	$	49,796	$	7,512	$	44,764	$	253,511	$	505,449
Special Mention - RR 7		4,634		—		—		—		—		—		9,013		13,647
Substandard - RR 8		—		212		2		36		29		1,210		—		1,489
Doubtful - RR 9		25		—		—		—		—		23		—		48
Total		43,220		79,056		32,463		49,832		7,541		45,997		262,524		520,633
Total commercial<br> LHFI	$	1,548,645	$	2,138,434	$	1,515,059	$	847,524	$	380,230	$	1,012,637	$	946,928	$	8,389,457

	Term Loans by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
As of June 30, 2022	Consumer LHFI
Loans secured by real estate:
Construction, land<br> development and other<br> land:
Current	$	20,574	$	51,378	$	6,845	$	2,374	$	2,355	$	2,384	$	—	$	85,910
Past due 30-89 days		—		114		506		33		—		29		—		682
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		61		—		—		—		11		—		72
Total		20,574		51,553		7,351		2,407		2,355		2,424		—		86,664
Other secured by 1-4 family<br> residential properties:
Current	$	11,368	$	11,183	$	7,268	$	5,506	$	4,730	$	8,964	$	365,637	$	414,656
Past due 30-89 days		—		274		69		50		4		232		1,421		2,050
Past due 90 days or more		—		31		—		—		—		—		532		563
Nonaccrual		45		25		5		25		8		506		2,514		3,128
Total		11,413		11,513		7,342		5,581		4,742		9,702		370,104		420,397
Secured by nonfarm,<br> nonresidential properties:
Current	$	—	$	24	$	—	$	—	$	—	$	—	$	—	$	24
Past due 30-89 days		—		—		—		—		—		—		—		—
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		—		—		—
Total		—		24		—		—		—		—		—		24
Other real estate secured:
Current	$	—	$	—	$	93	$	—	$	7	$	185	$	—	$	285
Past due 30-89 days		—		—		—		—		—		—		—		—
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		—		—		—
Total		—		—		93		—		7		185		—		285

	Term Loans by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
As of June 30, 2022	Consumer LHFI
Other loans secured by real<br> estate:
Secured by 1-4 family<br> residential properties
Current	$	564,074	$	589,588	$	213,120	$	116,458	$	92,047	$	289,083	$	—	$	1,864,370
Past due 30-89 days		420		1,497		1,284		200		806		1,368		—		5,575
Past due 90 days or more		—		—		270		—		—		179		—		449
Nonaccrual		—		1,033		2,535		1,867		1,716		6,467		—		13,618
Total		564,494		592,118		217,209		118,525		94,569		297,097		—		1,884,012
Consumer loans:
Current	$	42,972	$	41,295	$	15,612	$	4,616	$	2,777	$	806	$	54,385	$	162,463
Past due 30-89 days		447		164		52		41		45		5		454		1,208
Past due 90 days or more		18		42		—		—		—		—		143		203
Nonaccrual		62		20		9		4		3		7		22		127
Total		43,499		41,521		15,673		4,661		2,825		818		55,004		164,001
Total consumer LHFI	$	639,980	$	696,729	$	247,668	$	131,174	$	104,498	$	310,226	$	425,108	$	2,555,383
Total LHFI	$	2,188,625	$	2,835,163	$	1,762,727	$	978,698	$	484,728	$	1,322,863	$	1,372,036	$	10,944,840
	Term Loans by Origination Year
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
As of December 31, 2021	Commercial LHFI
Loans secured by real estate:
Construction, land<br> development and other<br> land:
Pass - RR 1 through RR 6	$	376,438	$	76,176	$	21,366	$	2,189	$	1,367	$	2,890	$	26,505	$	506,931
Special Mention - RR 7		71		6,382		—		—		—		—		—		6,453
Substandard - RR 8		2,243		—		3,435		30		—		—		—		5,708
Doubtful - RR 9		—		—		—		—		—		42		—		42
Total		378,752		82,558		24,801		2,219		1,367		2,932		26,505		519,134
Other secured by 1-4 family<br> residential properties:
Pass - RR 1 through RR 6	$	44,208	$	23,269	$	13,194	$	9,722	$	5,737	$	3,076	$	8,771	$	107,977
Special Mention - RR 7		111		143		—		—		—		—		—		254
Substandard - RR 8		721		150		6		166		46		627		—		1,716
Doubtful - RR 9		22		—		—		—		—		—		—		22
Total		45,062		23,562		13,200		9,888		5,783		3,703		8,771		109,969
Secured by nonfarm,<br> nonresidential properties:
Pass - RR 1 through RR 6	$	750,869	$	604,026	$	610,446	$	350,603	$	183,115	$	279,529	$	113,808	$	2,892,396
Special Mention - RR 7		1,510		9,584		412		—		1,562		4,522		—		17,590
Substandard - RR 8		11,017		2,357		13,609		3,591		5,988		29,309		1,025		66,896
Doubtful - RR 9		43		—		105		—		—		21		—		169
Total		763,439		615,967		624,572		354,194		190,665		313,381		114,833		2,977,051
Other real estate secured:
Pass - RR 1 through RR 6	$	256,273	$	105,687	$	220,487	$	64,268	$	6,816	$	56,196	$	13,350	$	723,077
Special Mention - RR 7		—		—		—		—		—		773		—		773
Substandard - RR 8		1,684		65		—		8		—		101		—		1,858
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		257,957		105,752		220,487		64,276		6,816		57,070		13,350		725,708

	Term Loans by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
As of December 31, 2021	Commercial LHFI
Other loans secured by real<br> estate:
Other construction
Pass - RR 1 through RR 6	$	273,747	$	393,580	$	25,142	$	—	$	—	$	—	$	17,909	$	710,378
Special Mention - RR 7		—		—		—		—		—		—		—		—
Substandard - RR 8		1,435		—		—		—		—		—		—		1,435
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		275,182		393,580		25,142		—		—		—		17,909		711,813
Commercial and industrial<br> loans:
Pass - RR 1 through RR 6	$	503,073	$	249,171	$	74,239	$	33,403	$	50,016	$	35,883	$	400,423	$	1,346,208
Special Mention - RR 7		643		365		147		550		48		—		99		1,852
Substandard - RR 8		14,530		1,338		1,221		1,119		9,237		386		38,182		66,013
Doubtful - RR 9		20		46		29		107		—		4		—		206
Total		518,266		250,920		75,636		35,179		59,301		36,273		438,704		1,414,279
State and other political<br> subdivision loans:
Pass - RR 1 through RR 6	$	381,317	$	148,156	$	56,987	$	30,558	$	95,491	$	418,319	$	8,409	$	1,139,237
Special Mention - RR 7		—		—		—		—		—		3,350		—		3,350
Substandard - RR 8		—		—		—		—		—		3,664		—		3,664
Doubtful - RR 9		—		—		—		—		—		—		—		—
Total		381,317		148,156		56,987		30,558		95,491		425,333		8,409		1,146,251
Other commercial loans:
Pass - RR 1 through RR 6	$	103,504	$	38,661	$	64,871	$	8,643	$	7,924	$	41,112	$	232,476	$	497,191
Special Mention - RR 7		4,059		—		—		—		—		—		9,013		13,072
Substandard - RR 8		4,532		6,681		82		212		—		—		13,000		24,507
Doubtful - RR 9		—		50		—		—		—		23		—		73
Total		112,095		45,392		64,953		8,855		7,924		41,135		254,489		534,843
Total commercial<br> LHFI	$	2,732,070	$	1,665,887	$	1,105,778	$	505,169	$	367,347	$	879,827	$	882,970	$	8,139,048

	Term Loans by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
As of December 31, 2021	Consumer LHFI
Loans secured by real estate:
Construction, land<br> development and other<br> land:
Current	$	51,849	$	16,204	$	3,024	$	3,059	$	797	$	2,404	$	—	$	77,337
Past due 30-89 days		—		265		49		5		—		14		—		333
Past due 90 days or more		—		—		—		—		—		7		—		7
Nonaccrual		64		—		—		—		—		93		—		157
Total		51,913		16,469		3,073		3,064		797		2,518		—		77,834
Other secured by 1-4 family<br> residential properties:
Current	$	21,166	$	11,098	$	6,119	$	5,903	$	3,291	$	7,853	$	347,743	$	403,173
Past due 30-89 days		5		34		87		114		—		145		1,214		1,599
Past due 90 days or more		—		4		—		—		—		13		91		108
Nonaccrual		26		70		29		9		341		274		2,085		2,834
Total		21,197		11,206		6,235		6,026		3,632		8,285		351,133		407,714
Secured by nonfarm,<br> nonresidential properties:
Current	$	31	$	—	$	—	$	—	$	2	$	—	$	—	$	33
Past due 30-89 days		—		—		—		—		—		—		—		—
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		—		—		—
Total		31		—		—		—		2		—		—		33
Other real estate secured:
Current	$	—	$	97	$	—	$	8	$	60	$	170	$	—	$	335
Past due 30-89 days		—		—		—		—		—		—		—		—
Past due 90 days or more		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		—		—		—
Total		—		97		—		8		60		170		—		335
Other loans secured by real<br> estate:
Secured by 1-4 family<br> residential properties
Current	$	622,330	$	233,951	$	137,500	$	107,345	$	56,374	$	285,919	$	—	$	1,443,419
Past due 30-89 days		542		494		333		10		369		714		—		2,462
Past due 90 days or more		199		501		165		122		218		450		—		1,655
Nonaccrual		272		1,875		1,419		2,105		916		6,187		—		12,774
Total		623,343		236,821		139,417		109,582		57,877		293,270		—		1,460,310
Consumer loans:
Current	$	65,366	$	25,512	$	8,498	$	4,734	$	1,289	$	378	$	54,518	$	160,295
Past due 30-89 days		989		223		123		22		10		5		468		1,840
Past due 90 days or more		26		23		6		—		—		—		248		303
Nonaccrual		71		17		2		13		8		—		6		117
Total		66,452		25,775		8,629		4,769		1,307		383		55,240		162,555
Total consumer LHFI	$	762,936	$	290,368	$	157,354	$	123,449	$	63,675	$	304,626	$	406,373	$	2,108,781
Total LHFI	$	3,495,006	$	1,956,255	$	1,263,132	$	628,618	$	431,022	$	1,184,453	$	1,289,343	$	10,247,829

Past Due LHFS

LHFS past due 90 days or more totaled $51.2 million and $69.9 million at June 30, 2022 and December 31, 2021, 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 six months of 2022 or 2021.

ACL on LHFI

Trustmark’s ACL methodology for LHFI is based upon guidance within the Financial Accounting Standards Board (FASB) Accounting Standards Codification (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, LHFI 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 ACL 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	DCF	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 ACL 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.

During the first quarter of 2022, Management elected to incorporate a methodology change related to the other construction pool. Components of this change include management utilizing an alternative LDA to support the PD and LGD assumptions necessary to apply a DCF methodology to the other construction pool. Fundamentally, this approach utilizes publicly reported default balances and leverages a generalized linear model (GLM) framework to estimate PD. Taken together, these differences allow for results to be scaled to be specific and directly applicable to the other construction segment. LGD is assumed to be a through-the-cycle constant based on the actual performance of Trustmark’s other construction segment. These assumptions are then input into the DCF model and used in conjunction with prepayment data to calculate the cash flows at the individual loan level. Previously, the other construction pool used the weighted average remaining maturity (WARM) method. Management believes this change is commensurate with the level of risk in the pool.

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 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 Gross Domestic Product (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 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 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 four are currently considered active: (i) economic conditions and concentrations of credit, (ii) nature and volume of the portfolio, (iii) performance trends and (iv) 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 nature and volume of the portfolio qualitative factor utilizes peer and industry assumptions for pools of loans where Trustmark’s historical experience might not capture the risk associated within a specific pool due to it being a different type of lending, different sources of repayment or a new line of business.

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). Trustmark's External Factor – Pandemic ensures 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 were not being captured in the quantitative reserve. During 2020, due to unforeseen pandemic conditions that varied from Management’s expectations, 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.

During the first quarter of 2022, in order to account for the potential uncertainty related to higher prices and low economic growth, Trustmark chose to enact a portion of the qualitative framework, External Factor - Stagflation. Management calculated the reserve using a third-party stagflation forecast and compared it to the third-party baseline forecast used in the quantitative modeling. The differential was added as qualitative reserves to account for potential uncertainty.

The following tables disaggregate the ACL and the amortized cost basis of the loans by the measurement methodology used at June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022
	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	$	926	$	6,375	$	7,301	$	4,280		660,537	$	664,817
Other secured by 1-4 family residential<br> properties		—		10,038		10,038		493		540,457		540,950
Secured by nonfarm, nonresidential<br> properties		—		29,735		29,735		9,810		3,168,269		3,178,079
Other real estate secured		—		3,297		3,297		—		555,311		555,311
Other loans secured by real estate:
Other construction		7,620		6,777		14,397		7,620		767,621		775,241
Secured by 1-4 family residential<br> properties		—		12,250		12,250		1,274		1,882,738		1,884,012
Commercial and industrial loans		1,396		12,707		14,103		15,936		1,535,065		1,551,001
Consumer loans		—		5,139		5,139		—		164,001		164,001
State and other political subdivision loans		927		990		1,917		3,196		1,107,599		1,110,795
Other commercial loans		36		4,927		4,963		36		520,597		520,633
Total	$	10,905	$	92,235	$	103,140	$	42,645	$	10,902,195	$	10,944,840
	December 31, 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	$	278	$	5,801	$	6,079	$	5,198	$	591,770	$	596,968
Other secured by 1-4 family residential<br> properties		—		10,310		10,310		—		517,683		517,683
Secured by nonfarm, nonresidential<br> properties		—		37,912		37,912		11,072		2,966,012		2,977,084
Other real estate secured		—		4,713		4,713		56		725,987		726,043
Other loans secured by real estate:
Other construction		—		5,968		5,968		—		711,813		711,813
Secured by 1-4 family residential<br> properties		—		2,706		2,706		1,319		1,458,991		1,460,310
Commercial and industrial loans		5,750		13,189		18,939		18,444		1,395,835		1,414,279
Consumer loans		—		4,774		4,774		—		162,555		162,555
State and other political subdivision loans		1,394		1,314		2,708		3,664		1,142,587		1,146,251
Other commercial loans		203		5,145		5,348		4,608		530,235		534,843
Total	$	7,625	$	91,832	$	99,457	$	44,361	$	10,203,468	$	10,247,829

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Balance at beginning of period	$	98,734		$	109,191		$	99,457		$	117,306
Loans charged-off		(2,277	)		(4,828	)		(4,519	)		(6,073	)
Recoveries		3,967			3,660			6,346			7,291
Net (charge-offs) recoveries		1,690			(1,168	)		1,827			1,218
PCL, LHFI		2,716			(3,991	)		1,856			(14,492	)
Balance at end of period	$	103,140		$	104,032		$	103,140		$	104,032

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

	Three Months Ended June 30, 2022
	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	$	7,351	$	(6	)	$	344	$	(388	)	$	7,301
Other secured by 1-4 family residential properties		9,867		(49	)		206		14			10,038
Secured by nonfarm, nonresidential properties		32,030		—			1,474		(3,769	)		29,735
Other real estate secured		3,640		(131	)		4		(216	)		3,297
Other loans secured by real estate:
Other construction		13,947		—			201		249			14,397
Secured by 1-4 family residential properties		5,628		(79	)		4		6,697			12,250
Commercial and industrial loans		14,951		(90	)		203		(961	)		14,103
Consumer loans		4,872		(357	)		452		172			5,139
State and other political subdivision loans		2,371		—			—		(454	)		1,917
Other commercial loans		4,077		(1,565	)		1,079		1,372			4,963
Total	$	98,734	$	(2,277	)	$	3,967	$	2,716		$	103,140

The decreases in the PCL, LHFI for the three months ended June 30, 2022 were primarily due to improvements in credit quality and 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, LHFI for the secured by 1-4 family residential properties portfolio increased $6.7 million during the three months ended June 30, 2022 primarily due to loan growth and the nature and volume of the portfolio. For the three months ended June 30, 2022, the PCL, LHFI for the other commercial loan portfolio increased $1.4 million primarily due to an increase in balances within the portfolio.

	Three Months Ended June 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	$	5,058	$	—		$	313	$	(261	)	$	5,110
Other secured by 1-4 family residential properties		8,667		(58	)		181		1,609			10,399
Secured by nonfarm, nonresidential properties		46,438		(79	)		1,027		(2,970	)		44,416
Other real estate secured		5,770		—			5		(464	)		5,311
Other loans secured by real estate:
Other construction		5,124		—			43		1,363			6,530
Secured by 1-4 family residential properties		3,753		(4	)		8		(847	)		2,910
Commercial and industrial loans		20,166		(3,674	)		652		(3,171	)		13,973
Consumer loans		4,750		(391	)		387		130			4,876
State and other political subdivision loans		3,015		—			—		218			3,233
Other commercial loans		6,450		(622	)		1,044		402			7,274
Total	$	109,191	$	(4,828	)	$	3,660	$	(3,991	)	$	104,032

The decreases in the PCL, LHFI for the three months ended June 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 implementation of the PD and LGD floors.

The PCL, LHFI for the other construction and other secured by 1-4 family residential properties portfolios increased $1.4 million and $1.6 million, respectively, during the three months ended June 30, 2021 primarily due to the implementation of the PD and LGD floors using Trustmark's historical experience.

	Six Months Ended June 30, 2022
	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	$	6,079	$	(34	)	$	1,187	$	69		$	7,301
Other secured by 1-4 family residential properties		10,310		(62	)		295		(505	)		10,038
Secured by nonfarm, nonresidential properties		37,912		—			1,501		(9,678	)		29,735
Other real estate secured		4,713		(131	)		7		(1,292	)		3,297
Other loans secured by real estate:
Other construction		5,968		—			204		8,225			14,397
Secured by 1-4 family residential properties		2,706		(79	)		10		9,613			12,250
Commercial and industrial loans		18,939		(375	)		303		(4,764	)		14,103
Consumer loans		4,774		(936	)		831		470			5,139
State and other political subdivision loans		2,708		—			—		(791	)		1,917
Other commercial loans		5,348		(2,902	)		2,008		509			4,963
Total	$	99,457	$	(4,519	)	$	6,346	$	1,856		$	103,140

The decreases in the PCL, LHFI for the six months ended June 30, 2022 were primarily due to improvements in credit quality and 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.

For the six months ended June 30, 2022, the PCL, LHFI for the other construction loan portfolio increased $8.2 million primarily due to specific reserves on individually analyzed credits. The PCL, LHFI for the secured by 1-4 family residential properties portfolio increased $9.6 million during the six months ended June 30, 2022 primarily due to loan growth and the nature and volume of the portfolio as well as a decrease in prepayment speeds which resulted from the rising interest-rate environment.

	Six Months Ended June 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	$	—		$	1,079	$	(2,823	)	$	5,110
Other secured by 1-4 family residential properties		9,928		(84	)		252		303			10,399
Secured by nonfarm, nonresidential properties		48,523		(79	)		1,057		(5,085	)		44,416
Other real estate secured		7,382		—			11		(2,082	)		5,311
Other loans secured by real estate:
Other construction		8,158		—			44		(1,672	)		6,530
Secured by 1-4 family residential properties		5,143		(4	)		108		(2,337	)		2,910
Commercial and industrial loans		14,851		(3,697	)		1,939		880			13,973
Consumer loans		5,838		(833	)		749		(878	)		4,876
State and other political subdivision loans		3,190		—			—		43			3,233
Other commercial loans		7,439		(1,376	)		2,052		(841	)		7,274
Total	$	117,306	$	(6,073	)	$	7,291	$	(14,492	)	$	104,032

The decreases in the PCL, LHFI for the six months ended June 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.

Note 4 – Mortgage Banking

MSR

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

	Six Months Ended June 30,
	2022			2021
Balance at beginning of period	$	87,687		$	66,464
Origination of servicing assets		10,159			15,201
Change in fair value:
Due to market changes		30,759			9,231
Due to run-off		(7,591	)		(10,132	)
Balance at end of period	$	121,014		$	80,764

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 June 30, 2022, the fair value of the MSR included an assumed average prepayment speed of 8 CPR and an average discount rate of 9.58% compared to an assumed average prepayment speed of 12 CPR and an average discount rate of 9.54% at June 30, 2021.

Mortgage Loans Serviced/Sold

During the first six months of 2022 and 2021, Trustmark sold $711.1 million and $1.289 billion, respectively, of residential mortgage loans. Gains on these sales were recorded as noninterest income in mortgage banking, net and totaled $12.3 million for the first six months of 2022 compared to $34.2 million for the first six months of 2021.

The table below details the mortgage loans sold and serviced for others at June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022		December 31, 2021
Federal National Mortgage Association	$	4,710,075	$	4,709,584
Government National Mortgage Association		3,260,997		3,194,373
Federal Home Loan Mortgage Corporation		39,097		35,971
Other		11,759		13,272
Total mortgage loans sold and serviced for others	$	8,021,928	$	7,953,200

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 June 30, 2022 and 2021, 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 June 30, 2022, Trustmark’s geographic other real estate distribution was primarily concentrated in its Mississippi market region. The ultimate recovery of a substantial portion of the carrying amount of other real estate is susceptible to changes in market conditions in this area.

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

	Six Months Ended June 30,
	2022			2021
Balance at beginning of period	$	4,557		$	11,651
Additions		456			382
Disposals		(1,868	)		(1,149	)
(Write-downs) recoveries		(111	)		(1,445	)
Balance at end of period	$	3,034		$	9,439
Gains (losses), net on the sale of other real estate included in<br> other real estate expense	$	(455	)	$	18

At June 30, 2022 and December 31, 2021, other real estate by type of property consisted of the following ($ in thousands):

	June 30, 2022		December 31, 2021
1-4 family residential properties	$	560	$	94
Nonfarm, nonresidential properties		2,474		4,463
Total other real estate	$	3,034	$	4,557

At June 30, 2022 and December 31, 2021, other real estate by geographic location consisted of the following ($ in thousands):

	June 30, 2022		December 31, 2021
Alabama	$	84	$	—
Mississippi (1)		2,950		4,557
Total other real estate	$	3,034	$	4,557

(1)

Mississippi includes Central and Southern Mississippi Regions.

At June 30, 2022, the balance of other real estate included $560 thousand of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property compared to $94 thousand at December 31, 2021. At June 30, 2022 and December 31, 2021, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $1.7 million and $1.2 million, respectively.

Note 6 – Leases

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Finance leases:
Amortization of right-of-use assets	$	379		$	387		$	766		$	771
Interest on lease liabilities		48			56			97			113
Operating lease cost		1,293			1,342			2,568			2,647
Short-term lease cost		98			110			230			229
Variable lease cost		323			311			634			618
Sublease income		(82	)		(77	)		(162	)		(153	)
Net lease cost	$	2,059		$	2,129		$	4,133		$	4,225

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

	Six Months Ended June 30,
	2022		2021
Finance leases:
Operating cash flows included in operating activities	$	97	$	113
Financing cash flows included in payments under finance lease obligations		733		712
Operating leases:
Operating cash flows (fixed payments) included in other operating activities, net		3,168		2,267
Operating cash flows (liability reduction) included in other operating activities, net		2,118		1,954

The following table details balance sheet information, as well as weighted-average lease terms and discount rates, related to leases at June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022			December 31, 2021
Finance lease right-of-use assets, net of accumulated depreciation	$	5,251		$	6,017
Finance lease liabilities		5,730			6,464
Operating lease right-of-use assets		34,684			34,603
Operating lease liabilities		37,108			36,468
Weighted-average lease term:
Finance leases	8.51 years			8.37 years
Operating leases	9.37 years			9.25 years
Weighted-average discount rate:
Finance leases		3.35	%		3.24	%
Operating leases		2.87	%		2.84	%

At June 30, 2022, future minimum rental commitments under finance and operating leases were as follows ($ in thousands):

	Finance Leases			Operating Leases
2022 (excluding the six months ended June 30, 2022)	$	767		$	2,474
2023		885			4,995
2024		572			5,001
2025		584			4,924
2026		589			4,733
Thereafter		3,279			20,205
Total minimum lease payments		6,676			42,332
Less imputed interest		(946	)		(5,224	)
Lease liabilities	$	5,730		$	37,108

Note 7 – Deposits

At June 30, 2022 and December 31, 2021, deposits consisted of the following ($ in thousands):

	June 30, 2022		December 31, 2021
Noninterest-bearing demand	$	4,509,472	$	4,771,065
Interest-bearing demand		4,616,243		4,372,500
Savings		4,503,351		4,745,137
Time		1,141,102		1,198,458
Total	$	14,770,168	$	15,087,160

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 $89.6 million and $252.4 million at June 30, 2022 and December 31, 2021, respectively. Trustmark’s repurchase agreements are transacted under master repurchase agreements that give Trustmark, in the event of default by the counterparty, the right of offset with the same counterparty. As of June 30, 2022, all repurchase agreements were short-term and consisted primarily of sweep repurchase arrangements, under which excess deposits are “swept” into overnight repurchase agreements with Trustmark. The following table presents the securities sold under repurchase agreements by collateral pledged at June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022		December 31, 2021
Mortgage-backed securities
Residential mortgage pass-through securities
Issued by FNMA and FHLMC	$	31,019	$	167,310
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		991		1,475
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		22,267		24,528
Total securities sold under repurchase agreements	$	54,277	$	193,313

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. There were no sales of other real estate properties, and therefore, no net gain or loss on the sales, during the three months ended June 30, 2022 compared to a net loss of $41 thousand for the three months ended June 30, 2021. Other real estate sales for the six months ended June 30, 2022 resulted in a net loss of $455 thousand compared to a net gain of $18 thousand for the six months ended June 30, 2021.

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

	Three Months Ended June 30, 2022						Three Months Ended June 30, 2021
	Topic 606		Not Topic <br>606 (1)		Total		Topic 606		Not Topic <br>606 (1)			Total
General Banking Segment
Service charges on deposit accounts	$	10,205	$	—	$	10,205	$	7,591	$	—		$	7,591
Bank card and other fees		8,665		1,490		10,155		8,519		(228	)		8,291
Mortgage banking, net		—		8,149		8,149		—		17,333			17,333
Wealth management		181		—		181		2		—			2
Other, net		1,855		—		1,855		1,699		251			1,950
Total noninterest income	$	20,906	$	9,639	$	30,545	$	17,811	$	17,356		$	35,167
Wealth Management Segment
Service charges on deposit accounts	$	21	$	—	$	21	$	22	$	—		$	22
Bank card and other fees		12		—		12		10		—			10
Wealth management		8,921		—		8,921		8,944		—			8,944
Other, net		33		12		45		35		9			44
Total noninterest income	$	8,987	$	12	$	8,999	$	9,011	$	9		$	9,020
Insurance Segment
Insurance commissions	$	13,702	$	—	$	13,702	$	12,217	$	—		$	12,217
Other, net		7		—		7		7		—			7
Total noninterest income	$	13,709	$	—	$	13,709	$	12,224	$	—		$	12,224
Consolidated
Service charges on deposit accounts	$	10,226	$	—	$	10,226	$	7,613	$	—		$	7,613
Bank card and other fees		8,677		1,490		10,167		8,529		(228	)		8,301
Mortgage banking, net		—		8,149		8,149		—		17,333			17,333
Insurance commissions		13,702		—		13,702		12,217		—			12,217
Wealth management		9,102		—		9,102		8,946		—			8,946
Other, net		1,895		12		1,907		1,741		260			2,001
Total noninterest income	$	43,602	$	9,651	$	53,253	$	39,046	$	17,365		$	56,411

(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.

	Six Months Ended June 30, 2022								Six Months Ended June 30, 2021
	Topic 606			Not Topic <br>606 (1)		Total			Topic 606		Not Topic <br>606 (1)		Total
General Banking Segment
Service charges on deposit accounts	$	19,636		$	—	$	19,636		$	14,929	$	—	$	14,929
Bank card and other fees		16,082			2,505		18,587			15,703		2,052		17,755
Mortgage banking, net		—			18,022		18,022			—		38,137		38,137
Wealth management		205			—		205			20		—		20
Other, net		4,373			657		5,030			3,087		891		3,978
Total noninterest income	$	40,296		$	21,184	$	61,480		$	33,739	$	41,080	$	74,819
Wealth Management Segment
Service charges on deposit accounts	$	41		$	—	$	41		$	40	$	—	$	40
Bank card and other fees		22			—		22			18		—		18
Wealth management		17,951			—		17,951			17,342		—		17,342
Other, net		65			19		84			67		16		83
Total noninterest income	$	18,079		$	19	$	18,098		$	17,467	$	16	$	17,483
Insurance Segment
Insurance commissions	$	27,791		$	—	$	27,791		$	24,662	$	—	$	24,662
Other, net		(1	)		—		(1	)		30		—		30
Total noninterest income	$	27,790		$	—	$	27,790		$	24,692	$	—	$	24,692
Consolidated
Service charges on deposit accounts	$	19,677		$	—	$	19,677		$	14,969	$	—	$	14,969
Bank card and other fees		16,104			2,505		18,609			15,721		2,052		17,773
Mortgage banking, net		—			18,022		18,022			—		38,137		38,137
Insurance commissions		27,791			—		27,791			24,662		—		24,662
Wealth management		18,156			—		18,156			17,362		—		17,362
Other, net		4,437			676		5,113			3,184		907		4,091
Total noninterest income	$	86,165		$	21,203	$	107,368		$	75,898	$	41,096	$	116,994

(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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Service cost	$	29		$	63		$	58		$	126
Interest cost		48			43			96			86
Expected return on plan assets		(30	)		(32	)		(60	)		(65	)
Recognized net actuarial loss		60			148			120			297
Net periodic benefit cost	$	107		$	222		$	214		$	444

For the plan year ending December 31, 2022, Trustmark’s minimum required contribution to the Continuing Plan is $176 thousand; however, Management and the Board of Directors of Trustmark will monitor the Continuing Plan throughout 2022 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 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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Service cost	$	18	$	19	$	36	$	38
Interest cost		316		277		646		570
Amortization of prior service cost		27		28		55		56
Recognized net actuarial loss		244		295		499		601
Net periodic benefit cost	$	605	$	619	$	1,236	$	1,265

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. At June 30, 2022, the maximum number of shares of Trustmark’s common stock available for issuance under the Stock Plan was 999,231 shares.

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 units 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-Based Awards

Trustmark’s time-based awards granted to Trustmark’s executive and senior management teams vest over three years. Trustmark’s time-based awards granted to members of Trustmark’s Board of Directors vest over one year. Time-based 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-based units instead of time-based awards. The time-based units have the same attributes as the previously granted time-based awards, except for the time-based units do not provide voting rights.

The following table summarizes the Stock Plan activity for the periods presented:

	Three Months Ended June 30, 2022
	Performance<br>Awards and Units			Time-Vested<br>Awards and Units
Nonvested shares, beginning of period		154,849			334,064
Granted		—			23,232
Released from restriction		—			(790	)
Forfeited		(3,093	)		(1,797	)
Nonvested shares, end of period		151,756			354,709
	Six Months Ended June 30, 2022
---	---	---	---	---	---	---
	Performance<br>Awards and Units			Time-Vested<br>Awards and Units
Nonvested shares, beginning of period		140,821			337,466
Granted		60,773			126,315
Released from restriction		(19,723	)		(105,927	)
Forfeited		(30,115	)		(3,145	)
Nonvested shares, end of period		151,756			354,709

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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Performance awards and units	$	406	$	324	$	535	$	206
Time-vested awards and units		834		890		1,950		3,189
Total compensation expense	$	1,240	$	1,214	$	2,485	$	3,395

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 June 30, 2022 and 2021, Trustmark had unused commitments to extend credit of $5.103 billion and $4.803 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 June 30, 2022 and 2021, Trustmark’s maximum exposure to credit loss in the event of nonperformance by the customer for letters of credit was $133.4 million and $132.2 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 June 30, 2022 and 2021, the fair value of collateral held was $37.7 million and $40.2 million, respectively.

ACL on 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 as of June 30, 2022 and December 31, 2021.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2022			2021		2022			2021
Balance at beginning of period	$	34,517		$	29,205	$	35,623		$	38,572
PCL, off-balance sheet credit exposures		(1,568	)		4,528		(2,674	)		(4,839	)
Balance at end of period	$	32,949		$	33,733	$	32,949		$	33,733

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 and six months ended June 30, 2022 was primarily due to improvements in the macroeconomic forecasts. The increase in the ACL on off-balance sheet credit exposures for the second quarter of 2021 was primarily due to an increase in the off-balance sheet credit exposures as well as the implementation of the PD and LGD floors by portfolio. The decrease in the ACL on off-balance sheet credit exposures for the six months ended June 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 sought 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.

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 have been 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, which was granted in December 2012. The OSIC initially sought to recover from TNB and the other defendant financial institutions: (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.

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) certain of the claims previously set forth in the SAC. 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 January 20, 2022, the court denied TNB’s motion for summary judgment, as well as the motion for summary judgment filed by all defendants (including TNB) with respect to OSIC claims that apply to all defendants.

The parties to the action have agreed that the case is to be tried in the District Court for the Southern District of Texas. 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 January 19, 2022, the judge of the District Court for the Northern District of Texas to whom the case is currently assigned issued a recommendation to the Judicial Panel on Multidistrict Litigation (the Panel) that the case be remanded to the District Court for the Southern District of Texas in light of that judge’s determination with respect to the summary judgment motions that triable issues of fact exist. On January 21, 2022, the Panel approved the remand of the case to the District Court for the Southern District of Texas, and on January 28, 2022 the remand of the case became effective. On June 9, 2022, the court entered an order scheduling trial beginning February 27, 2023, which will be held as a jury trial in front of Judge Kenneth M. Hoyt of the District Court for the Southern District of Texas.

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. There have been no developments in this case since this date.

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. Trustmark understands that the plaintiffs in the Joint Liquidators’ Action have appealed this decision. TNB was never served in connection with the TD Bank Declaratory Action (including the recent appeal), and thus has not made 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. TNB and its counsel are carefully evaluating the Smith Complaint.

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 remain 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. 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.

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 are being vigorously contested, with the exception of the TD Bank Declaratory Action that, as noted above, Trustmark was not served in connection with. In accordance FASB ASC Subtopic 450-20, “Loss Contingencies,” Trustmark will establish an accrued liability for any litigation matter if and when such matter presents 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 currently pending legal 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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Basic shares		61,378		63,215		61,446		63,305
Dilutive shares		168		195		179		161
Diluted shares		61,546		63,410		61,625		63,466

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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Weighted-average antidilutive stock awards		69		1		—		77

Note 14 – Statements of Cash Flows

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

	Six Months Ended June 30,
	2022		2021
Income taxes paid	$	1,058	$	13,045
Interest expense paid on deposits and borrowings		8,940		13,815
Noncash transfers from loans to other real estate		456		382
Finance right-of-use assets resulting from lease liabilities		—		92
Operating right-of-use assets resulting from lease liabilities		2,892		4,278

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 2021 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%. Accumulated other comprehensive income (loss), net of tax, is not included in computing regulatory capital. Trustmark 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 June 30, 2022, Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered well-capitalized at June 30, 2022. 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 June 30, 2022, 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 June 30, 2022 and December 31, 2021 ($ in thousands):

	Actual
	Regulatory Capital					Minimum			To Be Well
	Amount		Ratio			Requirement			Capitalized
At June 30, 2022:
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,439,352		11.01	%		7.00	%	n/a
Trustmark National Bank		1,529,578		11.70	%		7.00	%		6.50	%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,499,352		11.47	%		8.50	%	n/a
Trustmark National Bank		1,529,578		11.70	%		8.50	%		8.00	%
Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,734,106		13.26	%		10.50	%	n/a
Trustmark National Bank		1,641,180		12.55	%		10.50	%		10.00	%
Tier 1 Leverage (to Average Assets)
Trustmark Corporation	$	1,499,352		8.80	%		4.00	%	n/a
Trustmark National Bank		1,529,578		9.00	%		4.00	%		5.00	%
At December 31, 2021:
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,425,227		11.29	%		7.00	%	n/a
Trustmark National Bank		1,518,599		12.03	%		7.00	%		6.50	%
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,485,227		11.77	%		8.50	%	n/a
Trustmark National Bank		1,518,599		12.03	%		8.50	%		8.00	%
Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,710,700		13.55	%		10.50	%	n/a
Trustmark National Bank		1,621,030		12.84	%		10.50	%		10.00	%
Tier 1 Leverage (to Average Assets)
Trustmark Corporation	$	1,485,227		8.73	%		4.00	%	n/a
Trustmark National Bank		1,518,599		8.94	%		4.00	%		5.00	%

Stock Repurchase Program

On January 28, 2020, the Board of Directors of Trustmark authorized a 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 1.9 million shares of its outstanding common stock valued at $61.8 million during 2021.

On December 7, 2021, Trustmark's Board of Directors authorized a stock repurchase program effective January 1, 2022, under which $100.0 million of Trustmark's outstanding shares may be acquired through December 31, 2022. The repurchase program, which is subject to market conditions and management discretion, will continue to be implemented through open market repurchases or privately negotiated transactions. Under this authority, Trustmark repurchased approximately 263 thousand shares of its common stock valued at $7.5 million during the three months ended June 30, 2022. During the first six months of 2022, Trustmark repurchased approximately 542 thousand shares of its outstanding common stock valued at $16.6 million.

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 June 30, 2022									Three Months Ended June 30, 2021
	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	$	(44,529	)	$	11,132		$	(33,397	)	$	6,612	$	(1,653	)	$	4,959
Change in net unrealized holding loss on <br> securities transferred to held to maturity		(33,784	)		8,446			(25,338	)		736		(184	)		552
Total securities available for sale <br> and transferred securities		(78,313	)		19,578			(58,735	)		7,348		(1,837	)		5,511
Pension and other postretirement benefit plans:
Reclassification adjustments for changes<br> realized in net income:
Net change in prior service costs		27			(6	)		21			28		(7	)		21
Change in net actuarial loss		304			(76	)		228			443		(110	)		333
Total pension and other postretirement<br> benefit plans		331			(82	)		249			471		(117	)		354
Total other comprehensive income (loss)	$	(77,982	)	$	19,496		$	(58,486	)	$	7,819	$	(1,954	)	$	5,865
	Six Months Ended June 30, 2022									Six Months Ended June 30, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	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	$	(200,200	)	$	50,050		$	(150,150	)	$	(15,188	)	$	3,797		$	(11,391	)
Change in net unrealized holding loss on <br> securities transferred to held to maturity		(33,251	)		8,313			(24,938	)		1,447			(362	)		1,085
Total securities available for sale <br> and transferred securities		(233,451	)		58,363			(175,088	)		(13,741	)		3,435			(10,306	)
Pension and other postretirement benefit plans:
Reclassification adjustments for changes<br> realized in net income:
Net change in prior service costs		55			(14	)		41			56			(14	)		42
Change in net actuarial loss		619			(154	)		465			898			(224	)		674
Total pension and other postretirement<br> benefit plans		674			(168	)		506			954			(238	)		716
Total other comprehensive income (loss)	$	(232,777	)	$	58,195		$	(174,582	)	$	(12,787	)	$	3,197		$	(9,590	)

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, 2022	$	(17,774	)	$	(14,786	)	$	(32,560	)
Other comprehensive income (loss) before reclassification		(175,088	)		—			(175,088	)
Amounts reclassified from accumulated other <br> comprehensive income (loss)		—			506			506
Net other comprehensive income (loss)		(175,088	)		506			(174,582	)
Balance at June 30, 2022	$	(192,862	)	$	(14,280	)	$	(207,142	)
Balance at January 1, 2021	$	17,331		$	(18,382	)	$	(1,051	)
Other comprehensive income (loss) before reclassification		(10,306	)		—			(10,306	)
Amounts reclassified from accumulated other <br> comprehensive income (loss)		—			716			716
Net other comprehensive income (loss)		(10,306	)		716			(9,590	)
Balance at June 30, 2021	$	7,025		$	(17,666	)	$	(10,641	)

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 June 30, 2022 and December 31, 2021, 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 six months ended June 30, 2022 and the year ended December 31, 2021.

	June 30, 2022
	Total		Level 1		Level 2		Level 3
U.S. Treasury securities	$	419,696	$	419,696	$	—	$	—
U.S. Government agency obligations		11,947		—		11,947		—
Obligations of states and political subdivisions		5,179		—		5,179		—
Mortgage-backed securities		2,207,542		—		2,207,542		—
Securities available for sale		2,644,364		419,696		2,224,668		—
LHFS		190,186		—		190,186		—
MSR		121,014		—		—		121,014
Other assets - derivatives		5,569		70		3,917		1,582
Other liabilities - derivatives		28,575		2,108		26,467		—
	December 31, 2021
---	---	---	---	---	---	---	---	---
	Total		Level 1		Level 2		Level 3
U.S. Treasury securities	$	344,640	$	344,640	$	—	$	—
U.S. Government agency obligations		13,727		—		13,727		—
Obligations of states and political subdivisions		5,714		—		5,714		—
Mortgage-backed securities		2,874,796		—		2,874,796		—
Securities available for sale		3,238,877		344,640		2,894,237		—
LHFS		275,706		—		275,706		—
MSR		87,687		—		—		87,687
Other assets - derivatives		24,809		2,794		20,156		1,859
Other liabilities - derivatives		4,677		414		4,263		—

The changes in Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2022 and 2021 are summarized as follows ($ in thousands):

	MSR			Other Assets -<br>Derivatives
Balance, January 1, 2022	$	87,687		$	1,859
Total net (loss) gain included in Mortgage banking, net (1)		23,168			769
Additions		10,159			—
Sales		—			(1,046	)
Balance, June 30, 2022	$	121,014		$	1,582
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 June 30, 2022	$	30,759		$	(411	)
Balance, January 1, 2021	$	66,464		$	9,560
Total net (loss) gain included in Mortgage banking, net (1)		(901	)		5,857
Additions		15,201			—
Sales		—			(11,532	)
Balance, June 30, 2021	$	80,764		$	3,885
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 June 30, 2021	$	9,231		$	2,592

(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 June 30, 2022, 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 June 30, 2022, Trustmark had outstanding balances of $42.6 million with a related ACL of $10.9 million in collateral-dependent LHFI, compared to outstanding balances of $44.4 million with a related ACL of $7.6 million in collateral-dependent LHFI at December 31, 2021. 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 $2.9 million were remeasured during the first six months of 2022, requiring write-downs of $871 thousand to reach their current fair values compared to $5.3 million of foreclosed assets that were remeasured during the first six months of 2021, requiring write-downs of $268 thousand.

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 June 30, 2022 and December 31, 2021, are as follows ($ in thousands):

	June 30, 2022				December 31, 2021
	Carrying<br>Value		Estimated<br>Fair Value		Carrying<br>Value		Estimated<br>Fair Value
Financial Assets:
Level 2 Inputs:
Cash and short-term investments	$	742,461	$	742,461	$	2,266,829	$	2,266,829
Securities held to maturity		1,137,754		1,102,459		342,537		353,511
Level 3 Inputs:
Net LHFI and PPP loans		10,854,249		10,746,795		10,181,708		10,123,379
Financial Liabilities:
Level 2 Inputs:
Deposits		14,770,168		14,749,561		15,087,160		15,084,440
Federal funds purchased and securities sold under<br> repurchase agreements		70,157		70,157		238,577		238,577
Other borrowings		72,553		72,547		91,025		91,022
Subordinated notes		123,152		117,813		123,042		128,438
Junior subordinated debt securities		61,856		48,248		61,856		49,485

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 six months ended June 30, 2022, a net gain of $3.3 million and a net loss of $2.3 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 a net gain of $2.3 million and a net loss of $8.3 million for the three and six months ended June 30, 2021, respectively. Interest and fees on LHFS and LHFI for the three and six months ended June 30, 2022 included $1.9 million and $3.2 million, respectively, of interest earned on LHFS accounted for under the fair value option, compared to $1.7 million and $3.8 million for the three and six months ended June 30, 2021, 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 $66.7 million and $84.5 million at June 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022		December 31, 2021
Fair value of LHFS	$	123,452	$	191,242
LHFS contractual principal outstanding		121,536		186,535
Fair value less unpaid principal	$	1,916	$	4,707

Note 17 – Derivative Financial Instruments

Derivatives not Designated as Hedging Instruments

As part of Trustmark’s risk management strategy in the mortgage banking area, derivative instruments such as forward sales contracts are utilized. Trustmark’s obligations under forward 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 $182.5 million at June 30, 2022, with a negative valuation adjustment of $194 thousand, compared to $236.0 million, with a negative valuation adjustment of $81 thousand, at December 31, 2021.

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 $127.1 million at June 30, 2022, with a positive valuation adjustment of $1.6 million, compared to $142.6 million, with a positive valuation adjustment of $1.9 million, at December 31, 2021.

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 June 30, 2022, Trustmark had interest rate swaps with an aggregate notional amount of $1.255 billion related to this program, compared to $1.225 billion at December 31, 2021.

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 June 30, 2022, there was no 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 compared to a termination value of $655 thousand at December 31, 2021. At June 30, 2022, Trustmark had posted collateral of $40 thousand against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at June 30, 2022, 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 June 30, 2022, Trustmark had entered into five risk participation agreements as a beneficiary with an aggregate notional amount of $50.9 million compared to six risk participation agreements as a beneficiary with an aggregate notional amount of $52.0 million at December 31, 2021. At June 30, 2022, Trustmark had entered into twenty-five risk participation agreements as a guarantor with an aggregate notional amount of $206.8 million compared to twenty-four risk participation agreements as a guarantor with an aggregate notional amount of $173.5 million at December 31, 2021. The aggregate fair values of these risk participation agreements were immaterial at both June 30, 2022 and December 31, 2021.

Tabular Disclosures

The following tables disclose the fair value of derivative instruments in Trustmark’s consolidated balance sheets at June 30, 2022 and December 31, 2021 as well as the effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):

	June 30, 2022		December 31, 2021
Derivatives not designated as hedging instruments
Interest rate contracts:
Exchange traded purchased options included in other assets	$	70	$	438
OTC written options (rate locks) included in other assets		1,582		1,859
Futures contracts included in other assets		—		2,356
Interest rate swaps included in other assets (1)		3,898		20,115
Credit risk participation agreements included in other assets		19		41
Futures contracts included in other liabilities		1,428		—
Forward contracts included in other liabilities		194		81
Exchange traded written options included in other liabilities		680		414
Interest rate swaps included in other liabilities (1)		26,257		4,144
Credit risk participation agreements included in other liabilities		16		38

(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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Derivatives not designated as hedging instruments:
Amount of gain (loss) recognized in mortgage banking, net	$	(13,258	)	$	(1,614	)	$	(30,776	)	$	(10,812	)
Amount of gain (loss) recognized in bank card and other fees		(87	)		(667	)		322			935

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 June 30, 2022 and December 31, 2021 is presented in the following tables ($ in thousands):

Offsetting of Derivative Assets
As of June 30, 2022
							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	$	3,898	$	—	$	3,898	$	(1,059	)	$	—	$	2,839
Offsetting of Derivative Liabilities
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
As of June 30, 2022
							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	$	26,257	$	—	$	26,257	$	(1,059	)	$	(40	)	$	25,158
Offsetting of Derivative Assets
---	---	---	---	---	---	---	---	---	---	---	---	---	---
As of December 31, 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	$	20,115	$	—	$	20,115	$	(55	)	$	—	$	20,060

Offsetting of Derivative Liabilities
As of December 31, 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	$	4,144	$	—	$	4,144	$	(55	)	$	(850	)	$	3,239

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 2021 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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
General Banking
Net interest income	$	111,352		$	118,169		$	209,343		$	219,277
Provision for credit losses		1,149			540			(810	)		(19,326	)
Noninterest income		30,545			35,167			61,480			74,819
Noninterest expense		106,352			102,199			209,685			206,163
Income before income taxes		34,396			50,597			61,948			107,259
Income taxes		5,074			7,137			8,175			15,260
General banking net income	$	29,322		$	43,460		$	53,773		$	91,999
Selected Financial Information
Total assets	$	16,661,715		$	16,716,574		$	16,661,715		$	16,716,574
Depreciation and amortization	$	9,995		$	11,046		$	20,171		$	21,910
Wealth Management
Net interest income	$	1,326		$	1,256		$	2,682		$	2,487
Provision for credit losses		(1	)		(3	)		(8	)		(5	)
Noninterest income		8,999			9,020			18,098			17,483
Noninterest expense		8,131			7,749			16,413			15,943
Income before income taxes		2,195			2,530			4,375			4,032
Income taxes		548			633			1,094			1,009
Wealth management net income	$	1,647		$	1,897		$	3,281		$	3,023
Selected Financial Information
Total assets	$	199,752		$	299,275		$	199,752		$	299,275
Depreciation and amortization	$	73		$	66		$	146		$	134
Insurance
Net interest income	$	(2	)	$	(2	)	$	(5	)	$	(5	)
Noninterest income		13,709			12,224			27,790			24,692
Noninterest expense		9,284			8,731			19,188			18,121
Income before income taxes		4,423			3,491			8,597			6,566
Income taxes		1,108			867			2,156			1,645
Insurance net income	$	3,315		$	2,624		$	6,441		$	4,921
Selected Financial Information
Total assets	$	90,043		$	82,283		$	90,043		$	82,283
Depreciation and amortization	$	176		$	190		$	368		$	384
Consolidated
Net interest income	$	112,676		$	119,423		$	212,020		$	221,759
Provision for credit losses		1,148			537			(818	)		(19,331	)
Noninterest income		53,253			56,411			107,368			116,994
Noninterest expense		123,767			118,679			245,286			240,227
Income before income taxes		41,014			56,618			74,920			117,857
Income taxes		6,730			8,637			11,425			17,914
Consolidated net income	$	34,284		$	47,981		$	63,495		$	99,943
Selected Financial Information
Total assets	$	16,951,510		$	17,098,132		$	16,951,510		$	17,098,132
Depreciation and amortization	$	10,244		$	11,302		$	20,685		$	22,428

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 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 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 id 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 entity’s 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. On January 7, 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” to clarify the scope of the reference rate reform guidance in FASB ASC Topic 848. ASU 2021-01 refines the scope of FASB ASC Topic 848 to clarify that certain optional expedients and exceptions therein for contract modifications and hedge accounting apply to contracts that are affected by the discounting transition. Specifically, modifications related to reference rate reform would not be considered an event that requires reassessment of previous accounting conclusions. The amendments in ASU 2021-01 also amend the expedients and exceptions in FASB ASC Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments of ASU 2021-01 were effective immediately when issued. Entities may choose to apply the amendments of ASU 2021-01 retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. If an entity elects to apply any of the amendments in this ASU for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date that the entity applies the election. While the benchmark provider for U.S. LIBOR (which was typically the benchmark that Trustmark used) intends to provide the benchmark for some tenors of U.S. LIBOR through June 2023, Trustmark has transitioned to Secured Overnight Financing Rate (SOFR) for new variable rate loans, derivative contracts, borrowings and other financial instruments as of January 1, 2022. Management cannot make a determination at this time as to the impact the amendments of ASU 2020-04 and ASU 2021-01 or the reference rate reform will have on its consolidated financial statements.

Pending Accounting Pronouncements

ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326): Trouble Debt Restructurings and Vintage Disclosures.” Issued in March 2022, ASU 2022-02 seeks to improve the decision usefulness of information provided to investors concerning certain loan refinancings, restructurings and write-offs. In regard to troubled debt restructurings (TDRs) by creditors, investors and preparers observed that the additional designation of a loan modification as a TDR and the related accounting are unnecessarily complex and no longer provide decision-useful information. The amendments of ASU 2022-02 eliminate the accounting guidance for TDRs by creditors in FASB ASC Subtopic 310-40, “Receivables-Troubled Debt Restructurings by Creditors,” as it is no longer meaningful due to the implementation of FASB ASC Topic 326, which requires an entity to consider lifetime expected credit losses on loans when establishing an allowance for credit losses. Therefore, most losses that would have been realized for a TDR under FASB ASC Subtopic 310-40 are now captured by the accounting required under FASB ASC Topic 326. The amendments of ASU 2022-02 also enhanced disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Stakeholders also noted inconsistency in the requirement for a public business entity (PBE) to disclose gross write-offs and gross recoveries by class of financing receivable and major security type in certain vintage disclosures. Financial statement users expressed that, in addition to the existing vintage disclosures in FASB ASC Topic 326, information about gross write-offs by year of origination would be helpful in understanding credit quality changes in an entity’s loan portfolio and underwriting performance. For PBEs, the amendments of ASU 2022-02 require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of FASB ASC Subtopic 326-20, “Financial Instruments-Credit Losses-Measured at Amortized Cost.” For write-offs associated with origination dates that are more than five annual periods before the reporting period, an entity may present aggregate amounts in the current period for financing receivables and net investment in leases. The amendments of ASU 2022-02 are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2022 for entities that have already adopted the amendments of ASU 2016-13. Early adoption is permitted, provided that an entity has

adopted ASU 2016-13. If an entity elects to early adopt the amendments of this ASU during an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. In addition, an entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. Trustmark intends to adopt the amendments of ASU 2022-02 as of January 1, 2023. The amendments of ASU 2022-02 include only changes to certain financial statement disclosures, and, therefore, adoption of ASU 2022-02 is not expected to have a material impact on Trustmark’s consolidated financial statements or results of operations.

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 June 30, 2022, TNB had total assets of $16.949 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 177 offices and 2,727 full-time equivalent associates (measured at June 30, 2022) located in the states of Alabama (includes the Georgia Loan Production Office (LPO), which are collectively referred to herein as Trustmark's Alabama market region), 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, 2021 (2021 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 produced strong financial results for the three and six months ended June 30, 2022 reflected by significant loan growth in loans held for investment (LHFI) of $547.7 million, or 5.3%, and $697.0 million, or 6.8%, respectively, expansion of the net interest margin, consistent performance from its fee businesses and solid 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 in the first six months of 2022.

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 capital position remained solid, reflecting the consistent profitability of its diversified financial services businesses. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable September 15, 2022, to shareholders of record on September 1, 2022.

Recent Economic and Industry Developments

Economic activity continued to improve during the first six months of 2022 as COVID-19 cases declined across the United States and restrictions were lifted; however, economic concerns remain as a result of the cumulative weight of uncertainty regarding the long-term effectiveness of the COVID-19 vaccine and the potential economic impact of recent geopolitical developments, such as Russia's invasion of Ukraine and COVID-19 lockdowns in China. Inflation has become elevated, reflecting supply and demand imbalances related to the pandemic, supply chain issues, higher energy prices and broader price pressures. Doubts surrounding the near-term direction of global markets and the potential impact on the United States economy are expected to persist for the near term. While Trustmark's customer base is wholly domestic, international economic conditions affect domestic economic conditions, and thus may have an impact upon Trustmark's financial condition or results of operations.

Market interest rates have begun to rise during 2022 after an extended period at historical lows. In March 2022, the FRB raised the target federal funds rate for the first time in three years to a range of 0.25% to 0.50%. The FRB raised the target federal funds rate again

in May 2022 to a range of 0.75% to 1.00% and in June 2022 to a range of 1.50% to 1.75% and signaled the possibility of additional rate increases throughout 2022. In addition, the FRB increased the interest that it pays on reserves from 0.10% to 0.40% in March 2022, to 0.90% in May 2022 and to 1.65% in June 2022. The prolonged period of reduced interest rates has had and may continue to have an adverse effect on net interest income and margins and profitability for financial institutions, including Trustmark. Additionally, as interest rates increase, so will competitive pressures on the deposit cost of funds. It is not possible to predict the pace and magnitude of changes in interest rates, or the impact rate changes will have on Trustmark's results of operations.

In the July 2022 “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 May 23, 2022 through July 6, 2022) expanded at a modest pace; however, several Districts noted growing signs of a slowdown in demand, and some Districts noted concerns over an increased risk of a recession. Reports by the twelve Federal Reserve Districts (Districts) noted the following during the reporting period:

• Consumer spending moderated as higher food and gas prices diminished households' discretionary income. New auto sales remained sluggish across most Districts due to continued low inventory levels. Hospitality and tourism contacts cited healthy leisure travel activity with some noting an increase in business and group travel.

• Housing demand weakened noticeably as growing concerns about affordability contributed to non-seasonal declines in sales, resulting in a slight increase in inventory and more moderate price appreciation. Commercial real estate conditions slowed.

• Loan demand was mixed across most Districts; some financial institutions reported increased customer usage of revolving credit lines, while others reported weakening residential loan demand amid higher mortgage interest rates.

• While demand for energy products was robust and oil and gas drilling activity picked up, production remained constrained by labor availability and supply chain bottlenecks for critical components.

• Employment continued to rise at a modest to moderate pace and conditions remained tight overall. Nearly all Districts noted modest improvements in labor availability amid weaker demand for workers, particularly among manufacturing and construction contacts. Most Districts continue to report wage growth.

• Substantial price increases were reported across all Districts, at all stages of consumption, though some noted moderation in prices for construction inputs such as lumber and steel. Increases in food, commodities and energy (particularly fuel) costs remained significant. While several Districts noted concerns about slowing future demand, on balance, pricing power was steady, and some sectors, such as travel and hospitality, were successful in passing through sizable price increases to customers with little to no pushback. Most contacts expect pricing pressures to persist at least through the end of the year.

• The outlook for future economic growth was mostly negative among Districts, with contacts noting expectations for further weakening of demand over the next six to twelve months.

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 Sixth District also reported that deposit growth slowed at financial institutions, but demand for loans increased. The Federal Reserve's Sixth District also noted that conditions at financial institutions were steady as loan growth improved, with consumer lending experiencing the strongest growth among loan portfolios, and deposit balances were flat. The Federal Reserve's Eighth District noted that supply chain bottlenecks remain a key issue across industries, with shortages and delays affecting availability of key inputs. The Federal Reserve’s Eleventh District also reported that outlooks were mostly negative, and uncertainty surged, with contacts voicing concern about slowing future demand and increased risk of a recession stemming from high prices, supply-side constraints, weakening consumer sentiment and rising interest rates.

Financial Highlights

Trustmark reported net income of $34.3 million, or basic and diluted earnings per share (EPS) of $0.56, in the second quarter of 2022, compared to $48.0 million, or basic and diluted EPS of $0.76, in the second quarter of 2021. Trustmark’s reported performance during the quarter ended June 30, 2022 produced a return on average tangible equity of 11.36%, a return on average assets of 0.79%, an average equity to average assets ratio of 9.24% and a dividend payout ratio of 41.07%, compared to a return on average tangible equity of 13.96%, a return on average assets of 1.13%, an average equity to average assets ratio of 10.46% and a dividend payout ratio of 30.26% during the quarter ended June 30, 2021.

Trustmark report net income of $63.5 million, or basic and diluted EPS of $1.03, for the first six months of 2022, compared to $99.9 million, or basic and diluted EPS of $1.58 and $1.57, respectively, for the same time period in 2021. Trustmark's reported performance for the six months ended June 30, 2022 produced a return on average tangible equity of 10.16%, a return on average assets of 0.73%, an average equity to average assets ratio of 9.51% and a dividend payout ratio of 44.66%, compared to a return on average tangible equity of 14.75%, a return on average assets of 1.20%, an average equity to average assets ratio of 10.50% and a dividend payout ratio of 29.11% for the six months ended June 30, 2021.

Total revenue, which is defined as net interest income plus noninterest income, for the three and six months ended June 30, 2022 was $165.9 million and $319.4 million, respectively, a decrease of $9.9 million, or 5.6%, and $19.4 million, or 5.7%, respectively, when compared to the same time periods in 2021. The decrease in total revenue for the three and six months ended June 30, 2022 when compared to the same time periods in 2021, resulted from declines in both net interest income, primarily due to the decline in interest and fees on Paycheck Protection Plan (PPP) loans, and noninterest income, primarily due to a decline in mortgage banking, net. These factors are discussed in further detail below.

Net interest income for the three and six months ended June 30, 2022 totaled $112.7 million and $212.0 million, respectively, a decrease of $6.7 million, or 5.6%, and $9.7 million, or 4.4%, respectively, when compared to the same time periods in 2021. Interest income totaled $117.2 million and $220.9 million for the three and six months ended June 20, 2022, respectively, a decrease of $8.7 million, or 6.9%, and $14.5 million, or 6.2%, respectively, when compared to the same time periods in 2021, principally due to a decline in interest and fees on PPP loans, primarily due to PPP loans forgiven by the U.S. Small Business Administration (SBA) as well as the PPP loans sold during the second quarter of 2021, partially offset by increases in interest and fees on loans held for sale (LHFS) and LHFI primarily due to loan growth and rising interest rates, interest on securities primarily due to securities purchased and other interest income primarily due to an increase in the rate paid by the Federal Reserve Bank of Atlanta (FRBA) on reserves. Interest expense totaled $4.5 million and $8.9 million for the three and six months ended June 30, 2022, respectively, a decrease of $2.0 million, or 30.7%, and $4.8 million, or 34.9%, respectively, when compared to the same time periods in 2021, principally due to the decline in interest on deposits as a result of lower interest rates and a decrease in the average balances of time deposits.

Noninterest income for the three months ended June 30, 2022 totaled $53.3 million, a decrease of $3.2 million, or 5.6%, when compared to the same time period in 2021, primarily due to a decline in mortgage banking, net, partially offset by increases in service charges on deposit accounts, bank card and other fees and insurance commissions. Mortgage banking, net totaled $8.1 million for the three months ended June 30, 2022, a decrease of $9.2 million, or 53.0%, when compared to the same time period in 2021, principally due to a decline in the gain on sales of loans, net. Service charges on deposit accounts totaled $10.2 million for the second quarter of 2022, an increase of $2.6 million, or 34.3%, when compared to the same time period in 2021 principally due to increases in the amount of non-sufficient funds (NSF) and overdraft occurrences on consumer interest checking accounts and service charges on consumer interest checking accounts and demand deposit accounts (DDAs), primarily as a result of an increase in customer transactions with the further abatement of pandemic-related concerns. Bank card and other fees totaled $10.2 million for the second quarter of 2022, an increase of $1.9 million, or 22.5%, when compared to the same time period in 2021 principally due to an increase in customer derivative revenue. Insurance commissions totaled $13.7 million for the three months ended June 30, 2022, an increase of $1.5 million, or 12.2%, when compared to the same time period in 2021, principally due to growth in commissions from commercial property and casualty business.

Noninterest income for the six months ended June 30, 2022 totaled $107.4 million, a decrease of $9.6 million, or 8.2%, when compared to the same time period in 2021, principally due to a decline in mortgage banking, net, partially offset by increases in service charges on deposit accounts, insurance commissions and other income, net. Mortgage banking, net totaled $18.0 million for the six months ended June 30, 2022, a decrease of $20.1 million, or 52.7%, when compared to the same time period in 2021, principally due to a decline in the gain on sales of loans, net. Service charges on deposit accounts totaled $19.7 million for the first six months of 2022, an increase of $4.7 million, or 31.5%, when compared to the same time period in 2021 principally due to increases in the amount of NSF and overdraft occurrences on consumer interest checking accounts and DDAs and service charges on consumer interest checking accounts. Insurance commissions totaled $27.8 million for the six months ended June 30, 2022, an increase of $3.1 million, or 12.7%, when compared to the same time period in 2021, principally due to growth in commissions from commercial property and casualty business and other commission income. Other income, net totaled $5.1 million for the first six months of 2022, an increase of $1.0 million, or 25.0%, when compared to the same time period in 2021, principally due to gains on the sale of two closed bank branch locations and a decrease in the amortization of investments in tax credit partnerships.

Noninterest expense for the three and six months ended June 30, 2022 totaled $123.8 million and $245.3 million, respectively, an increase of $5.1 million, or 4.3%, and $5.1 million, or 2.1%, respectively, when compared to the same time periods in 2021. The increase in noninterest expense for the second quarter of 2022 was principally due to increases in services and fees and salaries and employee benefits. The increase in noninterest expense for the first six months of 2022 was principally due to an increase in services and fees. Services and fees totaled $24.5 million and $49.0 million for the three and six months ended June 30, 2022, respectively, an increase of $2.8 million, or 12.7%, and $4.7 million, or 10.7%, respectively, when compared to the same time periods in 2021. The increase in services and fees for the second quarter of 2022 was primarily due to increases in other services and fees, software licenses

and business processing outsourcing fees related to transaction processing. The increase in services and fees for the first six months of 2022 was principally due to increases in other services and fees, software licenses and business processing outsourcing fees related to transaction processing, partially offset by a decline in legal expenses. Salaries and employee benefits totaled $71.7 million for the three months ended June 30, 2022, an increase of $1.6 million, or 2.2%, when compared to the same time period in 2021, principally due to increases in commission expense related to improved insurance production and salaries expense as a result of general merit increases.

Trustmark’s provision for credit losses (PCL) on LHFI for the three and six months ended June 30, 2022 totaled $2.7 million and $1.9 million, respectively, an increase of $6.7 million and $16.3 million, respectively, when compared to the same time periods in 2021. The PCL on LHFI for the second quarter of 2022 was primarily driven by reserves related to loan growth and the nature and volume of the portfolio, partially offset by improvements in macroeconomic forecasts. The PCL on LHFI for the first six months of 2022 primarily reflected an increase in required reserves as a result of loan growth and specific reserves on individually analyzed LHFI, partially offset by improvements in the macroeconomic forecasts and credit quality. The PCL on off-balance sheet credit exposures totaled a negative $1.6 million and a negative $2.7 million for the three and six months ended June 30, 2022, respectively, a decrease of $6.1 million and an increase of $2.2 million, respectively, when compared to the same time periods in 2021. The negative PCL on off-balance sheet credit exposures for the second quarter of 2022 was primarily driven by improvements in macroeconomic forecasts. The negative PCL on off-balance sheet credit exposures for the first six months of 2022 primarily reflected a decline in required reserves as a result of decreases in the unfunded balances and changes in the total reserve rate used in the calculation of the allowance for credit losses (ACL) on off-balance sheet credit exposures. Please see the section captioned “Provision for Credit Losses” for additional information regarding the PCL on LHFI and off-balance sheet credit exposures.

At June 30, 2022, nonperforming assets totaled $65.1 million, a decrease of $2.2 million, or 3.2%, compared to December 31, 2021, as a result of declines in other real estate and nonaccrual loans. Nonaccrual LHFI totaled $62.1 million at June 30, 2022, a decrease of $646 thousand, or 1.0%, relative to December 31, 2021, primarily due to reductions and pay-offs of nonaccrual loans in the Alabama, Mississippi and Texas market regions, which were largely offset by commercial credits placed on nonaccrual status in the Texas and Mississippi market regions. Other real estate totaled $3.0 million at June 30, 2022, a decline of $1.5 million, or 33.4%, compared to December 31, 2021, principally due to properties sold in the Mississippi market region.

LHFI totaled $10.945 billion at June 30, 2022, an increase of $697.0 million, or 6.8%, compared to December 31, 2021. The increase in LHFI during the first six months of 2022 was primarily due to net growth in LHFI secured by real estate primarily in the Mississippi and Alabama market regions as well as growth in commercial and industrial LHFI in the Mississippi and Alabama market regions partially offset by a decline in commercial and industrial LHFI in the Tennessee 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 “Capital Resources and Liquidity” for further discussion of the components of Trustmark’s excess funding capacity.

Total deposits were $14.770 billion at June 30, 2022, a decrease of $317.0 million, or 2.1%, compared to December 31, 2021. During the first six months of 2022, noninterest-bearing deposits decreased $261.6 million, or 5.5%, reflecting declines in consumer and public DDAs partially offset by an increase in commercial DDAs. Interest-bearing deposits decreased $55.4 million, or 0.5%, during the first six months of 2022, primarily due to a decline in public interest checking accounts partially offset by growth in consumer interest checking accounts.

Recent Legislative and Regulatory Developments

On June 21, 2022, the Federal Deposit Insurance Corporation (FDIC) issued a proposed rule to increase initial base deposit insurance assessment rates for insured depository institutions by 2 basis points, beginning with the first quarterly assessment period of 2023. The proposed assessment rate schedules would remain in effect unless and until the reserve ratio of the Deposit Insurance Fund meets or exceeds 2 percent. If the proposed rule is finalized as proposed, the FDIC insurance costs of insured depository institutions, including TNB, would generally increase.

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 2021 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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Consolidated Statements of Income
Total interest income	$	117,184		$	125,925		$	220,897		$	235,397
Total interest expense		4,508			6,502			8,877			13,638
Net interest income		112,676			119,423			212,020			221,759
Provision for credit losses (PCL), LHFI		2,716			(3,991	)		1,856			(14,492	)
PCL, off-balance sheet credit exposures		(1,568	)		4,528			(2,674	)		(4,839	)
Noninterest income		53,253			56,411			107,368			116,994
Noninterest expense		123,767			118,679			245,286			240,227
Income before income taxes		41,014			56,618			74,920			117,857
Income taxes		6,730			8,637			11,425			17,914
Net Income	$	34,284		$	47,981		$	63,495		$	99,943
Total Revenue (1)	$	165,929		$	175,834		$	319,388		$	338,753
Per Share Data
Basic EPS	$	0.56		$	0.76		$	1.03		$	1.58
Diluted EPS		0.56			0.76			1.03			1.57
Cash dividends per share		0.23			0.23			0.46			0.46
Performance Ratios
Return on average equity		8.55	%		10.81	%		7.71	%		11.39	%
Return on average tangible equity		11.36	%		13.96	%		10.16	%		14.75	%
Return on average assets		0.79	%		1.13	%		0.73	%		1.20	%
Average equity / average assets		9.24	%		10.46	%		9.51	%		10.50	%
Net interest margin (fully taxable equivalent)		2.90	%		3.16	%		2.74	%		2.99	%
Dividend payout ratio		41.07	%		30.26	%		44.66	%		29.11	%
Credit Quality Ratios (2)
Net charge-offs (recoveries) / average loans		-0.06	%		0.05	%		-0.03	%		-0.02	%
PCL, LHFI / average loans		0.10	%		-0.16	%		0.03	%		-0.28	%
Nonaccrual LHFI / (LHFI + LHFS)		0.56	%		0.49	%
Nonperforming assets / (LHFI + LHFS)<br> plus other real estate		0.58	%		0.58	%
ACL LHFI / LHFI		0.94	%		1.02	%

(1)

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

(2)

Excludes PPP loans.

	June 30,
	2022			2021
Consolidated Balance Sheets
Total assets	$	16,951,510		$	17,098,132
Securities		3,782,118			2,981,751
Total loans (LHFI + LHFS)		11,135,026			10,485,001
Deposits		14,770,168			14,632,084
Total shareholders' equity		1,586,696			1,779,309
Stock Performance
Market value - close	$	29.19		$	30.80
Book value		25.93			28.35
Tangible book value		19.58			22.13
Capital Ratios
Total equity / total assets		9.36	%		10.41	%
Tangible equity / tangible assets		7.23	%		8.31	%
Tangible equity / risk-weighted assets		9.16	%		11.33	%
Tier 1 leverage ratio		8.80	%		9.00	%
Common equity Tier 1 risk-based capital ratio		11.01	%		11.76	%
Tier 1 risk-based capital ratio		11.47	%		12.25	%
Total risk-based capital ratio		13.26	%		14.10	%

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's common equity Tier 1 capital includes common stock, capital surplus and retained earnings, and is reduced by goodwill and other intangible assets, net of associated net deferred tax liabilities as well as disallowed deferred tax assets and threshold deductions as applicable.

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 calculation methods may not be comparable with those of 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 June 30,						Six Months Ended June 30,
		2022			2021			2022			2021
TANGIBLE EQUITY
AVERAGE BALANCES
Total shareholders' equity		$	1,608,309		$	1,780,705		$	1,660,739		$	1,770,087
Less: Goodwill			(384,237	)		(384,237	)		(384,237	)		(384,694	)
Identifiable intangible assets			(4,436	)		(6,442	)		(4,656	)		(6,778	)
Total average tangible equity		$	1,219,636		$	1,390,026		$	1,271,846		$	1,378,615
PERIOD END BALANCES
Total shareholders' equity		$	1,586,696		$	1,779,309
Less: Goodwill			(384,237	)		(384,237	)
Identifiable intangible assets			(4,264	)		(6,170	)
Total tangible equity	(a)	$	1,198,195		$	1,388,902
TANGIBLE ASSETS
Total assets		$	16,951,510		$	17,098,132
Less: Goodwill			(384,237	)		(384,237	)
Identifiable intangible assets			(4,264	)		(6,170	)
Total tangible assets	(b)	$	16,563,009		$	16,707,725
Risk-weighted assets	(c)	$	13,076,981		$	12,256,492
NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION
Net income		$	34,284		$	47,981		$	63,495		$	99,943
Plus: Intangible amortization net of tax			246			415			608			915
Net income adjusted for intangible amortization		$	34,530		$	48,396		$	64,103		$	100,858
Period end shares outstanding	(d)		61,201,123			62,773,226
TANGIBLE EQUITY MEASUREMENTS
Return on average tangible equity (1)			11.36	%		13.96	%		10.16	%		14.75	%
Tangible equity/tangible assets	(a)/(b)		7.23	%		8.31	%
Tangible equity/risk-weighted assets	(a)/(c)		9.16	%		11.33	%
Tangible book value	(a)/(d)*1,000	$	19.58		$	22.13
COMMON EQUITY TIER 1 CAPITAL (CET1)
Total shareholders' equity		$	1,586,696		$	1,779,309
CECL transitional adjustment			19,500			26,671
AOCI-related adjustments			207,142			10,641
CET1 adjustments and deductions:
Goodwill net of associated deferred tax liabilities (DTLs)			(370,229	)		(370,276	)
Other adjustments and deductions for CET1 (2)			(3,757	)		(5,243	)
CET1 capital	(e)		1,439,352			1,441,102
Additional Tier 1 capital instruments plus related surplus			60,000			60,000
Tier 1 Capital		$	1,499,352		$	1,501,102
Common equity Tier 1 risk-based capital ratio	(e)/(c)		11.01	%		11.76	%

(1)

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

(2)

Includes other intangible assets, net of DTLs, disallowed deferred tax assets and threshold deductions, as 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 tables show 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 six months ended June 30, 2022 decreased $6.8 million, or 5.5%, and $9.7 million, or 4.2%, respectively, when compared with the same time periods in 2021, principally due to declines in interest and fees on PPP loans, partially offset by increases in interest and fees on LHFS and LHFI, taxable interest on securities and other interest income as well as a decline in interest on deposits. The net interest margin-FTE for the three and six months ended June 30, 2022 decreased 26 basis points to 2.90% and 25 basis points to 2.74%, respectively, when compared to the same time periods in 2021. The net interest margin excluding PPP loans and the balance held at the 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 3.06% and 2.97% for the three and six months ended June 30, 2022, respectively, an increase of 12 basis points and 1 basis point, respectively, when compared to the same time periods in 2021. The increase in the net interest margin excluding PPP loans and the balance held at the FRBA for the three and six months ended June 30, 2022 compared to the same time periods in 2021, was principally due to increases in the yield on the LHFS and LHFI and securities portfolios and lower costs of interest-bearing deposits.

At June 30, 2022, Trustmark had PPP loans outstanding totaling $12.5 million, net of deferred fees and costs of $259 thousand, compared to $166.1 million, net of $2.1 million of deferred fees and costs, at June 30, 2021. 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 first six months of 2022, PPP loans totaling $21.0 million were forgiven by the SBA. 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-FTE for the quarter ended June 30, 2021. In addition, PPP loans totaling $605.5 million were forgiven by the SBA during 2021. Average PPP loans for the three and six months ended June 30, 2022 totaled $17.7 million and $23.3 million, respectively, a decrease of $630.5 million, or 97.3%, and $600.0 million, or 96.3%, respectively, when compared to the same time periods in 2021. Interest and fees on PPP loans for the three and six months ended June 30, 2022 decreased $25.4 million, or 99.3%, and $34.4 million, or 99.0%, respectively, when compared to the same time periods in 2021. The yield on PPP loans for the three and six months ended June 30, 2022 decreased to 4.16% and 3.04%, respectively, compared to 15.81% and 11.26%, respectively, for the three and six months ended June 30, 2021.

The average FRBA balance, included in other earning assets, for the three and six months ended June 30, 2022 totaled $1.077 billion and $1.416 billion, respectively, a decrease of $622.8 million, or 36.6%, and $243.7 million, or 14.7%, respectively, when compared to the same time periods in 2021, principally due to purchases of securities and growth in LHFI as well as the decline in deposits. Interest earned on FRBA balances increased $1.5 million and $1.8 million, respectively, when the three and six months ended June 30, 2022 are compared to the same time period in 2021. The yield on the FRBA balance was 0.71% and 0.37% for the three and six months ended June 30, 2022, respectively, an increase of 62 basis points and 28 basis points, respectively, when compared to the same time periods in 2021, reflecting increases in the interest rate that the FRBA pays on reserves beginning in the third quarter of 2021.

Average interest-earning assets for the three and six months ended June 30, 2022 were $15.984 billion and $16.022 billion compared to $15.512 billion and $15.356 billion for the same time periods in 2021, an increase of $472.0 million, or 3.0%, and $665.5 million, or 4.3%, principally due to increases in average securities and average loans (LHFS and LHFI), partially offset by declines in average PPP loans and average other earning assets. Average securities increased $1.119 billion, or 40.0%, and $1.086 billion, or 40.1%, respectively, when the three and six months ended June 30, 2022 are compared to the same time periods in 2021 primarily due to purchases of securities, 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. Average loans (LHFS and LHFI) increased $594.3 million, or 5.8%, and $415.3 million, or 4.0%, when the three and six months ended June 30, 2022 are compared to the same time periods in 2021 reflecting an increase in the average balance of the LHFI portfolio of $735.4 million, or 7.4%, and $590.1 million, or 6.0%, respectively, partially offset by a decrease in the average balance of the LHFS portfolio of $141.2 million, or 40.7%, and $174.8 million, or 43.8%, respectively. The increase in the LHFI portfolio was principally due to net growth in LHFI secured by real estate and commercial and industrial LHFI. The decrease in the LHFS portfolio was principally due to Trustmark's decision during 2021 to retain certain mortgage loans in its LHFI portfolio. Average other earning assets decreased $611.1 million, or 34.9%, and $235.7 million, or 13.8%, respectively, when the three and six months ended June 30, 2022 are compared to the same time period in 2021, was primarily due to the decrease in excess reserves held at the FRBA.

Interest income-FTE for the three and six months ended June 30, 2022 totaled $120.1 million and $226.8 million, respectively, a decrease of $8.8 million, or 6.8%, and $14.4 million, or 6.0%, respectively, while the yield on total earning assets declined 32 basis points to 3.01% and 2.85%, respectively, when compared to the same time periods in 2021. Interest income-FTE, excluding PPP loans and the balance held at the FRBA, for the three and six months ended June 30, 2022 increased $15.1 million, or 14.6%, and $18.2 million, or 8.8%, respectively, while the yield on total earning assets excluding PPP loans and the balance held at the FRBA increased 4 basis points to 3.18% and decreased 7 basis points to 3.10%, respectively, when compared to the same time periods in 2021. The increase in interest income-FTE, excluding PPP loans and the balance held at the FRBA, for the three and six months ended June 30, 2022 was primarily due to increases in interest and fees on LHFS and LHFI-FTE and interest on securities-taxable. During the three and six months ended June 30, 2022, interest and fees on LHFS and LHFI-FTE increased $9.3 million, or 10.0%, and $9.2 million, or 4.9%, respectively,

while the yield on LHFS and LHFI increased 15 basis points to 3.79% and 3 basis points to 3.69%, respectively, when compared to the same time periods in 2021, primarily due to the higher interest rate environment during the first six months of 2022. During the three and six months ended June 30, 2022, interest on securities-taxable increased $5.6 million, or 62.0%, and $9.0 million, or 50.1%, respectively, while the yield on securities-taxable increased 20 basis points to 1.50% and 9 basis points to 1.44%, respectively, when compared to the same time periods in 2021, primarily due to purchases of taxable securities and the higher interest rate environment during the first six months of 2022.

Average interest-bearing liabilities for the three months ended June 30, 2022 totaled $10.760 billion compared to $10.478 billion for the same time period in 2021, an increase of $282.6 million, or 2.7%. Average interest-bearing liabilities for the first six months of 2022 totaled $10.830 billion compared to $10.386 billion for the same time period in 2021, an increase of $444.7 million, or 4.3%. The increase in average interest-bearing liabilities when the three and six months ended June 30, 2022 are compared to the same time periods in 2021 was primarily the result of the increase in average interest-bearing deposits. Average interest-bearing deposits for the three and six months ended June 30, 2022 increased $390.2 million, or 3.9%, and $513.9 million, or 5.2%, respectively, when compared to the same time periods in 2021, reflecting growth in average interest-bearing demand deposits and savings deposits partially offset by declines in average time deposits.

Interest expense for the three and six months ended June 30, 2022 totaled $4.5 million and $8.9 million, respectively, a decrease of $2.0 million, or 30.7%, and $4.8 million, or 34.9%, respectively, when compared with the same time periods in 2021, while the rate on total interest-bearing liabilities decreased 8 basis points and 9 basis points, respectively, to 0.17%, primarily due to a decline in interest on deposits. Interest on deposits for the three and six months ended June 30, 2022 decreased $1.9 million, or 40.1%, and $4.3 million, or 43.8%, respectively, while the rate on interest-bearing deposits decreased 8 basis points and 9 basis points, respectively, to 0.11%, when compared to the same time periods in 2021, primarily due to lower interest rates and the decline in average balances of time deposits.

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 June 30,
	2022								2021
	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	$	110		$	1		3.65	%	$	55		$	—		—
Securities - taxable		3,905,963			14,561		1.50	%		2,781,350			8,991		1.30	%
Securities - nontaxable		10,740			107		4.00	%		16,132			149		3.70	%
PPP Loans		17,746			184		4.16	%		648,222			25,555		15.81	%
Loans (LHFS and LHFI)		10,910,178			103,033		3.79	%		10,315,927			93,698		3.64	%
Other earning assets		1,139,312			2,214		0.78	%		1,750,385			489		0.11	%
Total interest-earning assets		15,984,049			120,100		3.01	%		15,512,071			128,882		3.33	%
Other assets		1,513,127								1,622,388
Allowance for credit losses, LHFI		(99,106	)							(112,346	)
Total Assets	$	17,398,070							$	17,022,113
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	10,376,149			2,774		0.11	%	$	9,985,986			4,630		0.19	%
Federal funds purchased and<br> securities sold under repurchase<br> agreements		118,753			70		0.24	%		174,620			59		0.14	%
Other borrowings		265,255			1,664		2.52	%		316,952			1,813		2.29	%
Total interest-bearing liabilities		10,760,157			4,508		0.17	%		10,477,558			6,502		0.25	%
Noninterest-bearing demand deposits		4,590,338								4,512,268
Other liabilities		439,266								251,582
Shareholders' equity		1,608,309								1,780,705
Total Liabilities and<br> Shareholders' Equity	$	17,398,070							$	17,022,113
Net Interest Margin					115,592		2.90	%					122,380		3.16	%
Less tax equivalent adjustment					2,916								2,957
Net Interest Margin per<br> Consolidated Statements<br> of Income				$	112,676							$	119,423
	Six Months Ended June 30,
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	2022								2021
	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	$	83		$	1		2.43	%	$	95		$	—		—
Securities - taxable		3,781,847			26,918		1.44	%		2,684,886			17,929		1.35	%
Securities - nontaxable		11,592			229		3.98	%		22,660			439		3.91	%
PPP Loans		23,346			352		3.04	%		623,319			34,796		11.26	%
Loans (LHFS and LHFI)		10,731,438			196,285		3.69	%		10,316,122			187,092		3.66	%
Other earning assets		1,473,655			3,031		0.41	%		1,709,373			992		0.12	%
Total interest-earning assets		16,021,961			226,816		2.85	%		15,356,455			241,248		3.17	%
Other assets		1,531,884								1,611,877
Allowance for credit losses, LHFI		(99,247	)							(115,932	)
Total Assets	$	17,454,598							$	16,852,400
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	10,394,769			5,534		0.11	%	$	9,880,836			9,853		0.20	%
Federal funds purchased and<br> securities sold under repurchase<br> agreements		165,122			140		0.17	%		170,786			115		0.14	%
Other borrowings		270,602			3,203		2.39	%		334,209			3,670		2.21	%
Total interest-bearing liabilities		10,830,493			8,877		0.17	%		10,385,831			13,638		0.26	%
Noninterest-bearing demand deposits		4,595,693								4,438,324
Other liabilities		367,673								258,158
Shareholders' equity		1,660,739								1,770,087
Total Liabilities and<br> Shareholders' Equity	$	17,454,598							$	16,852,400
Net Interest Margin					217,939		2.74	%					227,610		2.99	%
Less tax equivalent adjustment					5,919								5,851
Net Interest Margin per<br> Consolidated Statements<br> of Income				$	212,020							$	221,759

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 $2.7 million and $1.9 million for the three and six months ended June 30, 2022, respectively, compared to a negative $4.0 and a negative $14.5 million, respectively, for the same time periods in 2021. The PCL on LHFI for the second quarter of 2022 was primarily driven by reserves related to loan growth and the nature and volume of the portfolio, partially offset by improvements in macroeconomic forecasts. The PCL on LHFI for the first six months of 2022 primarily reflected an increase in required reserves as a result of loan growth and specific reserves on individually analyzed LHFI, partially offset by improvements in the macroeconomic forecasts and credit quality.

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 the PCL, off-balance sheet credit exposures. The PCL, off-balance sheet credit exposures totaled a negative $1.6 million and a negative $2.7 million for the three and six months ended June 30, 2022, respectively, compared to $4.5 million and a negative $4.8 million, respectively, for the same time periods in 2021. The negative PCL on off-balance sheet credit exposures for the second quarter of 2022 was primarily driven by improvements in macroeconomic forecasts. The negative PCL on off-balance sheet credit exposures for the

first six months of 2022 primarily reflected a decline in required reserves as a result of decreases in the unfunded balances and changes in the total reserve rate used in the calculation of the ACL on off-balance sheet credit exposures.

See the section captioned “Allowance for Credit Losses” for information regarding Trustmark’s ACL methodology as well as further analysis of the PCL.

Noninterest Income

Noninterest income represented 32.1% and 33.6% of total revenue for the three and six months ended June 30, 2022, respectively, compared to 32.1% and 34.5% for the three and six months ended June 30, 2021, respectively. The following table provides the comparative components of noninterest income for the periods presented ($ in thousands):

	Three Months Ended June 30,									Six Months Ended June 30,
	2022		2021		Change		% Change			2022		2021		Change		% Change
Service charges on deposit accounts	$	10,226	$	7,613				34.3	%	$	19,677	$	14,969				31.5	%
Bank card and other fees		10,167		8,301				22.5	%		18,609		17,773				4.7	%
Mortgage banking, net		8,149		17,333		)		-53.0	%		18,022		38,137		)		-52.7	%
Insurance commissions		13,702		12,217				12.2	%		27,791		24,662				12.7	%
Wealth management		9,102		8,946				1.7	%		18,156		17,362				4.6	%
Other, net		1,907		2,001		)		-4.7	%		5,113		4,091				25.0	%
Total noninterest income	$	53,253	$	56,411		)		-5.6	%	$	107,368	$	116,994		)		-8.2	%

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 June 30, 2022 compared to the same time period in 2021 was principally due to increases in the amount of NSF and overdraft occurrences on consumer interest checking accounts and service charges on consumer interest checking accounts and DDAs, primarily as a result of an increase in customer transactions with the further abatement of pandemic-related concerns. The increase in service charges on deposit accounts for the first six months of 2022 was principally due to increases in the amount of NSF and overdraft occurrences on consumer interest checking accounts and DDAs and service charges on consumer interest checking accounts.

Bank Card and Other Fees

The increase in bank card and other fees for the second quarter of 2022 was principally due to an increase in customer derivative revenue.

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 June 30,											Six Months Ended June 30,
	2022			2021			Change		% Change			2022			2021			Change		% Change
Mortgage servicing income, net	$	6,557		$	6,318					3.8	%	$	12,986		$	12,499					3.9	%
Change in fair value-MSR from<br> runoff		(3,806	)		(5,029	)				24.3	%		(7,591	)		(10,132	)				25.1	%
Gain on sales of loans, net		6,030			14,778			)		-59.2	%		12,253			34,234			)		-64.2	%
Mortgage banking income<br> before net hedge<br> ineffectiveness		8,781			16,067			)		-45.3	%		17,648			36,601			)		-51.8	%
Change in fair value-MSR from<br> market changes		8,739			(4,465	)			n/m				30,759			9,231				n/m
Change in fair value of<br> derivatives		(9,371	)		5,731			)	n/m				(30,385	)		(7,695	)		)	n/m
Net hedge ineffectiveness		(632	)		1,266			)	n/m				374			1,536			)		-75.7	%
Mortgage banking, net	$	8,149		$	17,333			)		-53.0	%	$	18,022		$	38,137			)		-52.7	%

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 and six months ended June 30, 2022 when compared to the same time periods in 2021 was principally due to a decline in the gain on sales of loans, net. Mortgage loan production for the three and six months ended June 30, 2022 was $681.4 million and $1.226 billion, respectively, a decrease of $55.4 million, or 7.5%, and $277.7 million, or 18.5%, respectively, when compared to the same time periods in 2021. Loans serviced for others totaled $8.022 billion at June 30, 2022, compared with $7.853 billion at June 30, 2021, an increase of $168.8 million, or 2.1%.

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 and six months ended June 30, 2022 are compared to the same time period in 2021, was primarily the result of a decline in the volume of loans sold and lower profit margins in secondary marketing activities partially offset by an increase in the mortgage valuation adjustment. Loan sales totaled $337.4 million and $711.1 million for the three and six months ended June 30, 2022, respectively, a decrease of $292.4 million, or 46.4%, and $578.1 million, or 44.8%, respectively, when compared with the same time periods in 2021.

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 June 30,											Six Months Ended June 30,
	2022			2021			Change		% Change			2022			2021			Change	% Change
Partnership amortization for tax<br> credit purposes	$	(1,475	)	$	(1,989	)				25.8	%	$	(2,811	)	$	(3,511	)			19.9	%
Increase in life insurance cash<br> surrender value		1,683			1,653					1.8	%		3,310			3,292				0.5	%
Other miscellaneous income		1,699			2,337			)		-27.3	%		4,614			4,310				7.1	%
Total other, net	$	1,907		$	2,001			)		-4.7	%	$	5,113		$	4,091				25.0	%

All values are in US Dollars.

The increase in other income, net for the first six months of 2022 when compared to the same time period in 2021 was principally due to gains on the sale of two closed bank branch locations and a decrease in the amortization of investments in tax credit partnerships.

Noninterest Expense

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

	Three Months Ended June 30,									Six Months Ended June 30,
	2022		2021		Change		% Change			2022		2021		Change		% Change
Salaries and employee benefits	$	71,679	$	70,115				2.2	%	$	141,264	$	141,277		)		—
Services and fees		24,538		21,769				12.7	%		48,991		44,253				10.7	%
Net occupancy-premises		6,892		6,578				4.8	%		13,971		13,373				4.5	%
Equipment expense		6,047		5,567				8.6	%		12,108		11,811				2.5	%
Other expense (1)		14,611		14,650		)		-0.3	%		28,952		29,513		)		-1.9	%
Total noninterest expense	$	123,767	$	118,679				4.3	%	$	245,286	$	240,227				2.1	%

All values are in US Dollars.

(1)

During the first quarter of 2022, Trustmark reclassified its other real estate expense, net to other expense. 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

The increase in salaries and employee benefits when the second quarter of 2022 is compared to the same time period in 2021 was principally due to increases in commission expense related to improved insurance production and salaries expense as a result of general merit increases.

Services and Fees

The increase in services and fees when the three months ended June 30, 2022 is compared to the same time period in 2021 was primarily due to increases in other services and fees, software licenses and business processing outsourcing fees related to transaction processing. The increase in services and fees when the first six months of 2022 is compared to the same time period in 2021 was principally due to increases in other services and fees, software licenses and business processing outsourcing fees related to transaction processing, partially offset by a decline in legal expenses.

Other Expense

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

	Three Months Ended June 30,									Six Months Ended June 30,
	2022		2021		Change		% Change			2022		2021		Change		% Change
Loan expense	$	4,068	$	3,738				8.8	%	$	8,457	$	7,905				7.0	%
Amortization of intangibles		328		553		)		-40.7	%		810		1,219		)		-33.6	%
FDIC assessment expense		1,810		1,225				47.8	%		3,310		2,765				19.7	%
Other real estate expense, net (1)		623		1,511		)		-58.8	%		658		1,835		)		-64.1	%
Other miscellaneous expense		7,782		7,623				2.1	%		15,717		15,789		)		-0.5	%
Total other expense	$	14,611	$	14,650		)		-0.3	%	$	28,952	$	29,513		)		-1.9	%

All values are in US Dollars.

(1)

During the first quarter of 2022, Trustmark reclassified its other real estate expense, net to other expense. Prior periods have been reclassified accordingly.

The decrease in other real estate expense, net for the six months ended June 30, 2022 compared to the same time period in 2021 was principally due to a decline in other real estate write-downs primarily due to properties sold for which a reserve for write-down was previously recorded.

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 six months ended June 30, 2022 and 2021.

General Banking

Net interest income for the General Banking Segment decreased $9.9 million, or 4.5%, when the six months ended June 30, 2022 is compared with the same time period in 2021. The decrease in net interest income was principally due to the decrease in interest and fees on PPP loans, partially offset by increases in interest and fees on LHFS and LHFI, interest on securities and other interest income as well as the decrease in interest on deposits. The PCL (LHFI and off-balance sheet credit exposures) for the General Banking Segment for the six months ended June 30, 2022 totaled a negative $810 thousand compared to a negative PCL of $19.3 million for the same period in 2021, a decrease in the negative PCL of $18.5 million, or 95.8%. For more information on these net interest income and PCL items, please see the sections captioned “Financial Highlights” and “Results of Operations.”

Noninterest income for the General Banking Segment decreased $13.3 million, or 17.8%, when the first six months of 2022 is compared to the same time period in 2021, primarily due to the decline in mortgage banking, net, partially offset by increases in service charges on deposit accounts and other income, net. Noninterest income for the General Banking Segment represented 22.7% of total revenue for this segment for the first six months of 2022 compared to 25.4% for the same time period in 2021. 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 $3.5 million, or 1.7%, when the first six months of 2022 is compared with the same time period in 2021, principally due to increases in other services and fees and business process outsourcing expenses related to transaction processing, partially offset by declines in mortgage originations commissions, restricted stock expense and legal expense. 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 six months of 2022 increased $258 thousand, or 8.5%, when compared to the same time period in 2021, primarily due to an increase in noninterest income partially offset by an increase in noninterest expense. Net interest income for the Wealth Management Segment increased $195 thousand, or 7.8%, when the first six months of 2022 is compared to the same time period in 2021, principally due to a slight increase in interest and fees on loans partially offset by a slight increase in interest on deposits generated by the Private Banking Department. The PCL for the six months ended June 30, 2022 totaled a negative $8 thousand compared to a negative PCL of $5 thousand for the same period in 2021, an increase in the negative PCL of $3 thousand primarily due to improvements in the 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 $615 thousand, or 3.5%, when the first six months of 2022 is compared to the same time period in 2021, primarily due to increases in income from both trust management and brokerage services. Noninterest expense for the Wealth Management Segment increased $470 thousand, or 2.9%, when the first six months of 2022 is compared to the same time period in 2021, principally due to increases in salary and employee benefit expense, primarily related to broker commissions and trust incentives, and data processing charges related to software, partially offset by declines in other miscellaneous expenses.

At June 30, 2022 and 2021, Trustmark held assets under management and administration of $17.323 billion and $15.355 billion, respectively, and brokerage assets of $2.172 billion and $2.315 billion, respectively.

Insurance

Net income for the Insurance Segment for the first six months of 2022 increased $1.5 million, or 30.9%, when compared to the same time period in 2021. Noninterest income for the Insurance Segment, which is predominately composed of insurance commissions, increased $3.1 million, or 12.5%, when the first six months of 2022 is compared to the same time period in 2021, primarily due to new business commission volume in the commercial property and casualty business and other commission income. Noninterest expense for the Insurance Segment increased $1.1 million, or 5.9%, when the first six months of 2022 is compared to the same time period in 2021, primarily due to an increase in commission expense as a result of higher business volumes, partially offset by a decrease in outside services and fees related to independent contractor expenses.

Income Taxes

For the three and six months ended June 30, 2022, Trustmark’s combined effective tax rate was 16.4% and 15.2%, respectively, compared to 15.3% and 15.2%, respectively, for the same time periods in 2021. 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, securities sold under reverse repurchase agreements and other earning assets. Average earning assets totaled $16.022 billion, or 91.8% of total average assets, for the six months ended June 30, 2022, compared to $15.356 billion, or 91.1% of total average assets, for the six months ended June 30, 2021, an increase of $665.5 million, or 4.3%.

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 5.3 years at June 30, 2022 compared to 4.3 years at December 31, 2021.

When compared to December 31, 2021, total investment securities increased by $200.7 million, or 5.6%, during the first six months of 2022. This increase resulted primarily from purchases of 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 six months of 2022 or 2021.

During 2013, Trustmark reclassified $1.099 billion of securities available for sale to securities held to maturity. At the date of this transfer, the net unrealized holding loss on the available for sale securities totaled approximately $46.6 million ($28.8 million, net of tax). During the second quarter of 2022, Trustmark reclassified approximately $343.1 million 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. At the date of transfer, the net unrealized holding loss on the available for sale securities totaled approximately $34.8 million ($26.1 million net of tax). The resulting net unrealized holding losses are 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 June 30, 2022, the net unamortized, unrealized loss on all transferred securities included in accumulated other comprehensive income (loss), net of tax, (AOCI) in the accompanying consolidated balance sheets totaled $39.5 million ($29.7 million net of tax) compared to $6.3 million ($4.7 million net of tax) at December 31, 2021.

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 June 30, 2022, available for sale securities totaled $2.644 billion, which represented 69.9% of the securities portfolio, compared to $3.239 billion, or 90.4% of total securities, at December 31, 2021. At June 30, 2022, unrealized losses, net on available for sale securities totaled $217.6 million compared to unrealized losses, net of $17.4 million at December 31, 2021. At June 30, 2022, 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 June 30, 2022, held to maturity securities totaled $1.138 billion, which represented 30.1% of the total securities portfolio, compared to $342.5 million, or 9.6% of total securities, at December 31, 2021.

Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of 99.7% 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 FRBA, Trustmark does not hold any other equity investment in a GSE or other governmental entity.

As of June 30, 2022, 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 June 30, 2022 ($ in thousands):

	June 30, 2022
	Amortized Cost					Estimated Fair Value
	Amount		%			Amount		%
Securities Available for Sale
Aaa	$	2,856,859		99.8	%	$	2,639,170		99.8	%
A1 to A3		1,037		—			1,037		—
Not Rated (1)		4,080		0.2	%		4,157		0.2	%
Total securities available for sale	$	2,861,976		100.0	%	$	2,644,364		100.0	%
Securities Held to Maturity
Aaa	$	1,132,434		99.5	%	$	1,097,121		99.5	%
Aa1 to Aa3		3,004		0.3	%		3,003		0.3	%
Not Rated (1)		2,316		0.2	%		2,335		0.2	%
Total securities held to maturity	$	1,137,754		100.0	%	$	1,102,459		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 June 30, 2022, approximately 99.8% of the available for sale securities, measured at the estimated fair value, and 99.5% of the held to maturity securities, measured at amortized cost, were rated Aaa.

LHFS

At June 30, 2022, LHFS totaled $190.2 million, consisting of $123.5 million of residential real estate mortgage loans in the process of being sold to third parties and $66.7 million of GNMA optional repurchase loans. At December 31, 2021, LHFS totaled $275.7 million, consisting of $191.2 million of residential real estate mortgage loans in the process of being sold to third parties and $84.5 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 six months of 2022 or 2021.

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

At June 30, 2022 and December 31, 2021, LHFI consisted of the following ($ in thousands):

	June 30, 2022					December 31, 2021
	Amount		%			Amount		%
Loans secured by real estate:
Construction, land development and other land	$	664,817		6.1	%	$	596,968		5.8	%
Other secured by 1-4 family residential properties		540,950		4.9	%		517,683		5.1	%
Secured by nonfarm, nonresidential properties		3,178,079		29.0	%		2,977,084		29.1	%
Other real estate secured		555,311		5.1	%		726,043		7.1	%
Other loans secured by real estate:
Other construction		775,241		7.1	%		711,813		6.9	%
Secured by 1-4 family residential properties		1,884,012		17.2	%		1,460,310		14.2	%
Commercial and industrial loans		1,551,001		14.2	%		1,414,279		13.8	%
Consumer loans		164,001		1.5	%		162,555		1.6	%
State and other political subdivision loans		1,110,795		10.1	%		1,146,251		11.2	%
Other commercial loans		520,633		4.8	%		534,843		5.2	%
LHFI	$	10,944,840		100.0	%	$	10,247,829		100.0	%

LHFI increased $697.0 million, or 6.8%, compared to December 31, 2021. The increase in LHFI during the first six months of 2022 was primarily due to net growth in LHFI secured by real estate primarily in the Mississippi and Alabama market regions as well as growth in commercial and industrial LHFI in the Mississippi and Alabama market regions partially offset by a decline in commercial and industrial LHFI in the Tennessee market region.

LHFI secured by real estate increased $608.5 million, or 8.7%, during the first six months of 2022 reflecting net growth in all categories of LHFI secured by real estate with the exception of other real estate secured LHFI. LHFI secured by 1-4 family residential properties increased $423.7 million, or 29.0%, during the first six months of 2022 primarily due to growth in the Mississippi market region, reflecting Trustmark's decision in 2021 to retain certain mortgage loans in its portfolio. LHFI secured by nonfarm, nonresidential properties (NFNR) increased $201.0 million, or 6.8%, during the first six months of 2022 principally due other construction loans that moved to NFNR LHFI across all five market regions. Excluding other construction loan reclassifications, NFNR LHFI increased $2.8 million, or 0.1%, during the first six months of 2022 due to growth in nonowner-occupied LHFI in the Mississippi, Alabama, Tennessee and Florida market regions as well as owner-occupied LHFI in the Texas and Tennessee market regions, which were mostly offset by declines in owner-occupied LHFI in the Alabama, Mississippi and Florida market regions and nonowner-occupied LHFI in the Texas market region. LHFI secured by construction, land development and other land increased $67.8 million, or 11.4%, during the first six months of 2022 primarily due to growth in 1-4 family construction loans across all five market regions. Other construction loans increased $63.4 million, or 8.9%, during the first six months of 2022 primarily due to new construction loans across all five market regions partially offset by other construction loans moved to other loan categories upon the completion of the related construction project. During the first six months of 2022, $311.8 million loans were moved from other construction to other loan categories, including $113.0 million to multi-family residential loans, $121.6 million to nonowner-occupied loans and $76.6 million to owner-occupied loans. Excluding all reclassifications between loan categories, growth in other construction loans across all five market regions totaled $371.7 million, or 52.2%, during the first six months of 2022. LHFI secured by other 1-4 family residential properties increased $23.2 million, or 4.5%, during the first six months of 2022 reflecting growth across all five market regions. LHFI secured by other real estate decreased $170.7 million, or 23.5%, during the first six months of 2022, primarily due to declines in all five market regions partially offset by other construction loans that moved to LHFI secured by multi-family residential properties in the Texas, Mississippi and Alabama market regions. Excluding other construction loan reclassifications, LHFI secured by other real estate decreased $283.8 million, or 39.1%, during the first six months of 2022.

Commercial and industrial LHFI increased $136.7 million, or 9.7%, during the first six months of 2022, principally due to growth in the Mississippi and Alabama market regions partially offset by declines in the Tennessee market region.

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):

	June 30, 2022			December 31, 2021
Home equity loans	$	35,488		$	36,223
Home equity lines of credit		370,179			351,128
Percentage of loans and lines for which Trustmark holds first lien		55.8	%		58.2	%
Percentage of loans and lines for which Trustmark does not hold first lien		44.2	%		41.8	%

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 June 30, 2022 and December 31, 2021 ($ in thousands). Trustmark’s variable rate LHFI are based primarily on various prime and LIBOR interest rate bases. Trustmark has transitioned to SOFR for new variable rate loans as of January 1, 2022.

	June 30, 2022
	Fixed		Variable		Total
Loans secured by real estate:
Construction, land development and other land	$	174,387	$	490,430	$	664,817
Other secured by 1- 4 family residential properties		37,345		503,605		540,950
Secured by nonfarm, nonresidential properties		1,607,259		1,570,820		3,178,079
Other real estate secured		134,622		420,689		555,311
Other loans secured by real estate:
Other construction		111,300		663,941		775,241
Secured by 1- 4 family residential properties		1,150,679		733,333		1,884,012
Commercial and industrial loans		764,200		786,801		1,551,001
Consumer loans		135,674		28,327		164,001
State and other political subdivision loans		1,059,995		50,800		1,110,795
Other commercial loans		217,370		303,263		520,633
LHFI	$	5,392,831	$	5,552,009	$	10,944,840
	December 31, 2021
---	---	---	---	---	---	---
	Fixed		Variable		Total
Loans secured by real estate:
Construction, land development and other land	$	167,674	$	429,294	$	596,968
Other secured by 1- 4 family residential properties		178,097		339,586		517,683
Secured by nonfarm, nonresidential properties		1,543,699		1,433,385		2,977,084
Other real estate secured		261,236		464,807		726,043
Other loans secured by real estate:
Other construction		139,857		571,956		711,813
Secured by 1- 4 family residential properties		926,898		533,412		1,460,310
Commercial and industrial loans		688,219		726,060		1,414,279
Consumer loans		135,010		27,545		162,555
State and other political subdivision loans		1,088,032		58,219		1,146,251
Other commercial loans		303,168		231,675		534,843
LHFI	$	5,431,890	$	4,815,939	$	10,247,829

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 June 30, 2022 and reflects each region’s diversified mix of loans ($ in thousands):

	June 30, 2022
LHFI Composition by Region	Total		Alabama		Florida		Mississippi		Tennessee		Texas
Loans secured by real estate:
Construction, land development and other land	$	664,817	$	274,811	$	48,855	$	193,231	$	43,599	$	104,321
Other secured by 1-4 family residential<br> properties		540,950		119,599		44,161		288,917		61,764		26,509
Secured by nonfarm, nonresidential properties		3,178,079		927,830		252,323		1,245,604		178,658		573,664
Other real estate secured		555,311		120,384		1,784		265,884		6,906		160,353
Other loans secured by real estate:
Other construction		775,241		335,591		3,732		198,739		9		237,170
Secured by 1-4 family residential properties		1,884,012		—		—		1,877,870		6,142		—
Commercial and industrial loans		1,551,001		393,458		23,451		644,894		243,252		245,946
Consumer loans		164,001		22,038		7,559		103,179		18,638		12,587
State and other political subdivision loans		1,110,795		85,538		69,860		721,339		28,922		205,136
Other commercial loans		520,633		69,907		11,172		316,416		69,988		53,150
LHFI	$	10,944,840	$	2,349,156	$	462,897	$	5,856,073	$	657,878	$	1,618,836
Construction, Land Development and Other Land Loans by Region
Lots	$	69,566	$	35,149	$	10,758	$	16,700	$	2,255	$	4,704
Development		149,183		55,380		1,726		52,982		6,556		32,539
Unimproved land		100,319		17,366		11,781		32,771		10,889		27,512
1-4 family construction		345,749		166,916		24,590		90,778		23,899		39,566
Construction, land development and<br> other land loans	$	664,817	$	274,811	$	48,855	$	193,231	$	43,599	$	104,321
Loans Secured by Nonfarm, Nonresidential Properties by Region
Nonowner-occupied:
Retail	$	331,004	$	129,167	$	35,109	$	81,857	$	22,142	$	62,729
Office		282,768		110,140		19,116		89,459		10,790		53,263
Hotel/motel		339,184		186,628		76,318		33,002		28,693		14,543
Mini-storage		160,857		23,452		2,196		110,162		423		24,624
Industrial		296,943		106,567		19,243		99,690		252		71,191
Health care		53,221		20,763		1,045		27,704		351		3,358
Convenience stores		28,737		8,538		661		14,191		1,123		4,224
Nursing homes/senior living		343,468		138,209		—		138,436		5,934		60,889
Other		106,771		15,903		10,094		48,052		16,801		15,921
Total nonowner-occupied loans		1,942,953		739,367		163,782		642,553		86,509		310,742
Owner-occupied:
Office		154,226		42,428		36,256		45,836		12,664		17,042
Churches		77,154		17,024		5,439		43,393		7,979		3,319
Industrial warehouses		176,614		16,967		2,396		48,135		17,099		92,017
Health care		126,529		11,632		6,601		91,264		2,379		14,653
Convenience stores		152,200		13,886		20,857		71,648		421		45,388
Retail		97,749		12,615		9,052		44,873		19,151		12,058
Restaurants		54,167		3,143		4,801		29,965		12,377		3,881
Auto dealerships		51,017		6,453		242		25,496		18,826		—
Nursing homes/senior living		211,462		50,570		—		134,692		—		26,200
Other		134,008		13,745		2,897		67,749		1,253		48,364
Total owner-occupied loans		1,235,126		188,463		88,541		603,051		92,149		262,922
Loans secured by nonfarm, nonresidential<br> properties	$	3,178,079	$	927,830	$	252,323	$	1,245,604	$	178,658	$	573,664

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 from its primary regulator. 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 PCL, LHFI 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.

During the first quarter of 2022, Management elected to incorporate a methodology change related to the other construction pool. Components of this change include management utilizing an alternative LDA to support the PD and LGD assumptions necessary to apply a DCF methodology to the other construction pool. Fundamentally, this approach utilizes publicly reported default balances and leverages a GLM framework to estimate PD. Taken together, these differences allow for results to be scaled to be specific and directly applicable to the other construction segment. LGD is assumed to be a through-the-cycle constant based on the actual performance of Trustmark’s other construction segment. These assumptions are then input into the DCF model and used in conjunction with prepayment data to calculate the cash flows at the individual loan level. Previously, the other construction pool used the WARM method. Management believes this change is commensurate with the level of risk in the pool.

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. 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 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.

During the second quarter of 2022, Trustmark activated the nature and volume of the portfolio qualitative factor in the ACL methodology. The nature and volume of the portfolio qualitative factor utilizes peer and industry assumptions for pools of loans where Trustmark’s historical experience might not capture the risk associated within a specific pool due to it being a different type of lending, different sources of repayment or a new line of business.

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 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 2020, due to unforeseen pandemic conditions that varied from Management’s expectations, 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.

During the first quarter of 2022, to account for the potential uncertainty related to higher prices and low economic growth, Trustmark chose to enact a portion of the qualitative framework, External Factor- Stagflation. Management calculated the reserve using a third-party stagflation forecast and compared it to the third-party baseline forecast used in the quantitative modeling. The differential was added as qualitative reserves to account for potential uncertainty.

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 June 30, 2022, the ACL on LHFI was $103.1 million, an increase of $3.7 million, or 3.7%, when compared with December 31, 2021. The increase in the ACL during the first six months of 2022 was principally due to loan growth and an increase in specific reserves for individually analyzed credits, partially offset by improvements in the macroeconomic forecasting variables used in the ACL modeling and credit quality. Allocation of Trustmark’s $103.1 million ACL on LHFI, represented 0.88% of commercial LHFI and 1.14% of consumer and home mortgage LHFI, resulting in an ACL to total LHFI of 0.94% as of June 30, 2022. This compares with an ACL to total LHFI of 0.97% at December 31, 2021, which was allocated to commercial LHFI at 1.00% and to consumer and mortgage LHFI at 0.87%.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Balance at beginning of period	$	98,734		$	109,191		$	99,457		$	117,306
Provision for credit losses, LHFI		2,716			(3,991	)		1,856			(14,492	)
LHFI charged-off		(2,277	)		(4,828	)		(4,519	)		(6,073	)
Recoveries		3,967			3,660			6,346			7,291
Net (charge-offs) recoveries		1,690			(1,168	)		1,827			1,218
Balance at end of period	$	103,140		$	104,032		$	103,140		$	104,032

Net recoveries for the three and six months ended June 30, 2022 increased $2.9 million and $609 thousand, respectively, when compared to the same time periods in 2021, primarily due to a decrease in charge-offs in the Mississippi market region and increases in recoveries in the Alabama and Florida market regions, partially offset by decreases in recoveries in the Mississippi, Tennessee and Texas market regions.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Alabama	$	1,129		$	203		$	1,828		$	305
Florida		761			167			735			197
Mississippi		(266	)		(3,071	)		(354	)		(864	)
Tennessee		31			1,031			(393	)		1,078
Texas		35			502			11			502
Total net (charge-offs) recoveries	$	1,690		$	(1,168	)	$	1,827		$	1,218

The PCL, LHFI for the three and six months ended June 30, 2022 totaled 0.10% and 0.03% of average loans (LHFS and LHFI), respectively, compared to -0.16% and -0.28% of average loans (LHFS and LHFI) for the same time periods in 2021, respectively. The PCL on LHFI for the first six months of 2022 primarily reflected an increase in required reserves as a result of loan growth and specific reserves on individually analyzed LHFI, partially offset by improvements in the macroeconomic forecasts and credit quality.

Off-Balance Sheet Credit Exposures

Trustmark maintains a separate ACL on off-balance sheet credit exposures, including unfunded loan commitments and letters of credit. 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 June 30, 2022, the ACL on off-balance sheet credit exposures totaled $32.9 million compared to $35.6 million at December 31, 2021, a decrease of $2.7 million, or 7.5%. The PCL, off-balance sheet credit exposures totaled a negative $1.6 million and a negative $2.7 million for the three and six months ended June 30, 2022, respectively, compared to $4.5 million and a negative $4.8 million for the same time periods in 2021, respectively. The negative PCL on off-balance sheet credit exposures for the first six months of 2022 primarily reflected a decline in required reserves as a result of decreases in the unfunded balances and changes in the total reserve rate 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 June 30, 2022 and December 31, 2021 ($ in thousands):

	June 30, 2022			December 31, 2021
Nonaccrual LHFI
Alabama	$	2,698		$	8,182
Florida		233			313
Mississippi		23,039			21,636
Tennessee		9,500			10,501
Texas		26,582			22,066
Total nonaccrual LHFI		62,052			62,698
Other real estate
Alabama		84			—
Mississippi		2,950			4,557
Total other real estate		3,034			4,557
Total nonperforming assets	$	65,086		$	67,255
Nonperforming assets/total loans (LHFS and LHFI) and ORE		0.58	%		0.64	%
Loans past due 90 days or more
LHFI	$	1,347		$	2,114
LHFS - Guaranteed GNMA serviced loans (1)	$	51,164		$	69,894

(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 June 30, 2022, nonaccrual LHFI totaled $62.1 million, or 0.56% of total LHFS and LHFI, reflecting a decrease of $646 thousand, or 1.0%, relative to December 31, 2021. The decrease in nonaccrual LHFI during the first six months of 2022 was primarily due to reductions and pay-offs of nonaccrual loans in the Alabama, Mississippi and Texas market regions, which were largely offset by commercial credits placed on nonaccrual status in the Texas and Mississippi market regions.

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 June 30, 2022 decreased $1.5 million, or 33.4%, when compared with December 31, 2021. The decrease in other real estate was principally due to properties sold in the 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 June 30, 2022
	Total			Alabama		Florida		Mississippi			Tennessee		Texas
Balance at beginning of period	$	3,187		$	—	$	—	$	3,187		$	—	$	—
Additions		411			51		—		360			—		—
Disposals		—			—		—		—			—		—
(Write-downs) recoveries		(564	)		33		—		(597	)		—		—
Balance at end of period	$	3,034		$	84	$	—	$	2,950		$	—	$	—
	Three Months Ended June 30, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Total			Alabama			Florida		Mississippi			Tennessee		Texas
Balance at beginning of period	$	10,651		$	3,085		$	—	$	7,566		$	—	$	—
Additions		382			—			—		338			44		—
Disposals		(299	)		(93	)		—		(206	)		—		—
(Write-downs) recoveries		(1,295	)		(162	)		—		(1,148	)		15		—
Balance at end of period	$	9,439		$	2,830		$	—	$	6,550		$	59	$	—
	Six Months Ended June 30, 2022
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Total			Alabama		Florida		Mississippi			Tennessee		Texas
Balance at beginning of period	$	4,557		$	—	$	—	$	4,557		$	—	$	—
Additions		456			51		—		405			—		—
Disposals		(1,868	)		—		—		(1,868	)		—		—
(Write-downs) recoveries		(111	)		33		—		(144	)		—		—
Balance at end of period	$	3,034		$	84	$	—	$	2,950		$	—	$	—
	Six Months Ended June 30, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Total			Alabama			Florida		Mississippi			Tennessee			Texas
Balance at beginning of period	$	11,651		$	3,271		$	—	$	8,330		$	50		$	—
Additions		382			—			—		338			44			—
Disposals		(1,149	)		(229	)		—		(860	)		(60	)		—
(Write-downs) recoveries		(1,445	)		(212	)		—		(1,258	)		25			—
Balance at end of period	$	9,439		$	2,830		$	—	$	6,550		$	59		$	—

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 decreased $1.3 million, or 92.3%, when the first six months of 2022 is compared to the same time period in 2021, primarily due to a decrease in reserves for other real estate write-downs in the Mississippi market region as a result of properties sold which were previously reserved for.

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 $14.770 billion at June 30, 2022 compared to $15.087 billion at December 31, 2021, a decrease of $317.0 million, or 2.1%. During the first six months of 2022, noninterest-bearing deposits decreased $261.6 million, or 5.5%, reflecting declines in consumer and public DDAs partially offset by an increase in commercial DDAs. Interest-bearing deposits decreased $55.4 million, or 0.5%, during the first six months of 2022, primarily due to a decline in public interest checking accounts partially offset by growth in consumer 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 $70.2 million at June 30, 2022 compared to $238.6 million at December 31, 2021, a decrease of $168.4 million, or 70.6%, and represented customer related transactions, such as commercial sweep repurchase balances. Trustmark had no upstream federal funds purchased at June 30, 2022 or December 31, 2021.

Other borrowings totaled $72.6 million at June 30, 2022, a decrease of $18.5 million, or 20.3%, when compared with $91.0 million at December 31, 2021, primarily due to the decrease in the amount of GNMA loans eligible for repurchase.

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.

Capital Resources and Liquidity

At June 30, 2022, Trustmark’s total shareholders’ equity was $1.587 billion, a decrease of $154.6 million, or 8.9%, when compared to December 31, 2021. During the first six months of 2022, shareholders’ equity decreased primarily as a result of a decline in the fair market value of securities available for sale, net of tax, of $150.2 million, common stock dividends of $28.4 million and common stock repurchases of $16.6 million, partially offset by net income of $63.5 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

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 2021 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%. AOCI is not included in computing regulatory capital. Trustmark 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 June 30, 2022, Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered well-capitalized at June 30, 2022. 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 June 30, 2022 which Management believes have affected Trustmark’s or TNB’s present classification.

In 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 June 30, 2022, the carrying amount of the subordinated notes was $123.2 million compared to $123.0 million at December 31, 2021. The subordinated notes mature December 1, 2030 and are redeemable at Trustmark’s option under certain circumstances. For regulatory capital purposes, the subordinated notes qualified as Tier 2 capital for Trustmark at June 30, 2022 and December 31, 2021. 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 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 qualified as Tier 1 capital at June 30, 2022 and December 31, 2021. 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.

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 June 30, 2022 and December 31, 2021.

Dividends on Common Stock

Dividends per common share for the six months ended June 30, 2022 and 2021 were $0.46. Trustmark’s indicated dividend for 2022 is $0.92 per common share, which is the same as dividends per common share declared in 2021.

Stock Repurchase Program

From time to time, Trustmark's Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow Trustmark to proactively manage its capital position and return excess capital to shareholders. Shares purchased also provide Trustmark with shares of common stock necessary to satisfy obligations related to stock compensation awards.

On January 28, 2020, the Board of Directors of Trustmark authorized a stock repurchase program, effective April 1, 2020, under which $100.0 million of Trustmark’s outstanding common stock could be acquired through December 31, 2021. Under this authority, Trustmark repurchased approximately 1.9 million shares of its outstanding common stock valued at $61.8 million.

On December 7, 2021, the Board of Directors of Trustmark authorized a stock repurchase program, effective January 1, 2022, under which $100.0 million of Trustmark's outstanding common stock may be acquired through December 31, 2022. 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. Under this authority, Trustmark repurchased approximately 263 thousand shares of its outstanding common stock valued at $7.5 million during the three months ended June 30, 2022. During the first six months of 2022, Trustmark repurchased approximately 542 thousand shares of its outstanding common stock valued at $16.6 million.

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.

Trustmark's liquidity position is continuously monitored and adjustments are made to manage the balance as deemed appropriate. Liquidity risk management is an important element to Trustmark's asset/liability management process. Trustmark regularly models liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions or other significant occurrences as deemed appropriate by Management. These scenarios are incorporated into Trustmark's contingency funding plan, which provides the basis for the identification of its liquidity needs.

Deposit accounts represent Trustmark’s largest funding source. Average deposits totaled to $14.990 billion for the first six months of 2022 and represented approximately 85.9% of average liabilities and shareholders’ equity, compared to average deposits of $14.319 billion, which represented 85.0% of average liabilities and shareholders’ equity for the first six months of 2021.

Trustmark had $473.9 million held in an interest-bearing account at the FRBA at June 30, 2022, compared to $2.064 billion held at December 31, 2021.

Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. At June 30, 2022, brokered sweep MMDA deposits totaled $28.0 million compared to $29.6 million at December 31, 2021.

At both June 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021. Trustmark had a no standby letters of credit outstanding with the FHLB of Dallas at June 30, 2022 and December 31, 2021. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances or letters of credit with the FHLB of Dallas by $3.610 billion at June 30, 2022.

In addition, at June 30, 2022, Trustmark had no short-term and $88 thousand in long-term FHLB advances outstanding with the FHLB of Atlanta, which were acquired in the BancTrust merger in 2013, compared to no short-term and $97 thousand in long-term FHLB advances at December 31, 2021. 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 June 30, 2022, Trustmark had approximately $1.220 billion available in unencumbered Treasury and agency securities compared to $751.0 million at December 31, 2021.

Another borrowing source is the Discount Window. At June 30, 2022, Trustmark had approximately $1.192 billion available in collateral capacity at the Discount Window primarily from pledges of commercial and industrial LHFI, compared with $876.8 million at December 31, 2021.

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 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 June 30, 2022, the carrying amount of the subordinated notes was $123.2 million compared to $123.0 million at December 31, 2021. 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.

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 June 30, 2022, Trustmark had no shares of preferred stock issued and outstanding.

Management believes that Trustmark has sufficient liquidity and capital resources to meet presently known cash flow requirements arising from ongoing business transactions. As of June 30, 2022, Management is not aware of any events that are reasonably likely to have a material adverse effect on Trustmark's liquidity, capital resources or operations. In addition, Management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on Trustmark.

In the ordinary course of business, Trustmark has entered into contractual obligations and has made other commitments to make future payments. Please refer to the accompanying notes to the consolidated financial statements included in Part I. Item 1. – Financial Statements of this report and Trustmark's 2021 Annual Report for the expected timing of such payments as of June 30, 2022 and December 31, 2021. There have been no material changes in Trustmark's contractual obligations since year-end.

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 Financial Conduct Authority, 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

ended on December 31, 2021). Additionally, on March 15, 2022. the Adjustable Interest Rate (LIBOR) Act was signed into law as part of the Consolidated Appropriations Act, 2022. The Adjustable Interest Rate (LIBOR) Act establishes a nationwide process for replacing LIBOR in financial contracts that mature after the cessation of the overnight, one-, three-, six- and 12-month U.S. LIBOR tenors on June 30, 2023 and that do not provide for an effective means to replace LIBOR upon its cessation. For contracts in which a party has the discretion to identify a replacement rate, the Adjustable Interest Rate (LIBOR) Act also provides a safe harbor to parties if they choose the SOFR-based benchmark replacement rate to be identified by the FRB. 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. 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 2021 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 $309.6 million at June 30, 2022, with a positive valuation adjustment of $1.4 million, compared to $378.6 million, with a positive valuation adjustment of $1.8 million at December 31, 2021.

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 fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting under GAAP. The total notional amount of these derivative instruments was $209.0 million at June 30, 2022 compared to $409.5 million at December 31, 2021. 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 negative ineffectiveness of $632 thousand and a net positive ineffectiveness of $1.3 million for the three months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, the impact was a net positive ineffectiveness of $374 thousand and $1.5 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 June 30, 2022, Trustmark had interest rate swaps with an aggregate notional amount of $1.255 billion related to this program, compared to $1.225 billion as of December 31, 2021.

Credit-Risk-Related Contingent Features

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 June 30, 2022, Trustmark had entered into five risk participation agreements as a beneficiary with an aggregate notional amount of $50.9 million, compared to six risk participation agreements as a beneficiary with an aggregate notional amount of $52.0 million at December 31, 2021. At June 30, 2022, Trustmark had entered into twenty-five risk participation agreements as a guarantor with an aggregate notional amount of $206.8 million, compared to twenty-four risk participation agreements as a guarantor with an aggregate notional amount of $173.5 million at December 31, 2021. The aggregate fair values of these risk participation agreements were immaterial at both June 30, 2022 and December 31, 2021.

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 June 30, 2022 and 2021. At June 30, 2022 and 2021, 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	2022			2021
+200 basis points		11.3	%		21.8	%
+100 basis points		5.7	%		11.1	%
-100 basis points		-11.6	%		-7.9	%

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 2022 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 June 30, 2022 and 2021. 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 June 30, 2022 and 2021, 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	2022			2021
+200 basis points		2.3	%		12.2	%
+100 basis points		1.4	%		7.0	%

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 June 30, 2022, the MSR fair value was $121.0 million, compared to $80.8 million at June 30, 2021. 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 June 30, 2022, would be a decline in fair value of approximately $4.4 million and $5.1 million, respectively, compared to a decline in fair value of approximately $4.1 million and $2.8 million, respectively, at June 30, 2021. 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 2021 Annual Report. There have been no significant changes in Trustmark’s critical accounting policies during the first six months of 2022.

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 2021 Annual Report.

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

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 June 30, 2022 ($ 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
April 1, 2022 to April 30, 2022	—	$	—	—	$	90,906
May 1, 2022 to May 31, 2022	165,269		28.32	165,269		86,226
June 1, 2022 to June 30, 2022	97,513		28.96	97,513		83,402
Total	262,782			262,782

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

10-af	First Amendment to the Trustmark Corporation Amended and Restated Stock and Incentive Compensation Plan.
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:	August 4, 2022	DATE:	August 4, 2022

EX-10.af

Exhibit 10.af

AMENDMENT NO. 1 TO THE

TRUSTMARK CORPORATION

AMENDED AND RESTATED

STOCK AND INCENTIVE COMPENSATION PLAN

WHEREAS, Trustmark Corporation (the “Company”) sponsors the Trustmark Corporation Amended and Restated Stock and Incentive Compensation Plan (the “Plan”), which was amended and restated effective April 28, 2015.

WHEREAS, pursuant to Section 16.1 of the Plan, the Board of Directors of the Company (the “Board”) may amend the Plan at any time, subject to certain limitations;

WHEREAS, the Board wishes to amend the Plan solely to (1) increase the maximum aggregate number of shares available for issuance thereunder and (2) provide that, consistent with the Company’s current practices, the Company shall not pay dividends or dividend equivalents on shares underlying unvested awards granted under the Plan, unless any such dividends or divided equivalents are subject to the same restrictions, vesting and payment as the underlying unvested award, and believes that it is in the best interests of the Company and its shareholders to make such amendments; and

WHEREAS, this Amendment shall become effective upon the approval of this Amendment by the Company’s shareholders at the annual meeting of shareholders held on April 26, 2022 (the date of such approval, the “Effective Date”).

NOW THEREFORE, in consideration of the foregoing, the Plan is hereby amended as follows, effective as of the Effective Date:

1. The first sentence of Section 4.1 of the Plan is amended and restated to read as follows:

Subject to adjustment as provided in Section 4.4 or Article XIV herein, the maximum aggregate number of Shares that may be issued pursuant to Awards made under the Plan shall not exceed 3,000,000; provided, that effective April 26, 2022, such maximum aggregate number of shares shall be increased by 600,000 Shares, for a new maximum aggregate number of 3,600,000 Shares.

2. Section 7.8 of the Plan is amended and restated to read as follows:

7.8 Dividends and Other Distributions. Unless otherwise provided in the Agreement, during the Period of Restriction, recipients of Shares of Restricted Stock shall be entitled to receive all dividends and other distributions paid with respect to those Shares; provided, however, that any such dividends or distributions shall in all cases be subject to the same restrictions, vesting and payment (including any restrictions on transferability and the rules for custody) as the Shares of Restricted Stock to which they are attributable.

3. The first sentence of the second paragraph of Section 8.2 of the Plan is amended and restated to read as follows:

Unless otherwise provided in the Agreement, during the Period of Restriction, Participants holding Restricted Stock Units shall have added to their rights all dividends and other distributions which would have been paid with respect to the Shares represented by those Restricted Stock Units if such Shares were outstanding; provided, however, that any such deemed dividends or distributions shall in all cases be subject to the same restrictions, vesting and payment as the Restricted Stock Units to which they are attributable.

4. The second sentence of Section 10.2 of the Plan is amended and restated to read as follows:

The Committee may provide for payment of dividend equivalents with respect to each Performance Unit; provided, however, that any such dividend equivalents shall in all cases be subject to the same restrictions, vesting and payment as the Performance Units to which they are attributable.

IN WITNESS WHEREOF, this Amendment No. 1 to the Plan has been executed on behalf of the Company this 16th day of February, 2022.

TRUSTMARK CORPORATION

By: /s/ Duane A. Dewey

Duane A. Dewey, President and Chief Executive Officer

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:	August 4, 2022

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:	August 4, 2022

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 June 30, 2022, 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:	August 4, 2022

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 June 30, 2022, 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:	August 4, 2022