UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2020
or
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-3683
TRUSTMARK CORPORATION
(Exact name of Registrant as specified in its charter)
MISSISSIPPI
(State or other jurisdiction of incorporation or organization)
248 East Capitol Street, Jackson, Mississippi
(Address of principal executive offices)
Registrant’s telephone number, including area code:
64-0471500
(IRS Employer Identification Number)
39201
(Zip Code)
(601) 208-5111
Common Stock, no par value
(Title of Class)
TRMK
(Trading Symbol)
Nasdaq Global Select Market
(Name of Exchange on Which Registered)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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, a smaller reporting company, or an emerging growth
company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☑
☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No ☑
Based on the closing sales price at June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares
of common stock held by nonaffiliates of the registrant was approximately $920.2 million.
As of January 31, 2021, there were issued and outstanding 63,408,802 shares of the registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Trustmark’s 2021 Annual Meeting of Shareholders to be held April 27, 2021 are incorporated by reference into Part III of the Form 10-K
report.
TRUSTMARK CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Selected Financial Data
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
Item 11. Executive Compensation
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16.
Summary
SIGNATURES
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Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,”
“believe,” “estimate,” “predict,” “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 Item 1A. Risk Factors in this
report could have an adverse effect on our business, results of operations and financial condition. Should one or more of these risks materialize, or should any such
underlying assumptions prove to be significantly different, actual results may vary significantly from those anticipated, estimated, projected or expected.
Risks that could cause actual results to differ materially from current expectations of Management include, but are not limited to, changes in the level of
nonperforming assets and charge-offs, an increase in unemployment levels and slowdowns in economic growth, our ability to manage the impact of the COVID-19
pandemic on our markets and our customers, as well as the effectiveness of actions of federal, state and local governments and agencies (including the Board of
Governors of the Federal Reserve System (FRB)) to mitigate its spread and economic impact, local, state and national economic and market conditions, conditions
in the housing and real estate markets in the regions in which Trustmark operates and the extent and duration of the current volatility in the credit and financial
markets, levels of and volatility in crude oil prices, changes in our ability to measure the fair value of assets in our portfolio, material changes in the level and/or
volatility of market interest rates, the performance and demand for the products and services we offer, including the level and timing of withdrawals from our
deposit accounts, the costs and effects of litigation and of unexpected or adverse outcomes in such litigation, our ability to attract noninterest-bearing deposits and
other low-cost funds, competition in loan and deposit pricing, as well as the entry of new competitors into our markets through de novo expansion and acquisitions,
economic conditions, including the potential impact of issues related to the European financial system and monetary and other governmental actions designed to
address credit, securities, and/or commodity markets, the enactment of legislation and changes in existing regulations or enforcement practices or the adoption of
new regulations, changes in accounting standards and practices, including changes in the interpretation of existing standards, that affect our consolidated financial
statements, changes in consumer spending, borrowings and savings habits, technological changes, changes in the financial performance or condition of our
borrowers, changes in our ability to control expenses, greater than expected costs or difficulties related to the integration of acquisitions or new products and lines
of business, cyber-attacks and other breaches which could affect our information system security, natural disasters, environmental disasters, pandemics or other
health crises, acts of war or terrorism, and other risks described in our filings with the Securities and Exchange Commission (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.
BUSINESS
The Corporation
Description of Business
PART I
Trustmark Corporation (Trustmark), a Mississippi business corporation incorporated in 1968, is a bank holding company headquartered in Jackson,
Mississippi. Trustmark’s principal subsidiary is Trustmark National Bank (TNB), initially chartered by the State of Mississippi in 1889. At December 31, 2020,
TNB had total assets of $16.550 billion, which represented approximately 99.99% of the consolidated assets of Trustmark.
Through TNB and its subsidiaries, Trustmark operates as a financial services organization providing banking and other financial solutions through 183 offices and
2,797 full-time equivalent associates (measured at December 31, 2020) located in the states of Alabama, Florida (primarily in the northwest or “Panhandle” region
of that state, which is referred to herein as Trustmark’s Florida market), Mississippi, Tennessee (in the Memphis and Northern Mississippi regions, which are
collectively referred to herein as Trustmark’s Tennessee market), and Texas (primarily in Houston, which is referred to herein as Trustmark’s Texas market). The
principal products produced and services rendered by TNB and Trustmark’s other subsidiaries are as follows:
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Trustmark National Bank
Commercial Banking – TNB provides a full range of commercial banking services to corporations and other business customers. Loans are
provided for a variety of general corporate purposes, including financing for commercial and industrial projects, income producing commercial real
estate, owner-occupied real estate and construction and land development. TNB also provides deposit services, including checking, savings and
money market accounts and certificates of deposit as well as treasury management services.
Consumer Banking – TNB provides banking services to consumers, including checking, savings, and money market accounts as well as certificates
of deposit and individual retirement accounts. In addition, TNB provides consumer customers with installment and real estate loans and lines of
credit.
Mortgage Banking – TNB provides mortgage banking services, including construction financing, production of conventional and government
insured mortgages, secondary marketing and mortgage servicing.
Insurance – TNB provides a competitive array of insurance solutions for business and individual risk management needs. Business insurance
offerings include services and specialized products for medical professionals, construction, manufacturing, hospitality, real estate and group life and
health plans. Individual customers are also provided life and health insurance, and personal line policies. TNB provides these services through
Fisher Brown Bottrell Insurance, Inc. (FBBI), a Mississippi corporation and a wholly-owned subsidiary of TNB, which is based in Jackson,
Mississippi.
Wealth Management and Trust Services – TNB offers specialized services and expertise in the areas of wealth management, trust, investment and
custodial services for corporate and individual customers. These services include the administration of personal trusts and estates as well as the
management of investment accounts for individuals, employee benefit plans and charitable foundations. TNB also provides corporate trust and
institutional custody, securities brokerage, financial and estate planning and retirement plan services. TNB’s Wealth Management Segment is also
assisted by Trustmark Investment Advisors, Inc. (TIA), a SEC-registered investment adviser and a wholly-owned subsidiary of TNB. TIA provides
customized investment management services to TNB’s Wealth Management Segment, which in turn relies upon that advice to provide investment
management services to TNB’s wealth management customers.
New Market Tax Credits (NMTC) – TNB provides an intermediary vehicle for the provision of loans or investments in Low-Income Communities
(LICs) through its subsidiary Southern Community Capital, LLC (SCC). SCC is a Mississippi single member limited liability company, a certified
Community Development Entity (CDE) and a wholly-owned subsidiary of TNB. The primary mission of SCC is to provide investment capital for
LICs, as defined by Section 45D of the Internal Revenue Code, or for Low-Income Persons (LIPs). As a certified CDE, SCC is able to apply to the
Community Development Financial Institutions Fund (CDFI Fund) to receive NMTC allocations to offer investors in exchange for equity
investments in qualified projects.
Capital Trust
Trustmark Preferred Capital Trust I (the Trust) is a Delaware trust affiliate and a wholly-owned subsidiary of Trustmark formed in 2006 to facilitate
a private placement of $60.0 million in trust preferred securities. As defined in applicable accounting standards, the Trust is considered a variable
interest entity for which Trustmark is not the primary beneficiary. Accordingly, the accounts of the Trust are not included in Trustmark’s
consolidated financial statements.
Strategy
Trustmark seeks to be a premier diversified financial services company in its markets, providing a broad range of banking, wealth management and insurance
solutions to its customers. Trustmark’s products and services are designed to strengthen and expand customer relationships and enhance the organization’s
competitive advantages in its markets as well as to provide cross-selling opportunities that will enable Trustmark to continue to diversify its revenue and earnings
streams.
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The following table sets forth summary data regarding Trustmark’s securities, loans, assets, deposits, equity and revenue over the past five years ($ in thousands):
December 31,
Securities
Total securities growth (decline)
Total securities growth (decline)
Loans *
Total loans growth (decline)
Total loans growth (decline)
Assets
Total assets growth (decline)
Total assets growth (decline)
Deposits
Total deposits growth (decline)
Total deposits growth (decline)
Equity
Total equity growth (decline)
Total equity growth (decline)
Years Ended December 31,
Revenue **
Total revenue growth (decline)
Total revenue growth (decline)
$
$
$
$
2020
2,529,887
189,384
$
$
8.09%
2019
2,340,503
$
(380,953) $
-14.00%
2018
2,721,456
$
(573,665) $
-17.41%
2017
3,295,121
(220,204)
$
$
-6.26%
2016
3,515,325
(17,915)
-0.51%
9,824,524
416,295
$
$
4.42%
9,408,229
465,429
$
$
5.20%
8,942,800
111,316
$
$
1.26%
8,831,484
708,024
$
$
8.72%
8,123,460
641,664
8.58%
$
$ 16,551,840
3,053,963
$ 13,497,877
$
211,417
22.63%
$ 13,286,460
$
1.59%
(511,493) $
-3.71%
$ 13,797,953
445,620
$ 13,352,333
$
673,437
3.34%
5.31%
$
$ 14,048,764
2,803,207
$ 11,245,557
$
24.93%
(118,854) $
-1.05%
$ 11,364,411
786,899
$ 10,577,512
521,500
$
7.44%
$ 10,056,012
$
467,782
5.19%
4.88%
$
$
$
$
1,741,117
80,415
$
$
4.84%
1,660,702
69,249
$
$
4.35%
1,591,453
19,752
$
$
1.26%
1,571,701
51,493
$
$
3.39%
1,520,208
47,151
3.20%
$
701,130
87,496
$
14.26%
$
613,634
9,378
$
1.55%
604,256
12,043
$
$
2.03%
592,213
30,737
$
$
5.47%
561,476
(3,438)
-0.61%
*
**
Includes loans held for investment and acquired loans.
Consistent with Trustmark’s audited financial statements, revenue is defined as net interest income plus noninterest income.
For additional information regarding the general development of Trustmark’s business, see Part II. Item 6. – Selected Financial Data and Item 7. – Management’s
Discussion and Analysis of Financial Condition and Results of Operations of this report.
Overview of Lending Business
Trustmark categorizes loans on its balance sheet into three categories. These categories are described in more detail in Note 1 – Significant Accounting Policies
included in Part II. Item 8. - Financial Statements and Supplementary Data of this report.
•
•
•
Loans Held for Investment (LHFI) – Loans originally underwritten by Trustmark that do not constitute loans held for sale or acquired loans.
Loans Held for Sale (LHFS) – Mortgage loans purchased from wholesale customers or originated in Trustmark’s General Banking Segment, other
than mortgage loans that are retained in the LHFI portfolio based on banking relationships or certain investment strategies.
Paycheck Protection Program (PPP) Loans – Loans originated by Trustmark through the PPP administered by the Small Business Administration
(SBA). PPP loans are fully guaranteed by the SBA and forgivable, in whole or in part, if the proceeds are used for permitted purposes.
The following discussion briefly summarizes Trustmark’s lending business by focusing on LHFI and LHFS, and includes a discussion of the risks inherent in these
loans, Trustmark’s underwriting policies for its loans and the characteristics of the real estate loan component of these loans. PPP loans are excluded from this
summary, as these loans are not part of Trustmark’s ordinary lending business and were originated under specific program guidelines. Discussion of Trustmark’s
PPP loans is contained in the section captioned “Paycheck Protection Program” included in Part II. Item 7. – Management’s Discussion and Analysis of Financial
Condition and Results of Operations of this report.
As a general matter, extending credit to businesses and consumers exposes Trustmark to credit risk, which is the risk that the principal balance and any related
interest may not be collected according to the original terms due to the inability or unwillingness of the
5
borrower to repay the loan. Trustmark mitigates credit risk through a set of internal controls, which includes adherence to conservative lending practices and
underwriting guidelines, collateral monitoring, and oversight of its borrower’s financial performance and collateral. The risks inherent in specific subsets of
lending are discussed below.
LHFI Secured by Construction, Land Development, and Other Land – Construction and land development loans include loans for both commercial and residential
properties to builders/developers, other commercial borrowers and consumers. This category also includes loans secured by vacant land, except land known to be
used or usable for agricultural purposes, such as crop and livestock production. Repayment is normally derived from the sale of the underlying property or from
permanent financing, which refinances Trustmark’s initial loan. Trustmark’s engagement in this type of lending is generally extended to those builders and
developers exhibiting the highest credit quality with significant equity invested in the project and is primarily restricted to projects within Trustmark’s geographic
markets. 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 and availability of permanent financing. Risk within this portfolio is mitigated through adherence to policies and lending limits, periodic
target credit reviews of the different segments of this portfolio, inspection of projects throughout the life of the loan and routine monitoring of financial information
and collateral values as they are updated.
Inherent in real estate construction lending is the risk that the full value of the collateral does not exist at the time the loan is granted. Construction lending also
inherently includes the risk associated with a borrower’s ability to successfully complete a proposed project on time and within budget. Further, adverse changes
in the market occurring between the start of construction and completion of the projects can result in slower sales or rental rates and lower sales prices than
originally anticipated which could impact the underlying real estate collateral values and timely and full repayment of these loans. Rising interest rates can
adversely affect the cost of construction and the financial viability of real estate projects. Higher interest rates may also result in higher capitalization rates, thereby
reducing a property’s value. As a result of this risk profile, LHFI secured by construction, land development and other land are considered to be higher risks than
other real estate loans.
LHFI and LHFS Secured by Residential Properties – Residential real estate loans consist of first and junior liens on residential properties that are extended in the
geographic markets in which Trustmark operates as well as mortgage products, originated and purchased, that are underwritten to secondary market
standards. Credit underwriting standards include evaluation of the borrower’s credit history and repayment capacity, including verification of income and
valuation of collateral. Portfolio performance is continuously evaluated through updated credit bureau scores and monitoring of repayment performance.
Credit performance of consumer residential real estate loans is highly dependent on housing values and household income which, in turn are highly dependent on
national, regional and local economic factors. Rising interest rates, rising unemployment rates and other adverse changes in these economies may have a negative
effect on the ability of Trustmark’s borrowers to repay these loans and negatively affect value of the underlying residential real estate collateral.
LHFI Secured by Nonfarm, Nonresidential Properties (NFNR LHFI) – Trustmark provides financing for both owner-occupied commercial real estate as well as
income-producing commercial real estate. Trustmark seeks to maintain a balance of owner-occupied and income-producing real estate loans that moderates its risk
to the specific risks of each type of loan. Commercial real estate term loans are typically collateralized by liens on real property. Both types of commercial real
estate loans are underwritten to lending policies that include maximum loan-to-value ratios, minimum equity requirements, acceptable amortization periods and
minimum debt service coverage requirements, based on property type. Income-producing commercial real estate loans also generally require substantial equity and
are subject to exposure limits for a single project. All exceptions to established guidelines are subject to stringent internal review and require specific approval. As
with commercial loans, 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.
Risk for owner-occupied commercial real estate is driven by the creditworthiness of the underlying borrowers, particularly cash flow from the borrowers’ business
operations as well as the risk of a shortfall in collateral. Credit performance of loans secured by commercial income-producing real estate can be negatively
affected by national, regional and local economic conditions, which may result in deteriorating tenant credit profiles, tenant losses, reduced rental/lease rates and
higher than anticipated vacancy rates, all contributing to declines in value or liquidity of the underlying real estate collateral. Other factors, such as increasing
interest rates, may result in higher capitalization rates, thereby reducing a property’s value.
Commercial and Industrial LHFI – Commercial loans (other than commercial loans related to real estate assets, which are summarized above) are 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, equipment and
fixed asset purchases that are secured by those assets and term financing for those within Trustmark’s geographic markets. Trustmark’s credit underwriting
process for commercial loans includes
6
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. Credit risk within the commercial loan portfolio is managed through
adherence to specific commercial lending policies and internally established lending authorities, diversification within the portfolio and monitoring of the portfolio
on a continuing basis.
Credit risk in commercial and industrial loans can arise due to fluctuations in borrowers’ financial condition, deterioration in collateral values and changes in
market conditions. The credit risk inherent in these loans depends on, to a significant degree, the general economic conditions of these areas. Further, credit risk
can increase if Trustmark’s loans are concentrated to borrowers engaged in the same or similar activities, or to groups of borrowers who may be uniquely or
disproportionately affected by market or economic conditions.
Consumer LHFI – Consumer credit includes loans to individuals for household and personal items, automobile purchases, unsecured loans, personal lines of credit
and credit cards. All consumer loans are subject to a standardized underwriting process through Trustmark’s consumer loan center, which uses a custom credit
scoring model with emphasis placed upon the borrower’s credit evaluation and historical performance, income evaluation and valuation of collateral (where
applicable). Updated credit bureau scores are obtained on all existing consumer loans/lines on a periodic basis in order to monitor portfolio credit quality changes
and mitigate risk.
Similar to residential real estate loan portfolios, an inherent risk factor in consumer loans is that they are dependent on national, regional and local economic
factors that affect employment in the markets where these loans are originated. Generally, consumer loan portfolios consist of a large number of relatively small-
balance loans, some of which are originated as unsecured credit (credit cards and some personal lines of credit), and as such, do not have collateral as a secondary
source of repayment. Consumer loans generally pose heightened risks of collectability and loss when compared to other loan types.
Other LHFI – Other loans 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.
Similar to commercial and industrial loans, inherent risk in other loans can arise due to fluctuations in borrowers’ financial condition, deterioration in collateral
values and changes in market and economic conditions. Loans to state and political subdivisions have the added inherent risk of being somewhat dependent on the
ability and capacity of those entities to generate tax and other revenue to repay the loans. Loans to non-profit and charitable organizations are dependent on those
organizations’ ability to generate revenue through their fundraising efforts and other forms of financial support, which can be susceptible to economic downturns.
Recent Economic and Industry Developments
On March 11, 2020, the World Health Organization (WHO) declared the outbreak of the novel coronavirus (COVID-19) as a global pandemic, which continues to
spread throughout the United States and around the world. The COVID-19 pandemic has adversely affected, and may continue to adversely affect economic
activity globally, nationally and locally. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in
certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are
expected to continue to have an adverse impact on the economies and financial markets of many regions, including the geographical area in which Trustmark
operates and industries in which Trustmark regularly extends credit. For additional information regarding Trustmark’s exposure to industries impacted by the
COVID-19 pandemic, please see the section captioned “COVID-19 Update - Exposure to Stressed Industries” included in Part II. Item 7. – Management’s
Discussion and Analysis of Financial Condition and Results of Operations of this report.
Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of actions by the FRB. Market interest rates
have declined to historical lows. On March 3, 2020, the ten-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds
rate by 50 basis points to a range of 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds rate by 100 basis points to a range of
0.00% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19
pandemic. The FRB reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. Trustmark
expects that these reductions in interest rates, especially if prolonged, could adversely affect its net interest income and margins and its profitability.
In the January 2021 “Summary of Commentary on Current Economic Conditions by Federal Reserve District,” the twelve Federal Reserve Districts’ reports
suggested that economic activity during the reporting period (covering the period from November 21, 2020
7
through January 4, 2021) increased modestly across most Districts; however, changes in economic activities remained varied by sector. Reports by the twelve
Federal Reserve Districts noted the following during the reporting period:
•
•
•
•
•
•
Consumer spending reports were mixed, with some Districts noting declines in retail sales and demand for leisure and hospitality services, which was
largely attributed to the recent increase in COVID-19 cases and stricter containment measures. Most Districts reported an intensification of the shift
from in-person shopping to online sales during the holiday season. Auto sales weakened somewhat, while activity in the energy sector reportedly
expanded for the first time since the onset of the pandemic.
Manufacturing activity continued to recover in almost all Districts, despite increasing reports of supply chain challenges. Residential real estate activity
remained strong, but accounts of weak conditions in commercial real estate markets persisted.
Prices rose modestly in almost all Districts, with growth in input costs continuing to outpace that of finished goods and services. Prices for construction
and building materials, steel products and shipping services were reported to have risen further. Contacts in several Districts noted an improved ability
to raise final selling prices to consumers, especially in the retail, wholesale trade and manufacturing sectors, and some cited plans to increase selling
prices in coming months. Energy prices increased but remained below pre-pandemic levels. Home prices continued to climb, driven by low inventories
and rising construction costs.
Employment increased in the majority of the Districts, though growth remained slow and recovery incomplete. A growing number of Districts reported
a drop in employment levels relative to the previous reporting period. Labor demand was strongest in the manufacturing, construction and
transportation sectors, with some employers noting staff shortages and difficulty attracting qualified workers, especially for entry-level and on-site
positions. Hiring difficulties were exacerbated by the recent resurgence in COVID-19 cases and the resulting workplace disruptions in some
Districts. Firms in most Districts reported modest increases in wages, as labor market conditions improved somewhat in some areas but generally
remained weak.
Banking contacts saw little or no change in loan volumes, with some anticipating strong demand from borrowers in coming months for new
government-backed lending programs.
Although the prospect of COVID-19 vaccines has bolstered business optimism for 2021 growth, this has been tempered by concern over the recent
resurgence of COVID-19 cases and the implications for near-term business conditions.
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 noted that banking conditions remained stable, though some contacts
noted an increase in delinquencies, mostly with residential mortgages, deposit levels remained elevated and financial institutions continued to hold higher balances
in cash accounts and their securities portfolios. The Federal Reserve’s Eleventh District also reported that the housing market continued to be a bright spot, with
robust home sales and strengthening apartment demand, overall loan demand increased, led by real estate lending, loan pricing continued to decrease with some
contacts voicing concerns about margin compression and energy activity showed mounting signs of improvement after a prolonged contraction.
It is unknown what the complete financial effect of the COVID-19 pandemic will be on Trustmark. It is reasonably possible that estimates made in the financial
statements, including the expected credit losses on loans and off-balance sheet credit exposures, could be materially and adversely impacted in the near term as a
result of the adverse conditions associated with the COVID-19 pandemic.
For additional discussion of the impact of the current economic environment on the financial condition and results of operations of Trustmark and its subsidiaries,
see Part II. Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report.
Competition
There is significant competition within the banking and financial services industry in the markets in which Trustmark operates. Changes in regulation, technology
and product delivery systems have resulted in an increasingly competitive environment. Trustmark expects to continue to face increasing competition from online
and traditional financial institutions seeking to attract customers by providing access to similar services and products.
Trustmark and its subsidiaries compete with national and state-chartered banking institutions of comparable or larger size and resources and with smaller
community banking organizations. Trustmark has numerous local, regional and national nonbank competitors, including savings and loan associations, credit
unions, mortgage companies, insurance companies, finance companies, financial service operations of major retailers, investment brokerage and financial advisory
firms and mutual fund companies. Because nonbank financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies,
they can often operate with greater flexibility and lower cost structures. Currently, Trustmark does not face meaningful competition from international banks in its
markets, although that could change in the future.
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At June 30, 2020, Trustmark’s deposit market share ranked within the top three positions in 55% of the 56 counties served and within the top five positions in 71%
of the counties served. The table below presents Federal Deposit Insurance Corporation (FDIC) deposit data regarding TNB’s deposit market share by state as of
June 30, 2020. The FDIC deposit market share data presented below does not align with Trustmark’s reported geographic market regions, which in some instances
cross state lines, and Trustmark’s geographic coverage within certain states presented below is not statewide (see the section captioned “Description of Business”
above).
State
Alabama
Florida
Mississippi
Tennessee
Texas
Deposit Market Share
1.58%
0.15%
14.20%
0.32%
0.04%
Services provided by the Wealth Management Segment face competition from many national, regional and local financial institutions. Companies that offer broad
services similar to those provided by Trustmark, such as other banks, trust companies and full-service brokerage firms, as well as companies that specialize in
particular services offered by Trustmark, such as investment advisors and mutual fund providers, all compete with Trustmark’s Wealth Management Segment.
Trustmark’s insurance subsidiary faces competition from local, regional and national insurance companies, independent insurance agencies as well as from other
financial institutions offering insurance products.
Trustmark’s ability to compete effectively is a result of providing customers with desired products and services in a convenient and cost-effective
manner. Customers for commercial, consumer and mortgage banking as well as wealth management and insurance services are influenced by convenience, quality
of service, personal contacts, availability of products and services and competitive pricing. Trustmark continually reviews its products, locations, alternative
delivery channels, and pricing strategies to maintain and enhance its competitive position. While Trustmark’s position varies by market, Management believes it
can compete effectively as a result of the quality of Trustmark’s products and services, local market knowledge and awareness of customer needs.
Supervision and Regulation
The following discussion sets forth material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides
specific information relevant to Trustmark. The discussion is a summary of detailed statutes, regulations and policies. The descriptions are not intended to be
complete summaries of the statutes, regulations and policies referenced therein. Such statutes, regulations and policies are continually under the review of the
United States Congress and state legislatures as well as federal and state regulatory agencies. A change in statutes, regulations or policies could have a material
impact on the business of Trustmark and its subsidiaries.
Regulation of Trustmark
Trustmark is a registered bank holding company under the Bank Holding Company Act of 1956 (BHC Act). Trustmark and its nonbank subsidiaries are therefore
subject to the supervision, examination, enforcement and reporting requirements of the BHC Act, the Federal Deposit Insurance Act (FDI Act), the regulations of
the FRB and certain of the requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as amended by the
Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA).
Federal Oversight Over Mergers and Acquisitions, Investments and Branching
The BHC Act requires every bank holding company to obtain the prior approval of the FRB before: (i) it may acquire direct or indirect ownership or control of any
voting shares of any bank if, after such acquisition, the bank holding company will directly or indirectly own or control 5.0% or more of the voting shares of the
bank; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or (iii) it may merge or consolidate with any
other bank holding company. The BHC Act further requires the FRB to consider the competitive impact of the transaction, the financial and managerial resources
and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served, including the applicant’s
record of performance under the Community Reinvestment Act (CRA). The FRB is also required to take into account in evaluating such a transaction the
effectiveness of the parties in combatting money laundering activities. Provisions of the FDI Act known as the Bank Merger Act impose similar approval
standards for an insured depository institution to merge with another insured depository institution.
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The BHC Act, as amended by the interstate banking provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal Act),
permits a bank holding company, such as Trustmark, to acquire a bank located in any other state, regardless of state law to the contrary, subject to certain deposit-
percentage, aging requirements, and other restrictions, if the company is well-capitalized. The Riegle-Neal Act also generally permits national and state-chartered
banks to branch interstate through acquisitions of banks in other states, if the resulting institution would be well-capitalized and well-managed.
In addition, the Office of the Comptroller of the Currency (OCC) has the authority to approve applications by national banks to establish de novo branches,
including, under the Riegle-Neal Act, in states other than the bank’s home state if the law of the state in which the branch is located, or is to be located, would
permit establishment of the branch if the bank were a state bank chartered by such state.
The BHC Act also generally requires FRB approval for a bank holding company’s acquisition of a company that is not an insured depository institution. Bank
holding companies generally may engage, directly or indirectly, only in banking and such other activities as are determined by the FRB to be closely related to
banking. Additionally, a provision of the BHC Act known as the Volcker Rule places limits on the ability of Trustmark and TNB to acquire or retain ownership
interests in, or act as sponsor to, certain investment funds, including hedge funds and private equity funds, or to engage in proprietary trading (i.e., engaging as
principal in any purchase or sale of one or more financial instruments for a trading account).
Certain acquisitions of Trustmark’s voting stock may be subject to regulatory approval or notice under federal law. Under the Change in Bank Control Act and
BHC Act, a person or company that directly or indirectly acquires control of a bank holding company or bank must obtain the non-objection or approval of the
institution’s appropriate federal banking agency in advance of the acquisition. For a publicly-traded bank holding company such as Trustmark, control for
purposes of the Change in Bank Control Act is presumed to exist if the acquirer will have 10% or more of any class of the company’s voting securities.
Source of Strength
Under the FDI Act, Trustmark is expected to act as a source of financial and managerial strength to TNB. Under this policy, a bank holding company is expected
to commit resources to support its bank subsidiary, including at times when the holding company may not be inclined or in a financial position to provide it.
Capital Adequacy
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal bank regulatory agencies. Capital
adequacy regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The FRB
and the OCC, the primary regulators of Trustmark and TNB, respectively, have established substantially similar minimum risk-based capital ratio and leverage
ratio requirements for bank holding companies and banks.
Under capital requirements applicable to Trustmark and TNB, Trustmark and TNB are required to meet a common equity Tier 1 capital to risk-weighted assets
ratio of at least 7.0% (a minimum of 4.5% plus a capital conservation buffer of 2.5%), a Tier 1 capital to risk-weighted assets ratio of at least 8.5% (a minimum of
6.0% plus a capital conservation buffer of 2.5%), a total capital to risk-weighted assets ratio of at least 10.5% (a minimum of 8.0% plus a capital conservation
buffer of 2.5%), and a leverage ratio of Tier 1 capital to total consolidated assets of at least 4.0%.
For purposes of calculating the denominator of the risk-based capital ratios, a banking institution’s assets and some of its specified off-balance sheet commitments
and obligations are assigned to various risk categories. For purposes of calculating the numerator of the capital ratios, capital, at both the holding company and
bank level, is classified in one of three tiers depending on the “quality” and loss-absorbing features of the capital instrument. Common equity Tier 1 capital is
predominantly comprised of common stock instruments (including related surplus) and retained earnings, net of treasury stock, and after making necessary capital
deductions and adjustments. Tier 1 capital is comprised of common equity Tier 1 capital and additional Tier 1 capital, which includes non-cumulative perpetual
preferred stock and similar instruments meeting specified eligibility criteria (including related surplus). Newly issued trust preferred securities and cumulative
perpetual preferred stock may not be included in Tier 1 capital. Smaller depository institution holding companies (those with assets less than $15 billion as of
year-end 2009) and most mutual holding companies are allowed to continue to count as Tier 1 capital most outstanding trust preferred securities and other non-
qualifying securities that were issued prior to May 19, 2010 (up to a limit of 25% of Tier 1 capital, excluding non-qualifying capital instruments) rather than
phasing such securities out of regulatory capital. However, a depository institution holding company with less than $15 billion in assets that grows to $15 billion
or more in assets as a result of an acquisition of another depository institution holding company generally is no longer allowed to count outstanding non-qualifying
capital instruments toward its Tier 1 capital. Trustmark currently has outstanding trust preferred securities that are permitted to continue to count as Tier 1 capital
up to the regulatory limit. Total capital is comprised of
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Tier 1 capital and Tier 2 capital, which includes certain subordinated debt with a minimum original maturity of five years (including related surplus) and a limited
amount of allowance for loan losses. Newly issued trust preferred securities and cumulative perpetual preferred stock generally may be included in Tier 2 capital,
provided they do not include features that are disallowed by the capital rules, such as the acceleration of principal other than in the event of a bankruptcy,
insolvency, or receivership of the issuer.
Failure to meet minimum capital requirements could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC and certain other restrictions on its business. An institution’s failure to exceed the capital conservation buffer with common
equity Tier 1 capital would result in limitations on an institution’s ability to make capital distributions and discretionary bonus payments.
In addition, the FDI Act’s “prompt corrective action” framework identifies five capital categories for insured depository institutions: well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. For an insured depository institution to be “well-capitalized,” it must
have a common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 capital ratio of at least 8.0%, a total capital ratio of at least 10.0% and a leverage ratio of at least
5.0%, and must not be subject to any written agreement, order or capital directive or prompt corrective action directive issued by its primary federal regulator to
meet and maintain a specific capital level for any capital measure. An insured depository institution is subject to differential regulation corresponding to the capital
category within which the institution falls. For example, an insured depository institution is generally prohibited from making capital distributions, including
paying dividends, or paying management fees to a holding company, if the institution would thereafter be undercapitalized.
At December 31, 2020, Trustmark exceeded its minimum capital requirements with common equity Tier 1 capital, Tier 1 capital and total capital equal to 11.62%,
12.11% and 14.12% of its total risk-weighted assets, respectively. At December 31, 2020, TNB also exceeded these requirements with common equity Tier 1
capital, Tier 1 capital and total capital equal to 11.75%, 11.75% and 12.73% of its total risk-weighted assets, respectively. At December 31, 2020, the leverage
ratios for Trustmark and TNB were 9.33% and 9.07%, respectively. As of December 31, 2020, TNB was well-capitalized based on the ratios and guidelines
described above.
In December 2018, the federal banking agencies issued a final rule that allows institutions to elect to phase in the regulatory capital effects of the Current Expected
Credit Losses (CECL) accounting standard over three years. In addition, as a result of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act)
enacted on March 27, 2020 in response to the COVID-19 pandemic, the federal bank regulatory agencies issued rules that allow banking organizations that
implemented CECL in 2020 to elect to mitigate the effects of the CECL accounting standard on their regulatory capital for two years. This two-year delay is in
addition to the three-year transition period that the agencies had already made available. Trustmark has elected to defer the regulatory capital effects of CECL in
accordance with these rules, which will largely delay the effects of the adoption of CECL on its regulatory capital through December 31, 2021, after which the
effects will be phased-in over a three-year period from January 1, 2022 through December 31, 2024. For additional information regarding Trustmark’s
implementation of the CECL accounting standard, see the section captioned “Accounting Policies Recently Adopted – ASU 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” included in Note 1 – Significant Accounting Policies – Accounting Policies Recently
Adopted and Pending Accounting Pronouncements in Part II. Item 8. – Financial Statements and Supplementary Data of this report.
Payment of Dividends and Stock Repurchases
Trustmark is limited in its ability to pay dividends or repurchase its stock by the FRB, including if doing so would be an unsafe or unsound banking practice. In
addition, the FRB has adopted the policy that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year
is sufficient to cover the cash dividends, and that the company’s rate of earning retention is consistent with the company’s capital needs, asset quality and overall
financial condition. In addition, a bank holding company is required to consult with or notify the FRB prior to purchasing or redeeming its outstanding equity
securities in certain circumstances, including if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the
company for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of the company’s consolidated net worth. A bank
holding company that is well-capitalized, well-managed and not the subject of any unresolved supervisory issues is exempt from this notice requirement.
Anti-Money Laundering (AML) Initiatives and Sanctions Compliance
Trustmark and TNB are subject to extensive laws and regulations aimed at combatting money laundering and terrorist financing, including the USA Patriot Act of
2001 (USA Patriot Act) and the Bank Secrecy Act. Regulations implementing these statutes impose obligations on financial institutions to maintain appropriate
policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers and of
beneficial owners of their legal entity customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and
terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and financial consequences for the institution. The federal
Financial Crimes Enforcement Network of the Department of the Treasury, in addition to federal bank regulatory agencies, is
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authorized to impose significant civil money penalties for violations of these requirements, and has recently engaged in coordinated enforcement efforts with state
and federal banking regulators, the U.S. Department of Justice, the Consumer Financial Protection Bureau (CFPB), the Drug Enforcement Administration and the
Internal Revenue Service. Violations of AML requirements can also lead to criminal penalties. In addition, the federal banking agencies are required to consider
the effectiveness of a financial institution’s AML activities when reviewing proposed bank mergers and bank holding company acquisitions.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is responsible for helping to ensure that U.S. entities do not engage in
transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC administers and enforces economic and trade
sanctions programs, including publishing lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as
Specially Designated Nationals and Blocked Persons. OFAC regulations generally require either the blocking of accounts or other property of specified entities or
individuals, but they may also require the rejection of certain transactions involving specified entities or individuals. Trustmark maintains policies, procedures and
other internal controls designed to comply with these sanctions programs.
Other Federal Regulation of Trustmark
In addition to being regulated as a bank holding company, Trustmark is subject to regulation by the State of Mississippi under its general business corporation
laws. Trustmark is also subject to the disclosure and other regulatory requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934, as
administered by the SEC.
Regulation of TNB
TNB is a national bank and, as such, is subject to extensive regulation by the OCC and, to a lesser extent, by the FDIC. In addition, as a large provider of
consumer financial services, TNB is subject to regulation, supervision, enforcement and examination by the CFPB. Almost every area of the operations and
financial condition of TNB is subject to extensive regulation and supervision and to various requirements and restrictions under federal and state law including
loans, reserves, investments, issuance of securities, establishment of branches, capital adequacy, liquidity, earnings, dividends, management practices and the
provision of services. TNB is subject to supervision, examination, enforcement and reporting requirements under the National Bank Act, the Federal Reserve Act,
the FDI Act, regulations of the OCC and certain of the requirements imposed by the Dodd-Frank Act. Trustmark and TNB are also subject to a wide range of
consumer protection laws and regulations.
Restrictions on Lending, Insider Transactions and Affiliate Transactions
National banks are limited in the amounts they may lend to one borrower and the amount they may lend to insiders. These single counterparty and insider lending
limits extend to loans, derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. In addition,
the FDI Act imposes restrictions on insured depository institutions’ purchases of assets from insiders.
Under section 22 of the Federal Reserve Act, as implemented by the FRB’s Regulation O, restrictions also apply to extensions of credit by a bank to its executive
officers, directors, principal shareholders and their related interests, and to similar individuals at the holding company or affiliates. In general, such extensions of
credit (i) may not exceed certain dollar limitations, (ii) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with third parties and (iii) must not involve more than the normal risk of repayment or present other unfavorable features.
Sections 23A and 23B of the Federal Reserve Act establish parameters for an insured bank to conduct “covered transactions” with its affiliates, generally (i)
limiting the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s capital
stock and surplus, and limiting the aggregate of all such transactions with all affiliates to an amount equal to 20% of the bank’s capital stock and surplus, and (ii)
requiring that all such transactions be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those that would be provided to a non-
affiliate. In addition, an insured bank’s loans to affiliates must be fully collateralized. The term “covered transaction” includes the making of loans to the affiliate,
purchase of assets from the affiliate, issuance of a guarantee on behalf of the affiliate and several other types of transactions.
Payment of Dividends
The principal source of Trustmark’s cash revenue is dividends from TNB. There are various legal and regulatory provisions that limit the amount of dividends
TNB can pay to Trustmark without regulatory approval. Under the National Bank Act, approval of the OCC is required if the total of all dividends declared in any
calendar year exceeds the total of TNB’s net income for that year combined with its retained net income from the preceding two years. Also, under the National
Bank Act, TNB may not pay any dividends in excess of undivided profits (retained earnings).
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Community Reinvestment Act
The CRA requires an insured depository institution’s appropriate federal banking regulator to evaluate the institution's record of meeting the credit needs of its
entire community, including low- and moderate-income neighborhoods, and to consider this record in its evaluation of certain applications to banking regulators,
such as an application for approval of a merger or the establishment of a branch. A rating of less than “Satisfactory” may provide a basis for denial of such an
application. As of its last examination from the OCC, TNB received a CRA rating of “Satisfactory.” On May 20, 2020, the OCC issued a final rule that
substantially revises how the agency will assess an institution’s CRA performance beginning in 2023. Management is continuing to evaluate the impact of the
final rule on TNB.
Consumer Protection Laws
TNB is subject to a number of federal and state laws designed to protect customers and promote lending to various sectors of the economy and population. These
consumer protection laws apply to a broad range of TNB’s activities and to various aspects of its business, and include laws relating to interest rates, fair lending,
disclosures of credit terms and estimated transaction costs to consumer borrowers, debt collection practices, the use of and the provision of information to
consumer reporting agencies and the prohibition of unfair, deceptive or abusive acts or practices in connection with the offer, sale or provision of consumer
financial products and services. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home
Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act and their state law counterparts. At the federal level,
most consumer financial protection laws are administered by the CFPB, which supervises TNB.
Violations of applicable consumer protection laws can result in significant potential liability, including actual damages, restitution and injunctive relief, from
litigation brought by customers, state attorneys general and other plaintiffs, as well as enforcement actions by banking regulators and reputational harm.
Many states and local jurisdictions have consumer protection laws analogous, and in addition to, those listed above. While TNB’s activities are governed primarily
by federal law, the Dodd-Frank Act potentially narrowed National Bank Act preemption of state consumer financial laws, thereby making TNB and other national
banks potentially subject to increased state regulation. The Dodd-Frank Act also codified the Supreme Court’s decision in Cuomo v. Clearing House
Association. As a result, State Attorneys General may enforce in a court action “an applicable law” against federally-chartered depository institutions like
TNB. In addition, under the Dodd-Frank Act, state attorneys general are authorized to bring civil actions against federally-chartered institutions, like TNB, to
enforce regulations prescribed by the CFPB or to secure other remedies.
Finally, the Dodd-Frank Act potentially expanded state regulation over banks by eliminating National Bank Act preemption for national bank operating
subsidiaries, including operating subsidiaries of TNB.
Financial Privacy Laws and Cybersecurity
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLB Act) imposed requirements related to the privacy of customer financial
information. In accordance with the GLB Act, federal bank regulators adopted rules that limit the ability of banks and other financial institutions to disclose
nonpublic information about consumers to nonaffiliated third parties. The GLB Act also requires disclosure of privacy policies to consumers and, in some
circumstances, allows consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect
how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Trustmark recognizes the need to comply with
legal and regulatory requirements that affect its customers’ privacy.
In addition, the federal banking agencies pay close attention to the cybersecurity practices of banks, and the agencies include review of an institution’s information
technology and its ability to thwart cyberattacks in their examinations. An institution’s failure to have adequate cybersecurity safeguards in place can result in
supervisory criticism, monetary penalties and/or reputational harm.
Debit Interchange Regulation
The FRB has issued rules under the EFTA, as amended by the Dodd-Frank Act, to limit interchange fees that an issuer with $10.0 billion or more in assets, such as
TNB, may receive or charge for an electronic debit card transaction. Under the FRB’s rules, the maximum permissible interchange fee that an issuer may receive
for an electronic debit transaction is the sum of 21 cents per transaction and five basis points multiplied by the value of the transaction. In addition, the FRB’s
rules allow for an upward adjustment of no more than one cent to an issuer’s debit card interchange fee if the issuer develops and implements policies and
procedures reasonably designed to achieve the fraud-prevention standards set out in the rule.
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The FRB also has established rules governing routing and exclusivity that require debt card issuers to offer two unaffiliated networks for routing transactions on
each debit or prepaid product.
FDIC Deposit Insurance Assessments
The deposits of TNB are insured by the Deposit Insurance Fund (DIF), as administered by the FDIC, and, accordingly, are subject to deposit insurance assessments
to maintain the DIF at minimum levels required by statute.
The FDIC uses a risk-based assessment system that imposes insurance premiums as determined by multiplying an insured bank’s assessment base by its
assessment rate. A bank’s deposit insurance assessment base is generally equal to the bank’s total assets minus its average tangible equity during the assessment
period.
The FDIC determines a bank’s assessment rate within a range of base assessment rates using a risk scorecard that takes into account the bank’s financial ratios and
supervisory rating (the CAMELS composite rating), among other factors. The CAMELS rating system is a supervisory rating system developed to classify a
bank’s overall condition by taking into account capital adequacy, assets, management capability, earnings, liquidity and sensitivity to market and interest rate
risk. The methodology that the FDIC uses to calculate assessment amounts is also based on the FDIC’s designated reserve ratio, which is currently 2.0%.
The FDIC may terminate the deposit insurance of any insured depository institution, including the TNB, if the FDIC determines after a hearing that the institution
has engaged or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. The FDIC also may suspend deposit insurance temporarily during the hearing process
for the permanent termination of insurance if the institution has no tangible capital.
In 2020, TNB’s expenses related to deposit insurance premiums totaled $6.1 million.
TNB Subsidiaries
TNB’s nonbanking subsidiaries are subject to a variety of state and federal laws and regulations. TIA, a registered investment adviser, is subject to regulation by
the SEC under the Investment Advisers Act of 1940 and by the State of Mississippi. FBBI is subject to the insurance laws and regulations of the states in which it
is active. SCC is subject to the supervision and regulation of the CDFI Fund and the State of Mississippi.
The GLB Act authorizes national banks to own or control a “financial subsidiary” that engages in activities that are not permissible for national banks to engage in
directly. The GLB Act contains a number of provisions dealing with insurance activities by bank subsidiaries. Generally, the GLB Act affirms the role of the
states in regulating insurance activities, including the insurance activities of financial subsidiaries of banks, but the GLB Act also preempts certain state laws. As a
result of the GLB Act, TNB elected for predecessor subsidiaries that now constitute FBBI to become financial subsidiaries. This enables FBBI to engage in
insurance agency activities at any location.
Relief Measures Under the CARES Act
Congress, various federal agencies and state governments have taken measures to address the economic and social consequences of the pandemic, including the
enactment on March 27, 2020 of the CARES Act, which, among other things, established various initiatives to protect individuals, businesses and local economies
in an effort to lessen the impact of the COVID-19 pandemic on consumers and businesses. These initiatives included the PPP, relief with respect to troubled debt
restructurings (TDRs), mortgage forbearance and extended unemployment benefits. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020,
extended some of these relief provisions in certain respects.
The PPP permitted small businesses, sole proprietorships, independent contractors and self-employed individuals to apply for loans from existing SBA lenders and
other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The CARES Act appropriated $349.0 billion to
fund the PPP, and Congress appropriated an additional $320.0 billion to the PPP on April 24, 2020, and amended the PPP on June 5, 2020 to make the terms of the
PPP loans and loan forgiveness more flexible. PPP loans are forgivable, in whole or in part, if the proceeds are used for permitted purposes. Consistent with the
terms of the PPP, if not forgiven in whole or in part, these loans carry a fixed interest rate of 1.00% per annum and are 100% guaranteed by the SBA. TNB began
submitting PPP applications on behalf of and originating loans to qualified small businesses under this program in April 2020. The SBA discontinued accepting
applications in August 2020. Additionally, the Consolidated Appropriations Act, 2021 appropriated a further $284.0 billion to the PPP, and permitted certain PPP
borrowers to make “second draw” loans. TNB began submitting PPP applications on behalf of and originating loans to qualified small businesses under this third
round of PPP in January 2021 once allowable by the SBA.
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TNB’s participation in this program could subject it to increased governmental and regulatory scrutiny, negative publicity or increased exposure to litigation,
which could increase our operational, legal and compliance costs and damage our reputation.
The CARES Act and related guidance from the federal banking agencies provide financial institutions the option to temporarily suspend requirements under U.S.
generally accepted accounting principles (GAAP) related to classification of certain loan modifications as TDRs, to account for the current and anticipated effects
of COVID-19. The CARES Act, as amended by the Consolidated Appropriations Act, 2021, specified that COVID-19 related loan modifications executed
between March 1, 2020 and the earlier of (i) 60 days after the date of termination of the national emergency declared by the President and (ii) January 1, 2022, on
loans that were current as of December 31, 2019 are not TDRs. Additionally, under guidance from the federal banking agencies, other short-term modifications
made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs under Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) Subtopic 310-40, “Troubled Debt Restructuring by Creditors.” These modifications include short-term (e.g., up
to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Since the outset of
the pandemic, TNB has granted loan modifications to its customers primarily in the form of interest only payments for 90 days or full payment deferrals for 90
days.
The CARES Act also includes a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and
their customers. For example, provisions of the CARES Act require mortgage servicers to grant, on a borrower’s request, forbearance for up to 180 days (which
can be extended for an additional 180 days) on a federally-backed single-family mortgage loan, or forbearance up to 30 days (which can be extended for two
additional 30-day periods) on a federally-backed multifamily mortgage loan when the borrower experiences financial hardship due to the COVID-19 pandemic.
Further, in response to the COVID-19 pandemic, the FRB has established a number of facilities to provide emergency liquidity to various segments of the U.S.
economy and financial markets. Many of these facilities expired on December 31, 2020, or were extended for brief periods into 2021. The expiration of these
facilities could have adverse effect on the U.S. economy and ultimately on Trustmark’s business.
Available Information
Trustmark’s internet address is www.trustmark.com. Information contained on this website is not a part of this report. Trustmark makes available through this
address, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed, or furnished to, the
SEC.
Employees
At December 31, 2020, Trustmark employed 2,797 full-time equivalent associates, none of which are represented by a collective bargaining agreement. Trustmark
believes its employee relations to be satisfactory.
Information about Executive Officers of Trustmark
As of the filing date, the executive officers of Trustmark and its primary bank subsidiary, TNB, including their ages, positions and principal occupations for the last
five years are as follows:
Gerard R. Host, 66
Trustmark Corporation
Executive Chairman since January 2021
Chairman from April 2020 to December 2020
President and Chief Executive Officer since January 2011 to December 2020
Trustmark National Bank
Executive Chairman since January 2021
Chairman from April 2020 to December 2020
Chief Executive Officer from January 2011 to December 2020
President from January 2011 to December 2019
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Duane A. Dewey, 62
Trustmark Corporation
President and Chief Executive Officer since January 2021
Trustmark National Bank
Chief Executive Officer since January 2021
President since January 2020
Chief Operating Officer from January 2019 to December 2020
President – Corporate Banking from September 2011 to December 2018
Louis E. Greer, 66
Trustmark Corporation
Treasurer and Principal Financial Officer since January 2007
Principal Accounting Officer since February 2007
Trustmark National Bank
Executive Vice President and Chief Financial Officer since February 2007
Granville Tate, Jr., 64
Trustmark Corporation
Secretary since December 2015
Trustmark National Bank
Chief Administrative Officer since January 2021
Chief Risk Officer since June 2016
Executive Vice President, Secretary and General Counsel since December 2015
Monica A. Day, 60
Trustmark National Bank
President – Institutional Banking since April 2019
Executive Vice President and Real Estate Banking Manager from May 2017 to April 2019
Senior Vice President and Corporate Commercial Real Estate Manager from October 2008 to May 2017
Robert Barry Harvey, 61
Trustmark National Bank
Executive Vice President and Chief Credit Officer since March 2010
Thomas C. Owens, 56
Trustmark National Bank
Executive Vice President and Bank Treasurer since September 2013
W. Arthur Stevens, 55
Trustmark National Bank
President – Retail Banking since September 2011
Gerard R. Host became Executive Chairman of Trustmark and TNB on January 1, 2021. Duane A. Dewey, President and former Chief Operating Officer of TNB,
succeeded Mr. Host as President and Chief Executive Officer (CEO) of Trustmark and CEO of TNB on January 1, 2021. Granville Tate, Jr., who serves as
Executive Vice President, Chief Risk Officer and General Counsel of TNB, assumed additional responsibilities as TNB’s Chief Administrative Officer on January
1, 2021. He remains Secretary of the Boards of Directors of Trustmark and TNB. Additionally, on October 27, 2020, Trustmark announced the retirement of
Louis E. Greer, Treasurer and Principal Financial Officer of Trustmark and Chief Financial Officer of TNB, effective March 1, 2021. Thomas C. Owens, who has
served as Executive Vice President and Bank Treasurer of TNB since 2013, will succeed Mr. Greer as Treasurer and Principal Financial Officer of Trustmark and
Chief Financial Officer of TNB effective March 1, 2021. George T. (“Tom”) Chambers, Jr., who has served as Controller of TNB since 2007, will become
Principal Accounting Officer of Trustmark and Executive Vice President and Chief Accounting Officer of TNB effective March 1, 2021. Maria L. (“Ria”) Sugay,
who serves as Executive Vice President and Co-Treasurer of TNB, will succeed Mr. Owens as Bank Treasurer effective March 1, 2021.
ITEM 1A.
RISK FACTORS
Trustmark and its subsidiaries could be adversely impacted by various risks and uncertainties, which are difficult to predict. As a financial institution, Trustmark
has significant exposure to market risks, including interest rate risk, liquidity risk and credit risk. This section includes a description of the risks, uncertainties and
assumptions identified by Management that could, individually or in combination, materially affect Trustmark’s financial condition and results of operations, as
well as the value of Trustmark’s financial
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instruments in general, and Trustmark common stock, in particular. Additional risks and uncertainties that Management currently deems immaterial or is unaware
of may also impair Trustmark’s financial condition and results of operations. This report is qualified in its entirety by the risk factors that are identified below.
Risks Related to Trustmark’s Business
Interest Rate Risks
Trustmark’s largest source of revenue (net interest income) is subject to interest rate risk.
Trustmark’s profitability depends to a large extent on net interest income, which is the difference between income on interest-earning assets, such as loans and
investment securities, and expense on interest-bearing liabilities, such as deposits and borrowings. Trustmark is exposed to interest rate risk in its core banking
activities of lending and deposit taking, since assets and liabilities reprice at different times and by different amounts as interest rates change. Trustmark is unable
to predict changes in market interest rates, which are affected by many factors beyond Trustmark’s control, including inflation, recession, unemployment, money
supply, domestic and international events and changes in the United States and other financial markets. Additionally, the COVID-19 pandemic has significantly
affected the financial markets and has resulted in a number of actions by the FRB. Market interest rates have declined to historical lows. On March 3, 2020, the
ten-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. On
March 15, 2020, the FRB further reduced the target federal funds rate by 100 basis points to a range of 0.00% to 0.25% and announced a $700 billion quantitative
easing program in response to the expected economic downturn caused by the COVID-19 pandemic. The FRB reduced the interest that it pays on excess reserves
from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. Trustmark expects that these reductions in interest rates, especially if prolonged,
could adversely affect its net interest income and margins and its profitability.
Financial simulation models are the primary tools used by Trustmark to measure interest rate exposure. Using a wide range of scenarios, Management is provided
with extensive information on the potential impact to net interest income caused by changes in interest rates. Models are structured to simulate cash flows and
accrual characteristics of Trustmark’s balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the
changing composition of Trustmark’s balance sheet, resulting from both strategic plans and customer behavior. In addition, the model incorporates Management’s
assumptions and expectations regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates. Trustmark’s
simulation model using static balances at December 31, 2020, estimated that in the event of a hypothetical 200 basis point increase in interest rates, net interest
income may increase 20.4%, while a hypothetical 100 basis point increase in interest rates, may increase net interest income 10.8%. In the event of a hypothetical
100 basis point decrease in interest rates using static balances at December 31, 2020, it is estimated net interest income may decrease by 5.7%.
Net interest income is Trustmark’s largest revenue source, and it is important to discuss how Trustmark’s interest rate risk may be influenced by the various factors
shown below:
•
•
In general, for a given change in interest rates, the amount of the change in value (positive or negative) is larger for assets and liabilities with longer
remaining maturities. The shape of the yield curve may affect new loan yields, funding costs and investment income differently.
The remaining maturity of various assets or liabilities may shorten or lengthen as payment behavior changes in response to changes in interest
rates. For example, if interest rates decline sharply, fixed-rate loans may pre-pay, or pay down, faster than anticipated, thus reducing future cash
flows and interest income. Conversely, if interest rates increase, depositors may cash in their certificates of deposit prior to term (notwithstanding
any applicable early withdrawal penalties) or otherwise reduce their deposits to pursue higher yielding investment alternatives. Repricing
frequencies and maturity profiles for assets and liabilities may occur at different times. For example, in a falling rate environment, if assets reprice
faster than liabilities, there will be an initial decline in earnings. Moreover, if assets and liabilities reprice at the same time, they may not be by the
same increment. For instance, if the federal funds rate increased 50 basis points, rates on demand deposits may rise by 10 basis points, whereas rates
on prime-based loans will instantly rise 50 basis points.
Financial instruments do not respond in a parallel fashion to rising or falling interest rates. This causes asymmetry in the magnitude of changes in net interest
income, net economic value and investment income resulting from the hypothetical increases and decreases in interest rates. Therefore, Management monitors
interest rate risk and adjusts Trustmark’s investment, funding and hedging strategies to mitigate adverse effects of interest rate shifts on Trustmark’s balance sheet.
Trustmark utilizes derivative contracts to hedge the mortgage servicing rights (MSR) in order to offset changes in fair value resulting from changes in interest rate
environments. In spite of Trustmark’s due diligence in regard to these hedging strategies, significant risks are involved that, if realized, may prove such strategies
to be ineffective, which could adversely affect Trustmark’s financial condition or results of operations. Risks associated with these strategies include the risk that
counterparties in any such derivative and
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other hedging transactions may not perform; the risk that these hedging strategies rely on Management’s assumptions and projections regarding these assets and
general market factors, including prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, and that these assumptions and
projections may prove to be incorrect; the risk that these hedging strategies do not adequately mitigate the impact of changes in interest rates, prepayment speeds or
other forecasted inputs to the hedging model; and the risk that the models used to forecast the effectiveness of hedging instruments may project expectations that
differ from actual results. In addition, increased regulation of the derivative markets may increase the cost to Trustmark to implement and maintain an effective
hedging strategy.
Trustmark closely monitors the sensitivity of net interest income and investment income to changes in interest rates and attempts to limit the variability of net
interest income as interest rates change. Trustmark makes use of both on- and off-balance sheet financial instruments to mitigate exposure to interest rate risk.
Trustmark may be adversely affected by the transition from the London Interbank Offered Rate (LIBOR) as a reference rate.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after the end of 2021 it would no longer compel banks to submit the rates required to
calculate LIBOR. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after the end of 2021. The
Alternative Reference Rates Committee (ARRC), a committee of U.S. financial market participants, has proposed the Secured Overnight Financing Rate (SOFR)
as the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-
LIBOR. However, there are conceptual and technical differences between LIBOR and SOFR. ARRC has proposed a paced market transition plan to SOFR from
LIBOR and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to
LIBOR. While the benchmark provider for US$ LIBOR (which is typically the benchmark that Trustmark uses) has announced that it intends to provide the
benchmark through June 2023, Trustmark continues to work to transition to SOFR by the end of 2021.
Trustmark has a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly
dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated differently,
payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change Trustmark’s market risk profiles, requiring
changes to risk and pricing models, valuation tools, product design and hedging strategies. Trustmark has organized an internal initiative to identify operational
and contractual best practices, assess its risks, manage the transition, facilitate communication with its customers, and monitor the impacts. 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, results of operations and reputation with its customers.
Credit and Lending Risks
Trustmark is subject to lending risk, which could impact the adequacy of the allowance for credit losses and results of operations.
There are inherent risks associated with Trustmark’s lending activities. While the housing and real estate markets have shown continued improvement, they
remain at depressed levels in certain regions. If trends in the housing and real estate markets were to revert or further decline below recession levels, Trustmark
may experience higher than normal delinquencies and credit losses. Moreover, if the United States economy returns to a recessionary state, Management expects
that it could severely affect economic conditions in Trustmark’s market areas and that Trustmark could experience significantly higher delinquencies and credit
losses. In addition, bank regulatory agencies periodically review Trustmark’s allowance for credit losses and may require an increase in the provision for credit
losses or the recognition of further charge-offs, based on judgments different from those of Management. As a result, Trustmark may elect, or be required, to make
further increases in its provision for credit losses in the future, particularly if economic conditions deteriorate.
Additionally, Trustmark may rely on information furnished by or on behalf of customers and counterparties in deciding whether to extend credit or enter into other
transactions. This information could include financial statements, credit reports, business plans, and other information. Trustmark may also rely on
representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial statements, credit reports, or other information could have a material adverse impact on Trustmark’s
business, financial condition, and results of operations.
Declines in asset values may result in credit losses and adversely affect the value of Trustmark’s investments.
Trustmark maintains an investment portfolio that includes, among other asset classes, obligations of states and municipalities, agency debt securities and agency
mortgage-related securities. The market value of investments in Trustmark’s investment portfolio may be
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affected by factors other than interest rates or the underlying performance of the issuer of the securities, such as ratings downgrades, adverse changes in the
business climate and a lack of pricing information or liquidity in the secondary market for certain investment securities. In addition, government involvement or
intervention in the financial markets or the lack thereof or market perceptions regarding the existence or absence of such activities could affect the market and the
market prices for these securities.
On a quarterly basis, Trustmark evaluates investments and other assets for expected credit losses. As of December 31, 2020, gross unrealized losses on securities
for which an allowance for credit losses has not been recorded totaled $1.9 million. Trustmark may be required to record credit loss expense if these investments
suffer a decline in value that is the result of a credit loss. If Trustmark determines that a credit loss exists, the credit portion of the allowance would be measured
using a discounted cash flow (DCF) analysis using the effective interest rate as of the security’s purchase date. The amount of credit loss Trustmark may record is
limited to the amount by which the amortized cost exceeds the fair value, which could have a material adverse effect on results of operations in the period in which
a credit loss, if any, occurs.
Liquidity Risk
Trustmark is subject to liquidity risk, which could disrupt its ability to meet its financial obligations.
Liquidity refers to Trustmark’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including
demand for loans and deposit withdrawals, funding operating costs and other corporate purposes. Liquidity risk arises whenever the maturities of financial
instruments included in assets and liabilities differ or when assets cannot be liquidated at fair market value as needed. Trustmark obtains funding through deposits
and various short-term and long-term wholesale borrowings, including federal funds purchased and securities sold under repurchase agreements, the Federal
Reserve Discount Window (Discount Window) and Federal Home Loan Bank (FHLB) advances. Any significant restriction or disruption of Trustmark’s ability to
obtain funding from these or other sources could have a negative effect on Trustmark’s ability to satisfy its current and future financial obligations, which could
materially affect Trustmark’s financial condition or results of operations.
In addition to the risk that one or more of the funding sources may become constrained due to market conditions unrelated to Trustmark, there is the risk that
Trustmark’s credit profile may decline such that one or more of these funding sources becomes partially or wholly unavailable to Trustmark.
Trustmark attempts to quantify such credit event risk by modeling bank specific and systemic scenarios that estimate the liquidity impact. Trustmark estimates
such impact by attempting to measure the effect on available unsecured lines of credit, available capacity from secured borrowing sources and securitizable
assets. To mitigate such risk, Trustmark maintains available lines of credit with the Federal Reserve Bank of Atlanta and the FHLB of Dallas that are secured by
loans and investment securities. Management continuously monitors Trustmark’s liquidity position for compliance with internal policies.
External and Market-Related Risks
Trustmark’s business may be adversely affected by conditions in the financial markets and economic conditions in general.
On March 11, 2020, the WHO declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the
world. The COVID-19 pandemic has adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Actions taken
around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public
places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies
and financial markets of many regions, including the geographical area in which Trustmark operates and industries in which Trustmark regularly extends
credit. Doubts surrounding the near-term direction of global markets, and the potential impact of these trends 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 conditions, and thus may have an
impact upon Trustmark’s financial condition or results of operations. While domestic demand for loans has improved, further meaningful gains will depend on
sustained economic growth. Strategic risk, including threats to business models from rising rates and modest economic growth, remains high. Management’s
ability to plan, prioritize and allocate resources in this new environment will be critical to Trustmark’s ability to sustain earnings that will attract capital. Because
of the complexities presented by current economic conditions, Management will continue to be challenged in identifying alternative sources of revenue, prudently
diversifying assets, liabilities and revenue and effectively managing the costs of compliance.
Interest rates remain within a historically low level that, when combined with the extended period of lower interest rates in recent years, continue to place pressure
on net interest margins for Trustmark (as well as its competitors). Any further declines in interest rates will place additional competitive pressure on net interest
margins. Conversely, increases in interest rates will place competitive pressures on the deposit cost of funds. It is not possible to predict the pace and magnitude
of changes to interest rates, or the impact rate changes will have on Trustmark’s results of operations.
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Despite recent optimism resulting from stabilization in the housing sector, improvement of unemployment data and credit quality improvement, Trustmark does
not assume that current uncertain conditions in the economy will improve significantly in the near future. A further weakened economy could affect Trustmark in
a variety of substantial and unpredictable ways. In particular, Trustmark may face the following risks in connection with these events:
•
•
•
•
Market developments and the resulting economic pressure on consumers may affect consumer confidence levels and may cause increases in
delinquencies and default rates, which, among other effects, could further affect Trustmark’s charge-offs and provision for loan losses.
Loan performance could experience a significantly extended deterioration or loan default levels could accelerate, foreclosure activity could
significantly increase, or Trustmark’s assets (including loans and investment securities) could materially decline in value, any one of which, or any
combination of more than one of which, could have a material adverse effect on Trustmark’s financial condition or results of operations.
Management’s ability to measure the fair value of Trustmark’s assets could be adversely affected by market disruptions that could make valuation of
assets more difficult and subjective. If Management determines that a significant portion of its assets have values that are significantly below their
recorded carrying value, Trustmark could recognize a material charge to earnings in the quarter during which such determination was made,
Trustmark’s capital ratios would be adversely affected by any such charge, and a rating agency might downgrade Trustmark’s credit rating or put
Trustmark on credit watch.
As of December 31, 2020, energy-related LHFI represented approximately 1.0% of Trustmark’s total LHFI portfolio and consisted principally of
loans within the oilfield services and midstream segments. Additionally, as of December 31, 2020, approximately 10.2% of Trustmark’s energy-
related LHFI, or 0.1% of Trustmark’s total LHFI portfolio, were classified as nonaccrual. Trustmark has no loan exposure where the source of
repayment, or the underlying security of such exposure, is tied to the realization of value from energy reserves. Nonetheless, if oil prices fall below
current levels for an extended period of time, Trustmark could experience weakening or increased losses within its energy-related LHFI portfolio.
It is difficult to predict the extent to which these challenging economic conditions will persist or whether recent progress in the economic recovery will instead
shift to the potential for further decline. If the economy does weaken in the future, it is uncertain how Trustmark’s business would be affected and whether
Trustmark would be able successfully to mitigate any such effects on its business. Accordingly, these factors in the United States (and, indirectly, global) economy
could have a material adverse effect on Trustmark’s financial condition and results of operations.
For a further discussion of the potential risks posed by the COVID-19 pandemic, see the risk factors under the section captioned “Risks Related to the COVID-19
Pandemic” below.
Trustmark operates in a highly competitive financial services industry.
Trustmark faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have greater
financial resources. Such competitors primarily include banks, as well as community banks operating nationwide and regionally within the various markets in
which Trustmark operates. Trustmark also faces competition from many other types of financial institutions, including savings and loans, credit unions, finance
companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. Additionally, fintech developments, such as blockchain
and other distributed ledger technologies, have the potential to disrupt the financial industry and change the way banks do business. The financial services industry
could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.
Some of Trustmark’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many of Trustmark’s
larger competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those
products and services than Trustmark.
Trustmark’s ability to compete successfully depends on a number of factors, including: the ability to develop, maintain and build upon long-term customer
relationships based on top quality service, high ethical standards and safe, sound assets; the ability to continue to expand Trustmark’s market position through
organic growth and acquisitions; the scope, relevance and pricing of products and services offered to meet customer needs and demands; the rate at which
Trustmark introduces new products and services relative to its competitors; and industry and general economic trends. Failure to perform in any of these areas
could significantly weaken Trustmark’s competitive position, which could adversely affect Trustmark’s financial condition or results of operations.
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The soundness of other financial institutions could adversely affect Trustmark.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or questions or rumors
about, one or more financial services institutions or the financial services industry in general, could lead to market-wide liquidity problems, which could, in turn,
lead to defaults or losses by Trustmark and by other institutions. Trustmark has exposure to many different industries and counterparties, and routinely executes
transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, mutual funds, and other
institutional clients. Many of these transactions expose Trustmark to credit risk in the event of default of its counterparty or client. In addition, Trustmark’s credit
risk may be exacerbated when the collateral it holds cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or
derivative exposure owed to Trustmark. Losses related to these credit risks could materially and adversely affect Trustmark’s results of operations.
Compliance and Regulatory Risks
Trustmark is subject to extensive government regulation and supervision and possible enforcement and other legal actions.
Trustmark, primarily through TNB and certain nonbank subsidiaries, is subject to extensive federal and state regulation and supervision, which vests a significant
amount of discretion in the various regulatory authorities. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds
and the banking system as a whole, not security holders. These regulations and supervisory guidance affect Trustmark’s lending practices, capital structure,
investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and
policies for possible changes. Changes to statutes, regulations or regulatory policies or supervisory guidance, including changes in interpretation or
implementation or statutes, regulations, policies and supervisory guidance, could affect Trustmark in substantial and unpredictable ways. Such changes could
subject Trustmark to additional costs, limit the types of financial services and products Trustmark may offer and/or increase the ability of nonbanks to offer
competing financial services and products, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in
enforcement and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the revocation of a banking
charter, civil money penalties, other sanctions by regulatory agencies and/or reputational damage. In this regard, government authorities, including bank regulatory
agencies, continue to pursue enforcement agendas with respect to compliance and other legal matters involving financial activities, which heightens the risks
associated with actual and perceived compliance failures. Any of the foregoing could have a material adverse effect on Trustmark’s financial condition or results
of operations.
Trustmark is subject to stringent capital requirements.
Under the regulatory capital rules of the FRB, OCC, and FDIC that implement a set of capital requirements issued by the Basel Committee on Banking Supervision
known as Basel III, Trustmark and TNB are required to maintain a common equity Tier 1 capital to risk-weighted assets ratio of at least 7.0% (a minimum of 4.5%
plus a capital conservation buffer of 2.5%), a Tier 1 capital to risk-weighted assets ratio of at least 8.5% (a minimum of 6.0% plus a capital conservation buffer of
2.5%), a total capital to risk-weighted assets ratio of at least 10.5% (a minimum of 8.0% plus a capital conservation buffer of 2.5%) and a leverage ratio of Tier 1
capital to total consolidated assets of at least 4.0%. In addition, for TNB to be “well-capitalized” under the banking agencies’ prompt corrective action framework,
it must have a common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 capital ratio of at least 8.0%, a total capital ratio of at least 10.0% and a leverage ratio of
at least 5.0%, and must not be subject to any written agreement, order or capital directive, or prompt corrective action directive issued by its primary federal
regulator to meet and maintain a specific capital level for any capital measure.
The capital rules also include stringent criteria for capital instruments to qualify as Tier 1 or Tier 2 capital. For instance, the rules effectively disallow newly-
issued trust preferred securities to be a component of a holding company’s Tier 1 capital. Trustmark will continue to count $60.0 million in outstanding trust
preferred securities issued by the Trust as Tier 1 capital up to the regulatory limit, as permitted by a grandfather provision in the capital rules, but this grandfather
provision may cease to apply if Trustmark grows to $15 billion or more in total assets as a result of an acquisition of a depository institution holding company.
Additionally, the FASB Accounting Standard Update (ASU) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments,” which implements CECL as a new impairment model based on expected credit losses, requires Trustmark to recognize all expected credit
losses over the life of a loan based on historical experience, current conditions and reasonable and supportable forecasts. CECL generally is expected to result in
earlier recognition of credit losses, which would increase reserves and decrease capital. Additionally, the CECL model could be materially impacted by changes in
current and forecasted macroeconomic conditions. It is not possible to predict the timing or magnitude of changes in macroeconomic conditions or the impact such
changes could have on Trustmark’s allowance for credit losses; however, material changes in the allowance for credit losses could have a material impact on
Trustmark’s reserves and capital.
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The regulatory capital rules applicable to Trustmark and TNB may continue to evolve as a result of new requirements established by the Basel Committee on
Banking Supervision or legislative, regulatory or accounting changes in the United States. Management cannot predict the effect that any changes to current
capital requirements would have on Trustmark and TNB.
Trustmark’s use of third-party service providers and Trustmark’s other ongoing third-party business relationships are subject to increasing regulatory
requirements and attention.
Trustmark regularly uses third-party service providers and subcontractors as part of its business. Trustmark also has substantial ongoing business relationships
with partners and other third-parties and relies on certain third-parties to provide products and services necessary to maintain day-to-day operations. These types of
third-party relationships are subject to increasingly demanding regulatory requirements and attention by regulators, including the FRB, OCC, CFPB and
FDIC. Under regulatory guidance, Trustmark is required to apply stringent due diligence, conduct ongoing monitoring and maintain effective control over third-
party service providers and subcontractors and other ongoing third-party business relationships. Trustmark expects that the regulators will hold Trustmark
responsible for deficiencies in its oversight and control of its third-party relationships and in the performance of the parties with which Trustmark has these
relationships. Trustmark maintains a system of policies and procedures designed to ensure adequate due diligence is performed and to monitor vendor
risks. While Trustmark believes these policies and procedures effectively mitigate risk, if the regulators conclude that Trustmark has not exercised adequate
oversight and control over third-party service providers and subcontractors or other ongoing third-party business relationships or that such third-parties have not
performed appropriately, Trustmark could be subject to enforcement actions, including civil monetary penalties or other administrative or judicial penalties or fines
as well as requirements for customer remediation.
Operational Risks
There may be risks resulting from the extensive use of models in Trustmark’s business.
Trustmark relies on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing
of various products, assessing potential acquisition opportunities, developing presentations made to market analysts and others, creating loans and extending credit,
measuring interest rate and other market risks, predicting losses, assessing capital adequacy, calculating regulatory capital levels and estimating the fair value of
financial instruments and balance sheet items. These models reflect assumptions that may not be accurate, particularly in times of market stress or other
unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or
their implementation. If models for determining interest rate risk and asset-liability management are inadequate, Trustmark may incur increased or unexpected
losses upon changes in market interest rates or other market measures. If models for determining expected credit losses are inadequate, the allowance for credit
losses may not be sufficient to support future charge-offs. If models to measure the fair value of financial instruments are inadequate, the fair value of such
financial instruments may fluctuate unexpectedly or may not accurately reflect what Trustmark could realize upon sale or settlement of such financial
instruments. Any such failure in the analytical or forecasting models could have a material adverse effect on Trustmark’s financial condition or results of
operations.
Also, information Trustmark provides to its regulators based on poorly designed or implemented models could be inaccurate or misleading. Certain decisions that
the regulators make, including those related to capital distributions and dividends to Trustmark’s shareholders, could be adversely affected due to the regulator’s
perception that the quality of Trustmark’s models used to generate the relevant information is insufficient.
Trustmark could be required to write down goodwill and other intangible assets.
If Trustmark consummates an acquisition, a portion of the purchase price would generally be allocated to goodwill and other identifiable intangible assets. The
amount of the purchase price that is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable
assets acquired. At December 31, 2020, goodwill and other identifiable intangible assets were $392.7 million. Under current accounting standards, if Trustmark
determines goodwill or intangible assets are impaired, Trustmark would be required to write down the carrying value of these assets. Trustmark’s annual goodwill
impairment evaluation performed during the fourth quarter of 2020 indicated no impairment of goodwill for any reporting segment. Management cannot provide
assurance, however, that Trustmark will not be required to take an impairment charge in the future. Any impairment charge would have an adverse effect on
Trustmark’s shareholders’ equity and financial condition and could cause a decline in Trustmark’s stock price.
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Trustmark holds a significant amount of other real estate and may acquire and hold significant additional amounts, which could lead to increased operating
expenses and vulnerability to additional declines in real property values.
As business necessitates, Trustmark forecloses on and takes title to real estate serving as collateral for loans. At December 31, 2020, Trustmark held $11.7 million
of other real estate, compared to $29.2 million at December 31, 2019. The amount of other real estate held by Trustmark may increase in the future as a result of,
among other things, business combinations, increased uncertainties in the housing market or increased levels of credit stress in residential real estate loan
portfolios. Increased other real estate balances could lead to greater expenses as Trustmark incurs costs to manage, maintain and dispose of real properties as well
as to remediate any environmental cleanup costs incurred in connection with any contamination discovered on real property on which Trustmark has foreclosed
and to which Trustmark has taken title. As a result, Trustmark’s earnings could be negatively affected by various expenses associated with other real estate owned,
including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with real property ownership, as
well as by the funding costs associated with other real estate assets. The expenses associated with holding a significant amount of other real estate could have a
material adverse effect on Trustmark’s financial condition or results of operations.
If Trustmark is required to repurchase a significant number of mortgage loans that it had previously sold, such repurchases could negatively affect earnings.
One of Trustmark’s primary business operations is mortgage banking under which residential mortgage loans are sold in the secondary market under agreements
that contain representations and warranties related to, among other things, the origination and characteristics of the mortgage loans. Trustmark may be required to
either repurchase the outstanding principal balance of a loan or make the purchaser whole for the anticipated 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 the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) on or after January 1, 2013 are subject to the Lending and Selling Representations and
Warranties Framework updated in May 2014, 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.
Changes in retail distribution strategies and consumer behavior may adversely impact Trustmark’s investments in premises, equipment, technology and other
assets and may lead to increased expenditures to change its retail distribution channel.
Trustmark has significant investments in bank premises and equipment for its branch network. Advances in technology such as ecommerce, telephone, internet and
mobile banking, and in-branch self-service technologies including interactive teller machines and other equipment, as well as an increasing customer preference for
these other methods of accessing Trustmark’s products and services, could decrease the value of its branch network, technology, or other retail distribution
physical assets and may cause Trustmark to change its retail distribution strategy, close and/or sell certain branches or parcels of land held for development and
restructure or reduce its remaining branches and work force. These actions could lead to losses on these assets or could adversely impact the carrying value of any
long-lived assets and may lead to increased expenditures to renovate, reconfigure or close a number of Trustmark’s remaining branches or to otherwise reform its
retail distribution channel.
Trustmark may experience disruptions of its operating systems or breaches in its information system security.
Trustmark is dependent upon communications and information systems to conduct business as such systems are used to manage virtually all aspects of Trustmark’s
business. Trustmark’s operations rely on the secure processing, storage and transmission of confidential and other information within its computer systems and
networks. Trustmark has taken protective measures, which are continuously monitored and modified as warranted; however, Trustmark’s computer systems,
software and networks may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially
beyond Trustmark’s control. There could be sudden increases in customer transaction volume; electrical, telecommunications or other major physical
infrastructure outages; natural disasters; and events arising from local or larger scale political or social matters, including terrorist acts. Further, Trustmark’s
operational and security systems and infrastructure may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious codes and
cyber-attacks that could affect their information system security. If one or more of these events were to occur, Trustmark’s or its customers’ confidential and other
information would be jeopardized, or such an event could cause interruptions or malfunctions in Trustmark’s or its customers’ or counterparties’
operations. Trustmark may be required to expend significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities
or other exposures in its computer systems and networks, and Trustmark may be subject to litigation and financial losses that are either not insured against or not
fully covered through any insurance maintained by Trustmark. Any such losses, which
23
may be difficult to detect, could adversely affect Trustmark’s financial condition or results of operations. In addition, the occurrence of such a loss could expose
Trustmark to reputational risk, the loss of customer business and additional regulatory scrutiny.
Security breaches in Trustmark’s internet and mobile banking activities (myTrustmarkSM) could further expose Trustmark to possible liability and reputational
risk. Any compromise in security could deter customers from using Trustmark’s internet and mobile banking services that involve the transmission of confidential
information. Trustmark relies on standard internet security systems to provide the security and authentication necessary to effect secure transmission of
data. However, these precautions may not protect Trustmark’s systems from compromise or breaches of security, which could result in significant legal liability
and significant damage to Trustmark’s reputation and business.
Trustmark relies upon certain third-party vendors to provide products and services necessary to maintain day-to-day operations. Accordingly, Trustmark’s
operations are exposed to the risk that these vendors might not perform in accordance with applicable contractual arrangements or service level agreements or that
the security of the third-party vendors’ computer systems, software and networks may be vulnerable to compromises that could impact information system
security. Trustmark maintains a system of policies and procedures designed to monitor vendor risks. While Trustmark believes these policies and procedures
effectively mitigate risk, the failure of an external vendor to perform in accordance with applicable contractual arrangements or service level agreements or any
compromise in the security of an external vendor’s information systems could be disruptive to Trustmark’s operations, which could have a material adverse effect
on its financial condition or results of operations.
Trustmark must utilize new technologies to deliver its products and services, which could require significant resources and expose Trustmark to additional risks,
including cyber-security risks.
In order to deliver new products and services and to improve the productivity of existing products and services, the banking industry relies on rapidly evolving
technologies. Trustmark continues to invest in technology to facilitate the ability of its customers to engage in financial transactions, and otherwise enhance the
customer experience with respect to its products and services. Trustmark’s ability to effectively utilize new technologies to address customer needs and create
operating efficiencies could materially affect future prospects. Management cannot provide any assurances that Trustmark will be successful in utilizing such new
technologies. Incorporation of new products and services, such as internet and mobile banking services, may require significant resources and expose Trustmark to
additional risks, including cyber-security risks.
Trustmark’s controls and procedures may fail or be circumvented.
Trustmark’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures are based in part on assumptions, and can
provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of Trustmark’s controls and procedures
or failure to comply with regulations related to controls and procedures could have a material adverse effect on Trustmark’s business, financial condition and
results of operations.
Trustmark may be subject to increased claims and litigation, which could result in legal liability and reputational damage.
Trustmark has been named from time to time as a defendant in litigation relating to its businesses and activities. Litigation may include claims for substantial
compensatory or punitive damages or claims for indeterminate amounts of damages.
In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories,
collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual,
of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the
borrower or its other creditors or shareholders.
Substantial legal liability against Trustmark, including its subsidiaries, could materially adversely affect Trustmark’s business, financial condition or results of
operations, or cause significant harm to its reputation.
Damage to Trustmark’s reputation could have a significant negative impact on Trustmark’s business.
Trustmark’s ability to attract and retain customers, clients, investors, and highly-skilled management and employees is affected by its reputation. Public perception
of the financial services industry declined as a result of the economic downturn and related government response. Trustmark faces increased public and regulatory
scrutiny resulting from the financial crisis and economic downturn. Significant harm to Trustmark’s reputation can also arise from other sources, including
employee misconduct, actual or perceived unethical behavior, litigation or regulatory outcomes, failing to deliver minimum or required standards of service and
quality, compliance failures, disclosure of confidential information, significant or numerous failures, interruptions or breaches of its information systems and the
activities of its clients, customers and counterparties, including vendors. Actions by the financial services industry generally or by certain members or individuals
in the industry may have a significant adverse effect on Trustmark’s
24
reputation. Trustmark could also suffer significant reputational harm if it fails to properly identify and manage potential conflicts of interest. Management of
potential conflicts of interests has become increasingly complex as Trustmark expands its business activities through more numerous transactions, obligations and
interests with and among its clients. The actual or perceived failure to adequately address conflicts of interest could affect the willingness of clients to deal with
Trustmark, which could adversely affect Trustmark’s businesses.
Risk Related to Acquisition Activity
Potential acquisitions by Trustmark may disrupt Trustmark’s business and dilute shareholder value.
Trustmark continuously monitors the market for merger or acquisition opportunities and, depending upon business and other considerations, may elect to pursue
one or more such opportunities in the future. Any such merger or acquisition candidate would need to have a similar culture to Trustmark, have experienced
management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or
expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including: potential exposure to
unknown or contingent liabilities of the target company, exposure to potential asset quality issues of the target company, difficulty and expense of integrating the
operations and personnel of the target company, potential disruption to Trustmark’s business, potential diversion of Trustmark’s Management’s time and attention,
the possible loss of key employees and customers of the target company, difficulty in estimating the value of the target company and potential changes in banking
or tax laws or regulations that may affect the target company. Acquisitions may involve the payment of a premium over book and market values, and, therefore,
some dilution of Trustmark’s tangible book value and net income per share of common stock may occur in connection with any future transaction. Furthermore,
failure to realize the expected revenue projections, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition
could have a material adverse effect on Trustmark’s financial condition or results of operations.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic and actions taken to mitigate its spread and economic impact, or an outbreak of another highly infectious or contagious disease, could
adversely affect Trustmark’s business activities, financial condition and results of operations.
The spread of a highly infectious or contagious disease, such as COVID-19, and actions taken by governmental and public health authorities to mitigate its spread,
such as instituting quarantines, travel restrictions and “shelter in place” orders, have lead to severe disruptions in the United States economy, which could continue
to disrupt the business, activities and operations of Trustmark’s customers, as well as its business and operations. Moreover, since the beginning of January 2020,
the COVID-19 pandemic has caused significant disruption in the financial markets both globally and in the United States.
Trustmark’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. A significant increase in
the number of COVID-19 cases, or an outbreak of another highly infectious or contagious disease, may result in a significant decrease in business and/or cause
Trustmark’s customers to be unable to meet existing payment or other obligations, particularly in the event of a significant increase in COVID-19 cases or an
outbreak of an infectious disease in Trustmark’s market regions. Although Trustmark maintains contingency plans for pandemic outbreaks, a significant increase
in COVID-19 case above current levels, or an outbreak of another contagious disease, could also negatively impact the availability of key personnel necessary to
conduct its business activities. Such an increase or outbreak could also negatively impact the business and operations of third-party service providers who perform
critical services for Trustmark. If COVID-19, or another highly infectious or contagious disease, spreads or the response to contain COVID-19 is unsuccessful,
Trustmark could continue to experience a material adverse effect to its business, financial condition, and results of operations.
Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of actions by the FRB that affect
Trustmark. Market interest rates have declined significantly. On March 3, 2020, the ten-year Treasury yield fell below 1.00% for the first time, and the FRB
reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds rate by
100 basis points to a range of 0.00% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by
the COVID-19 pandemic. The FRB reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15,
2020. Trustmark expects that these reductions in interest rates, especially if prolonged, could adversely affect its net interest income and margins and its
profitability. In addition, the federal banking agencies have also issued guidance encouraging financial institutions to prudently work with affected borrowers and
have providing relief from reporting loan classifications due to modifications related to the COVID-19 pandemic. Pursuant to such guidance and related provisions
of the CARES Act, Trustmark is not treating certain COVID-19-related loan modifications as TDRs. For additional details regarding COVID-related loan
modification, see the section captioned “COVID-19 Update – Loan Concessions” included in Part II. Item 7. – Management’s Discussion and Analysis of
Financial Condition and Results of Operations of this report. Finally, in response to the COVID-19 pandemic, the FRB established numerous emergency
programs, including various liquidity facilities, intended to mitigate disruptions
25
to certain financial markets. The expiration or termination of any of these FRB emergency programs could result in further financial market disruptions, and
adversely affect Trustmark’s business.
In addition, the spread of COVID-19 has caused Trustmark to modify its business practices, including the implementation of temporary branch and office
closures. Trustmark may take further actions as may be required by government authorities or that it determines are in the best interests of its employees,
customers and business partners. Although Trustmark has initiated a remote work protocol and restricted business travel in its workforce, if significant portions of
its workforce, including key personnel, are unable to work effectively because of illness, government actions or other restrictions in connection with the pandemic,
the impact of the pandemic on Trustmark’s business could be exacerbated. Further, increased levels of remote access may create additional opportunities for
cybercriminals to attempt to exploit vulnerabilities, and Trustmark’s employees may be more susceptible to phishing and social engineering attempts in the remote
environment. In addition, Trustmark’s technological resources may be strained due to the number of remote users.
The spread of COVID-19 and its impact on the economy heightens the risk associated with many of the risk factors described in this report, such as those related to
credit losses and Trustmark’s reliance on its executives and third-party service providers, for example. The extent to which the COVID-19 pandemic will impact
Trustmark’s business, results of operations and financial condition, as well as its regulatory capital, liquidity ratios and stock price, will depend on future
developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities
and other third parties in response to the pandemic.
As a participating lender in the SBA’s PPP, Trustmark is subject to additional risks of litigation from its customers or other parties regarding TNB’s processing of
loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
Trustmark is participating as an eligible lender under the PPP. Since the opening of the PPP, several financial institutions have been subject to litigation regarding
the processes and procedures used in processing applications for the PPP. Trustmark may be exposed to the risk of similar litigation, from both customers and non-
customers that approached TNB regarding PPP loans, regarding its processes and procedures used in processing applications for the PPP. In addition to litigation,
Trustmark’s participation in the PPP exposes Trustmark to the possibility of governmental investigations, enforcement actions and negative publicity. If any such
litigation, enforcement action or other action is filed against Trustmark and is not resolved in a manner favorable to Trustmark, it may result in significant financial
liability or adversely affect Trustmark’s reputation. In addition, litigation and investigations can be costly, regardless of outcome. Any financial liability, litigation
and investigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on Trustmark’s business, financial condition
and results of operations.
Trustmark also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated,
funded, or serviced by TNB, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws,
rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was
a deficiency in the manner in which the PPP loan was originated, funded, or serviced by TNB, the SBA may deny its liability under the guaranty, reduce the
amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from Trustmark.
General Risk Factors
The stock price of financial institutions, like Trustmark, can be volatile.
The volatility in the stock prices of companies in the financial services industry, such as Trustmark, may make it more difficult for shareholders to resell Trustmark
common stock at attractive prices in a timely manner. Trustmark’s stock price can fluctuate significantly in response to a variety of factors, including factors
affecting the financial industry as a whole. The factors affecting financial stocks generally and Trustmark’s stock price in particular include:
•
•
•
•
•
•
•
actual or anticipated variations in earnings;
changes in analysts’ recommendations or projections;
operating and stock performance of other companies deemed to be peers;
perception in the marketplace regarding Trustmark, its competitors and/or the industry as a whole;
significant acquisitions or business combinations involving Trustmark or its competitors;
provisions in Trustmark’s by-laws and articles of incorporation that may discourage takeover attempts, which may make Trustmark less attractive to
a potential purchaser;
changes in government regulation;
26
•
•
failure to integrate acquisitions or realize anticipated benefits from acquisitions; and
volatility affecting the financial markets in general.
General market fluctuations, the potential for breakdowns on electronic trading or other platforms for executing securities transactions, industry factors and general
economic and political conditions could also cause Trustmark’s stock price to decrease regardless of operating results.
Changes in accounting standards may affect how Trustmark reports its financial condition and results of operations.
Trustmark’s accounting policies and methods are fundamental to how Trustmark records and reports its financial condition and results of operations. From time to
time, the FASB changes the financial accounting and reporting standards that govern the preparation of Trustmark’s financial statements. The most recent
economic recession resulted in increased scrutiny of accounting standards by regulators and legislators, particularly as they relate to fair value accounting
principles. In addition, ongoing efforts to achieve convergence between GAAP and International Financial Reporting Standards may result in changes to
GAAP. Any such changes can be difficult to predict and can materially affect how Trustmark records and reports its financial condition or results of
operations. For additional details regarding recently adopted and pending accounting pronouncements, see Note 1 – Significant Accounting Policies included in
Part II. Item 8. - Financial Statements and Supplementary Data of this report.
Trustmark may not be able to attract or retain key employees.
Trustmark’s success depends substantially on its ability to attract and retain skilled, experienced personnel. Competition for qualified candidates in the activities
and markets that Trustmark serves is intense. While Trustmark invests significantly in the training and development of its employees, it is possible that Trustmark
may not be able to retain key employees. If Trustmark were unable to retain its most qualified employees, its performance and competitive positioning could be
materially adversely affected.
Natural disasters, such as hurricanes, could have a significant negative impact on Trustmark’s business.
Many of Trustmark’s loans are secured by property or are made to businesses in or near the Gulf Coast regions of Alabama, Florida, Mississippi and Texas, which
are often in the path of seasonal hurricanes. Natural disasters, such as hurricanes, could have a significant negative impact on the stability of Trustmark’s deposit
base, the ability of borrowers to repay outstanding loans and the value of collateral securing loans, and could cause Trustmark to incur material additional
expenses. Although Management has established disaster recovery policies and procedures, the occurrence of a natural disaster, especially if any applicable
insurance coverage is not adequate to enable Trustmark’s borrowers to recover from the effects of the event, could have a material adverse effect on Trustmark’s
financial condition or results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
ITEM 2.
PROPERTIES
Trustmark’s principal offices are housed in its main office building located in downtown Jackson, Mississippi and owned by TNB. Trustmark’s main office
building is primarily allocated for bank use with a small portion available for occupancy by tenants on a lease basis, although such incidental leasing activity is not
material to Trustmark’s operations. As of December 31, 2020, Trustmark, through TNB, operated 174 full-service branches, 12 limited-service branches and an
ATM network, which included 230 automated teller machines (ATMs) and 34 interactive teller machines (ITMs) at its branches and other locations. During
January 2021, Trustmark consolidated two branch locations into one new central branch location and converted two drive-thru limited service branch locations to
ITM only locations. In addition, Trustmark operated 12 offices in various locations providing mortgage banking, wealth management and insurance
services. Trustmark leases 31 of its branch and other office locations with the remainder being owned. Trustmark believes its properties are suitable and adequate
to operate its financial services business.
ITEM 3.
LEGAL PROCEEDINGS
Information required in this section is set forth under the heading “Legal Proceedings” of Note 17 – Commitments and Contingencies in Part II. Item 8. – Financial
Statements and Supplementary Data of this report.
In accordance FASB ASC Subtopic 450-20, “Loss Contingencies,” Trustmark will establish an accrued liability for litigation matters when those matters present
loss contingencies that are both probable and reasonably estimable. At the present time, Trustmark believes, based on its evaluation and the advice of legal
counsel, that a loss in any such proceeding is not probable and reasonably
27
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. Management 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 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Common Stock Prices and Dividends
Trustmark’s common stock is listed on the Nasdaq Stock Market and is traded under the symbol “TRMK.”
Trustmark paid quarterly cash dividends to shareholders of $0.23 per share, or $0.92 per share annually, in 2020. As a component of return to common
shareholders, Trustmark intends to pay cash dividends when corporate financial performance and capital strength allow it to do so. All dividend payments must be
approved and declared by the Board of Directors of Trustmark and are required to be in compliance with all applicable laws and regulations.
At January 31, 2021, there were approximately 3,319 registered shareholders of record and approximately 16,117 beneficial account holders of shares in nominee
name of Trustmark’s common stock. Other information required by this item can be found in Note 18 - Shareholders’ Equity included in Part II. Item 8. -
Financial Statements and Supplementary Data of this report.
Stock Repurchase Program
The Board of Directors of Trustmark authorized a stock repurchase program effective April 1, 2019, under which $100.0 million of Trustmark’s outstanding
common shares could be acquired through March 31, 2020. Trustmark repurchased approximately 887 thousand shares of its outstanding common stock valued at
$27.5 million during the three months ended March 31, 2020. Under this authority, Trustmark repurchased approximately 1.5 million shares valued at $47.2
million.
On January 28, 2020, the Board of Directors of Trustmark authorized a new stock repurchase program, effective April 1, 2020, under which $100.0 million of
Trustmark’s outstanding common stock may be acquired through December 31, 2021. On March 9, 2020, Trustmark suspended its share repurchase programs to
preserve capital to support customers during the COVID-19 pandemic. Trustmark resumed the repurchase of its shares in January 2021. Under this authority,
Trustmark repurchased approximately 16 thousand shares of its outstanding common stock valued at $446 thousand during January 2021. The shares may be
purchased from time to time at prevailing market prices, through open market or private transactions, depending on market conditions, and in conjunction with its
disciplined share repurchase framework. There is no guarantee as to the number of shares that may be repurchased by Trustmark, and Trustmark may discontinue
repurchases at any time at Management’s discretion.
28
Performance Graph
The following graph compares Trustmark’s annual percentage change in cumulative total return on common shares over the past five years with the cumulative
total return of companies comprising the Nasdaq market value index and the S&P 500 – Regional Banks index. The S&P 500 – Regional Banks index is an
industry index published by S&P Dow Jones Indices, a division of S&P Global, and is comprised of stock in the S&P Total Market Index that are classified in the
Global Industry Classification Standard regional banks sub-industry. This presentation assumes that $100 was invested in shares of the relevant issuers on
December 31, 2015, and that dividends received were immediately invested in additional shares. The graph plots the value of the initial $100 investment at one-
year intervals for the fiscal years shown. The S&P 500 – Regional Banks index replaces the Morningstar Banks - Regional – US index in this analysis and going
forward, as the latter data is no longer accessible. The latter index has been included with data through 2019.
Company
Trustmark
NASDAQ Composite-Total Return
S&P 500 - Regional Banks
Morningstar Banks - Regional - US
$
$
2015
100.00
100.00
100.00
100.00
2016
160.13
108.87
133.80
128.37
$
2017
147.28
141.13
157.12
151.66
2018
$ 135.18
137.12
128.55
133.74
2019
$ 168.60
187.44
174.08
162.97
2020
$ 138.41
271.64
166.19
—
29
ITEM 6.
SELECTED FINANCIAL DATA
The following unaudited consolidated financial data is derived from Trustmark’s audited financial statements as of and for the five years ended December 31, 2020
($ in thousands, except per share data). The data should be read in conjunction with Part II. Item 7. - Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Item 8. – Financial Statements and Supplementary Data.
Years Ended December 31,
2020
2019
2018
2017
2016
Consolidated Statements of Income
Total interest income
Total interest expense
Net interest income
Provision for credit losses (PCL) (1)
Provision for loan losses, acquired loans (1)
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net Income
Total Revenue (2)
Per Share Data
Basic earnings per share
Diluted earnings per share
Cash dividends per share
Performance Ratios
Return on average equity
Return on average tangible equity
Return on average assets
Average equity/average assets
Net interest margin (fully taxable equivalent)
Dividend payout ratio
Credit Quality Ratios (3)
Net charge-offs (recoveries)/average loans
PCL/average loans (1)
Nonaccrual LHFI/(LHFI + LHFS)
Nonperforming assets/(LHFI + LHFS)
plus other real estate
Allowance for credit losses (ACL) LHFI/LHFI (1)
$
$
468,335
41,798
426,537
36,113
—
274,593
475,235
189,782
29,757
160,025
$
$
510,492
83,903
426,589
10,797
42
187,045
429,002
173,793
23,333
150,460
$
$
$
485,612
66,192
419,420
17,993
(1,005)
184,836
415,415
171,853
22,269
149,584
$
$
449,795
42,245
407,550
15,094
(7,395)
184,663
430,169
154,345
48,715
105,630
$
412,080
24,547
387,533
10,957
3,757
173,943
407,298
139,464
31,053
108,411
$
701,130
$
613,634
$
604,256
$
592,213
$
561,476
$
$
2.52
2.51
0.92
$
2.33
2.32
0.92
$
2.22
2.21
0.92
$
1.56
1.56
0.92
1.60
1.60
0.92
9.52%
12.58%
1.05%
11.05%
3.19%
36.51%
0.02%
0.36%
0.61%
0.73%
1.19%
9.28%
12.45%
1.11%
12.02%
3.62%
39.48%
0.06%
0.12%
0.56%
0.86%
0.90%
9.43%
12.86%
1.11%
11.78%
3.54%
41.44%
0.19%
0.20%
0.69%
1.07%
0.90%
6.77%
9.39%
0.77%
11.38%
3.48%
58.97%
0.11%
0.18%
0.77%
1.26%
0.90%
7.14%
9.99%
0.84%
11.73%
3.53%
57.50%
0.10%
0.14%
0.61%
1.38%
0.91%
(1)
(2)
(3)
Effective January 1, 2020, Trustmark adopted FASB ASU 2016-13 using the modified retrospective approach; therefore, prior period balances are
presented under legacy GAAP and may not be comparable to current period presentation.
Consistent with Trustmark’s audited financial statements, total revenue is defined as net interest income plus noninterest income.
Excludes PPP and Acquired Loans.
30
December 31,
2020
2019
2018
2017
2016
Consolidated Balance Sheets
Total assets
Securities
Total loans (incl. PPP, LHFS and acquired loans)
Deposits
Total shareholders' equity
$ 16,551,840
2,529,887
10,881,609
14,048,764
1,741,117
$ 13,497,877
2,340,503
9,634,576
11,245,557
1,660,702
$ 13,286,460
2,721,456
9,096,599
11,364,411
1,591,453
$ 13,797,953
3,295,121
9,011,996
10,577,512
1,571,701
$ 13,352,333
3,515,325
8,299,387
10,056,012
1,520,208
Stock Performance
Market value - close
Book value
Tangible book value
Capital Ratios
Total equity/total assets
Tangible equity/tangible assets
Tangible equity/risk-weighted assets
Tier 1 leverage ratio (1)
Common equity tier 1 risk-based capital ratio (1)
Tier 1 risk-based capital ratio (1)
Total risk-based capital ratio (1)
$
$
27.31
27.45
21.26
$
34.51
25.87
19.84
$
28.43
24.17
18.24
$
31.86
23.20
17.35
35.65
22.48
16.76
10.52%
8.34%
11.22%
9.33%
11.62%
12.11%
14.12%
12.30%
9.72%
11.58%
10.48%
11.93%
12.48%
13.25%
11.98%
9.31%
11.11%
10.26%
11.77%
12.33%
13.07%
11.39%
8.77%
11.13%
9.67%
11.77%
12.33%
13.10%
11.39%
8.74%
11.39%
9.90%
12.16%
12.76%
13.59%
(1)
Effective 2020, Trustmark elected the five-year phase-in transition period related to adopting FASB ASU 2016-13 for regulatory capital purposes.
The following unaudited tables represent Trustmark’s summary of quarterly operations for the years ended December 31, 2020 and 2019 ($ in thousands, except
per share data):
2020
1Q
2Q
3Q
4Q
Interest income
Interest expense
Net interest income
PCL (1)
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Earnings per share
Basic
Diluted
$
$
$
120,394
16,442
103,952
20,581
65,264
123,810
24,825
2,607
22,218
$
$
114,653
9,653
105,000
18,185
69,511
118,659
37,667
5,517
32,150
$
$
114,364
8,157
106,207
1,760
73,701
113,959
64,189
9,749
54,440
$
$
118,924
7,546
111,378
(4,413)
66,117
118,807
63,101
11,884
51,217
$
0.35
0.35
$
0.51
0.51
$
0.86
0.86
0.81
0.81
(1)
Effective January 1, 2020, Trustmark adopted FASB ASU 2016-13 using the modified retrospective approach; therefore, prior period balances are
presented under legacy GAAP and may not be comparable to current period presentation.
31
2019
1Q
2Q
3Q
4Q
Interest income
Interest expense
Net interest income
Provision for loan losses, LHFI
Provision for loan losses, acquired loans
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Earnings per share
Basic
Diluted
125,491
20,683
104,808
1,611
78
41,491
106,021
38,589
5,250
33,339
$
$
130,136
22,412
107,724
2,486
106
49,639
106,101
48,670
6,530
42,140
$
$
130,228
21,762
108,466
3,039
(140)
48,337
106,853
47,051
6,016
41,035
$
$
124,637
19,046
105,591
3,661
(2)
47,578
110,027
39,483
5,537
33,946
$
0.51
0.51
$
0.65
0.65
$
0.64
0.64
0.53
0.53
$
$
$
32
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following provides a narrative discussion and analysis of Trustmark’s financial condition and results of operations. This discussion should be read in
conjunction with the consolidated financial statements and the supplemental financial data included in Part II. Item 8. – Financial Statements and Supplementary
Data of this report. Discussion and analysis of Trustmark’s financial condition and results of operations for the years ended December 31, 2019 and 2018 are
included in the respective sections within Part II. Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of Trustmark’s
Annual Report filed on Form 10-K for the year ended December 31, 2019.
COVID-19 Update
Trustmark has been proactive in responding to the COVID-19 pandemic, taking comprehensive action to support customers, associates and the communities it
serves. Trustmark activated its Pandemic Preparedness Plan in March 2020 to protect the health and safety of its employees and customers, and continues to take
additional precautions as recommended by the Centers for Disease Control and Prevention and mandated by government ordinances. Trustmark remains
committed to serving its customers through its branches, actively promoting digital touchpoints including its ATM and ITM network and robust digital and mobile
banking options. Trustmark has been proactive in reaching out to customers to discuss challenges and solutions, provided waivers of certain fees and charges,
granted extensions, deferrals and forbearance as appropriate, paused all foreclosures and repossessions and refrained from negative credit bureau reporting for
previously up-to-date customers. To date, Trustmark has not incurred any significant disruptions to its business activities.
Exposure to Stressed Industries
The full impact of COVID-19 is unknown and rapidly evolving. It has caused substantial disruption in international and the United States economies, markets and
employment. The outbreak has had and may continue to have a significant adverse impact on certain industries Trustmark serves. The following provides a
summary of Trustmark’s exposure to COVID-19 impacted industries within the LHFI portfolio as of December 31, 2020:
•
•
•
•
•
Restaurants: Aggregate outstanding balance of $116.0 million, credit exposure of $129.0 million, 330 total loans, represents 1.2% of Trustmark’s
outstanding LHFI portfolio, 85.0% of the loans are real estate secured, 37.0% are full-service restaurants, 61.0% are limited-service restaurants and 2%
are other.
Hotels: Aggregate outstanding balance of $395.0 million, credit exposure of $437.0 million, 100 total loans, represents 4.0% of Trustmark’s outstanding
LHFI portfolio, 99.0% of the loans are real estate secured, consists of experienced operators and carry secondary guarantor support, 91.0% operate
under a major hotel chain.
Retail (Commercial Real Estate): Aggregate outstanding balance of $452.0 million, credit exposure of $527.0 million, 302 total loans, represents 4.6%
of Trustmark’s outstanding LHFI portfolio, 18.0% are stand-alone buildings with strong essential services tenants, 2.0% are national grocery store-
anchored, 20.0% are investment grade anchored centers, mall exposure in only one borrower with $5 million outstanding.
Energy: Aggregate outstanding balance of $102.3 million, credit exposure of $329.1 million, 118 total loans, represents 1.0% of Trustmark’s
outstanding LHFI portfolio, no loans where repayment or underlying security ties to realization of value from energy reserves.
Higher Risk Commercial and Industrial: Aggregate outstanding balance of $11.0 million, credit exposure of $14.0 million, one borrower.
During the year ended December 31, 2020, Trustmark incurred total credit loss expenses of $45.0 million, primarily due to net changes in the economic forecast
due to the negative effects of the COVID-19 pandemic on the overall economy and macroeconomic factors. During the fourth quarter of 2020, Trustmark
conducted an updated analysis of previously reviewed borrowers receiving payment concessions and other borrowers in industries significantly impacted by the
COVID-19 pandemic, which included certain pass rated credits of $500 thousand or more and watch or criticized rated credits of $100 thousand or
more. Collectively, an aggregate outstanding balance of $969.7 million was reviewed, which included approximately 47.0% of borrowers receiving payment
concessions, 93.0% of outstanding hotel loans, 46.0% of outstanding restaurant loans and 41.0% of outstanding retail commercial real estate loans. As a result of
this review, approximately $32.0 million of the outstanding balances reviewed were downgraded to a criticized risk rating category, including $18.0 million in
hotel loans, $2.0 million in restaurant loans and $2.0 million in retail commercial real estate loans. Because of the significant uncertainties related to the ultimate
duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no
assurances as to how the crisis may ultimately affect Trustmark’s loan portfolio.
33
Loan Concessions
On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their
contractual obligations because of the effects of COVID-19. The guidance goes on to explain that in consultation with the FASB staff that the federal banking
agencies conclude that short-term modifications (e.g., six months) made on a good faith basis to borrowers that were current as of the implementation date of a
relief program are not TDRs. On March 27, 2020, the CARES Act, a $2 trillion stimulus package intended to provide relief to businesses and consumers in the
United States struggling as a result of the pandemic, was signed into law. Section 4013 of the CARES Act also addressed COVID-19 related modifications and
specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. On April 7, 2020, the federal banking agencies
revised its earlier guidance to clarify the interaction between the March 22, 2020 interagency statement and section 4013 of the CARES Act, as well as the
agencies’ views on consumer protection considerations. During 2020, Trustmark modified 2,362 individual loans with aggregate principal balances totaling
$1.266 billion at December 31, 2020 under this guidance, as well as 61 individual loans with aggregate principal balances totaling $4.7 million at December 31,
2020 which were not eligible under this guidance, but were not classified as a TDR under Trustmark’s existing policies. More of these types of modifications are
likely to be executed in the first quarter of 2021. Commercial concessions were primarily either interest only for 90 days or full payment deferrals for 90
days. Consumer concessions were 90-day full payment deferrals.
Paycheck Protection Program
A provision in the CARES Act included a $349 billion fund for the creation of the PPP through the SBA and Treasury Department. The PPP is intended to provide
loans to small businesses to pay their employees, rent, mortgage interest and utilities. PPP loans are forgivable, in whole or in part, if the proceeds are used for
payroll and other permitted purposes in accordance with the requirements of the PPP. If not forgiven, in whole or in part, these loans carry a fixed rate of 1.00%
per annum with payments deferred until the date the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan
forgiveness, ten months after the end of the borrower’s loan forgiveness covered period). Originally, the loans carried a term of two years under SBA rules
implemented by the CARES Act, but a June 5, 2020 amendment to the CARES Act provided for a five-year minimum loan term for loans made beginning as of
such date, and permitted lenders and borrowers to mutually agree to amend existing two-year loans to have terms of five years. The loans are 100% guaranteed by
the SBA. The SBA pays the originating bank a processing fee ranging from 1.0% to 5.0%, based on the size of the loan. The SBA began accepting submissions
for these PPP loans on April 3, 2020 and reached the limit of funds originally available to disburse under this program on April 16, 2020. Legislation providing an
additional $320 billion in funding for the PPP was signed into law on April 24, 2020. The SBA began accepting applications for the new funding on April 27,
2020 and stopped accepting applications on August 8, 2020. The SBA and Treasury Department have released a series of rules, guidance documents and processes
governing all aspects of the PPP, including a streamlined process for loan forgiveness of PPP loans of $50 thousand or less. Under the CARES Act and interim
and final rules released by the federal banking agencies, PPP loans receive a zero percent risk weight for regulatory capital purposes, and if pledged as part of the
Paycheck Protection Program Liquidity Facility (PPPLF), are subtracted from the lender’s Tier 1 leverage ratio. The PPPLF was established by the FRB to
provide a liquidity source to PPP lenders, through non-recourse credit secured by PPP loans. The Consolidated Appropriations Act, 2021, enacted on December
27, 2020, extended some of the relief provisions in certain respects of the CARES Act, and appropriated an additional $284.0 billion to the PPP and permitted
certain PPP borrowers to make “second draw” loans.
TNB began submitting applications to the SBA on behalf of its customers on April 4, 2020 and began funding those loans on April 13, 2020. Through the PPP,
TNB had 7,398 loans totaling $623.0 million outstanding as of December 31, 2020. Net of deferred fees and costs of $12.9 million, PPP loans totaled $610.1
million at December 31, 2020. Trustmark began submitting applications to the SBA on behalf of qualified small businesses under the third appropriation of PPP
funds in January 2021. Due to the amount and nature of the PPP loans, these loans are not included in Trustmark’s LHFI portfolio and are presented separately in
the accompanying consolidated balance sheet. At December 31, 2020, TNB had no outstanding PPP loans pledged as collateral at the PPPLF. Trustmark cannot
predict the amount of PPP loans that will be forgiven in whole or in part by the SBA, nor can it predict the magnitude and timing of the impact the PPP loans and
related fees will have on Trustmark’s net interest margin. However, TNB’s participation in the PPP will likely have a significant impact on Trustmark’s asset mix
and net interest margin in 2021 as a result of the addition of these low interest rate loans and the related processing fees earned on these loans.
Executive Overview
Trustmark has been committed to meeting the banking and financial needs of its customers and communities for over 130 years. During the COVID-19 pandemic,
Trustmark remains focused on providing support, advice and solutions to meet its customers’ unique needs. During 2020, Trustmark experienced strong growth in
its mortgage banking business, which increased noninterest income by $20.2 million and $96.0 million, respectively, when the three months and year ended
December 31, 2020 are compared to the same time period in 2019. Trustmark continued to maintain and expand customer relationships as reflected by growth in
the LHFI portfolio of $488.9 million, or 5.2%, and growth in deposits of $2.803 billion, or 24.9%, during 2020. Trustmark is committed to managing the
34
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 continued to invest in its insurance business with the
completion of the acquisition of a Mississippi-based agency during the second quarter of 2020. Trustmark’s capital position remained solid, reflecting the
consistent profitability of its diversified financial services businesses. The Board of Directors of Trustmark declared a quarterly cash dividend of $0.23 per
share. The dividend is payable March 15, 2021, to shareholders of record on March 1, 2021.
Financial Highlights
Trustmark reported net income of $51.2 million, or basic and diluted earnings per share (EPS) of $0.81, for the fourth quarter of 2020, compared to $33.9 million,
or basic and diluted EPS of $0.53, in the fourth quarter of 2019. Trustmark’s reported performance during the quarter ended December 31, 2020, produced a return
on average tangible equity of 15.47%, a return on average assets of 1.28%, an average equity to average assets ratio of 10.82% and a dividend payout ratio of
28.40%, compared to a return on average tangible equity of 10.85%, a return on average assets of 1.00%, an average equity to average assets ratio of 12.30% and a
dividend payout ratio of 43.40% during the quarter ended December 31, 2019.
Revenue, which is defined as net interest income plus noninterest income, totaled $177.5 million for the quarter ended December 31, 2020 compared to $153.2
million for the quarter ended December 31, 2019, an increase of $24.3 million, or 15.9%. The increase in total revenue for the fourth quarter of 2020 was
principally due to an increase in total noninterest income primarily as a result of the increase in mortgage banking, net.
Net interest income for the fourth quarter of 2020 totaled $111.4 million, an increase of $5.8 million, or 5.5%, when compared to the fourth quarter of 2019,
principally due to interest and fees on PPP loans of $14.9 million and a decline in interest on deposits of $11.4 million, or 64.1%, partially offset by a decline in
interest and fees on LHFS and LHFI of $14.8 million, or 13.6%. The declines in interest on deposits and interest and fees on LHFS and LHFI for the fourth quarter
of 2020 were principally due to lower interest rates. Noninterest income for the fourth quarter of 2020 totaled $66.1 million, an increase of $18.5 million, or
39.0%, when compared to the fourth quarter of 2019, principally due to an increase in mortgage banking, net of $20.2 million. The increase in mortgage banking,
net for the fourth quarter of 2020 was principally due to an increase in gain on sales of loans, net. Noninterest expense for the fourth quarter of 2020 totaled $118.8
million, an increase of $8.8 million, or 8.0%, when compared to the fourth quarter of 2019, principally due to increases in salaries and employee benefits of $7.3
million, or 11.8%, and services and fees of $2.8 million, or 14.5%. The increase in salaries and employee benefits when the fourth quarter of 2020 is compared to
the fourth quarter of 2019 was principally due to increases in performance based incentives, mortgage origination commissions, general merit increases and
additional salaries expense related to the COVID-19 pandemic. The increase in services and fees when the fourth quarter of 2020 is compared to the fourth quarter
of 2019 was principally due to increases in legal fees related to ongoing litigation matters and data processing charges related to software.
Trustmark adopted FASB ASC Topic 326, in accordance with the amendments of FASB ASU 2016-13, effective January 1, 2020. The guidance in FASB ASC
Topic 326 replaced Trustmark’s previous incurred loss methodology with a methodology that reflects the current expected credit losses (often referred to as CECL)
and requires consideration of a broader range of reasonable and supportable information to determine credit losses. Trustmark’s allowance for credit losses (ACL)
for LHFI is an estimate of expected credit losses inherent within Trustmark’s existing LHFI portfolio. The ACL, LHFI is adjusted through the provision for credit
losses and reduced by the charge off of loan amounts, net of recoveries. FASB ASC Topic 326 also requires Trustmark to estimate expected credit losses for off-
balance sheet credit exposures which are not unconditionally cancellable by Trustmark. Trustmark maintains a separate allowance for credit losses for off-balance
sheet credit exposures, including unfunded commitments and letters of credit. Adjustments to the allowance for credit losses on off-balance sheet credit exposures
are recorded as noninterest expense in credit loss expense related to off-balance sheet credit exposures. Trustmark adopted FASB ASC Topic 326 using the
modified retrospective approach prescribed by the amendments of FASB ASU 2016-13; therefore, prior period loan loss provision balances are presented under
legacy GAAP and may not be comparable to current period credit loss presentation.
Trustmark’s provision for credit losses for the three months ended December 31, 2020 totaled a negative $4.4 million compared to a provision for loan losses,
LHFI of $3.7 million for the three months ended December 31, 2019. Credit loss expense related to off-balance sheet credit exposures totaled a negative $1.1
million for the three months ended December 31, 2020. The decrease in the provision for credit losses and the credit loss expense related to off-balance sheet
credit exposures for the fourth quarter of 2020 was primarily due to improvements in the economic forecast and macroeconomic factors. Please see the section
captioned “Allowance for Credit Losses,” for additional information regarding the provision for credit losses and credit loss expense related to off-balance sheet
credit exposures.
For the year ended December 31, 2020, Trustmark reported net income of $160.0 million, or basic and diluted EPS of $2.52 and $2.51, respectively, compared to
$150.5 million, or basic and diluted EPS of $2.33 and $2.32, respectively, for the year ended December 31, 2019 and $149.6 million, or basic and diluted EPS of
$2.22 and $2.21, respectively, for the year ended December 31,
35
2018. Trustmark’s reported performance for the year ended December 31, 2020, produced a return on average tangible equity of 12.58%, a return on average
assets of 1.05% and a dividend payout ratio of 36.51%, compared to a return on average tangible equity of 12.45%, a return on average assets of 1.11% and a
dividend payout ratio of 39.48% for the year ended December 31, 2019 and a return on average tangible equity of 12.86%, a return on average assets of 1.11% and
a dividend payout ratio of 41.44% for the year ended December 31, 2018. Trustmark’s average equity to average assets ratio was 11.05%, 12.02% and 11.78% for
the years ended December 31, 2020, 2019 and 2018, respectively.
Revenue totaled $701.1 million for the year ended December 31, 2020, compared to $613.6 million and $604.3 million for the years ended December 31, 2019 and
2018, respectively. The increase in total revenue for 2020 compared to 2019 was principally due to an increase in total noninterest income primarily as a result of
the increase in mortgage banking, net.
Net interest income for the year ended December 31, 2020 totaled $426.5 million, relatively unchanged when compared to the year ended December 31, 2019,
principally due to declines in interest and fees on LHFS and LHFI of $49.4 million, or 11.2%, interest and fees on acquired loans of $8.4 million, interest on
securities of $7.0 million, or 12.5%, and other interest income of $3.8 million, or 70.9%, offset by a decline in interest on deposits of $41.7 million, or 52.7%, and
the addition of interest and fees on PPP loans of $26.6 million. Declines in interest and fees on LHFS and LHFI, interest on securities and interest on deposits for
2020 were principally due to the decline in interest rates. The decline in interest and fees on acquired loans for 2020 was due to the reclassification of the
remaining balance of acquired loans to LHFI upon the adoption of FASB ASC Topic 326. See the section captioned “Acquired Loans,” for additional information
regarding the acquired loans reclassified to LHFI. The decline in other interest income for 2020 was principally due to a decline in interest earned on deposits held
at the Federal Reserve as a result of the FRB’s decision to reduce the interest it pays on excess reserves from 1.60% to 0.10% in March of 2020.
Noninterest income totaled $274.6 million for 2020, an increase of $87.5 million, or 46.8%, when compared to 2019, principally due to an increase in mortgage
banking, net partially offset by a decline in service charges on deposit accounts. Mortgage banking, net increased $96.0 million when 2020 is compared to 2019,
principally due to increases in gain on sales of loans, net and a positive net hedge ineffectiveness. Service charges on deposit accounts declined $10.3 million, or
24.2%, when 2020 is compared to 2019, principally due to declines in non-sufficient funds (NSF) and overdraft fees on consumer demand deposit and interest
checking accounts and commercial demand deposit accounts, primarily due to declines in overdraft occurrences as a result of COVID-19 related business closures,
stay-at-home orders and government stimulus programs.
Noninterest expense totaled $475.2 million for 2020, an increase of $46.2 million, or 10.8%, when compared to 2019, principally due to increases in salaries and
employee benefits and services and fees, as well as the addition of the credit loss expense related to off-balance sheet credit exposures. Salaries and employee
benefits expense increased $24.5 million, or 9.9%, when 2020 is compared to 2019. During the first quarter of 2020, Trustmark completed a voluntary early
retirement program and incurred $4.3 million of non-routine salaries and employee benefits expense related to this program. Excluding these non-routine
expenses, salaries and employee benefits increased $20.3 million, or 8.2%, when 2020 is compared to 2019. The increase in salaries and employee benefits
expense, excluding the non-routine expenses, for the year ended December 31, 2020 was principally due to higher commissions expense resulting from
improvements in mortgage production as well as an increase in salary expenses as a result of an increase in performance incentives, general merit increases, an
increase in overtime pay and temporary compensation adjustments and one-time payments to front-line associates as a result of the COVID-19 pandemic. Services
and fees increased $10.5 million, or 14.3%, when 2020 is compared to 2019, primarily due to increases in legal fees related to ongoing litigation matters and data
processing charges related to software.
Trustmark’s provision for credit losses for 2020 totaled $36.1 million compared to a provision for loan losses, LHFI of $10.8 million for 2019. Credit loss expense
related to off-balance sheet credit exposures totaled $8.9 million for 2020. The increase in the provision for credit losses and the credit loss expense related to off-
balance sheet credit exposures for the year ended December 31, 2020 was primarily due to net changes in the economic forecast due to the anticipated negative
effects of the COVID-19 pandemic on the overall economy and macroeconomic factors. Please see the section captioned “Allowance for Credit Losses” for
additional information regarding the provision for credit losses and credit loss expense related to off-balance sheet credit exposures.
At December 31, 2020, nonperforming assets totaled $74.8 million, a decrease of $7.7 million, or 9.3%, compared to December 31, 2019 due to a decline other real
estate partially offset by an increase in nonaccrual LHFI. Total nonaccrual LHFI were $63.1 million at December 31, 2020, representing an increase of $9.9
million, or 18.6%, relative to December 31, 2019, primarily due to LHFI placed on nonaccrual status in Trustmark’s Alabama, Tennessee, Texas and Mississippi
market regions, partially offset by reductions, pay-offs and charge-offs of nonaccrual LHFI in Trustmark’s Mississippi and Tennessee market regions. The
percentage of loans, excluding PPP and acquired loans, that are 30 days or more past due and nonaccrual LHFI increased in 2020 to 2.08% compared to 1.28% in
2019 and 1.56% in 2018. Other real estate totaled $11.7 million at December 31, 2020, a decline of $17.6 million, or 60.2%, when compared to December 31,
2019, principally due to properties sold in Trustmark’s Mississippi, Florida, Alabama, and Tennessee market regions.
36
LHFI totaled $9.825 billion at December 31, 2020, an increase of $488.9 million, or 5. 2%, compared to December 31, 2019. On January 1, 2020, Trustmark
transferred $72.6 million, the remaining balance of the loans acquired in the BancTrust merger, from acquired impaired loans to LHFI as purchased credit
deteriorated (PCD) loans as part of its adoption of FASB ASC Topic 326. For additional information regarding the acquired loans transferred to LHFI, see the
section captioned “Acquired Loans.” Excluding the transferred acquired loans, LHFI increased $416.3 million, or 4.4%, compared to December 31, 2019. The
increase in LHFI during 2020, excluding the transferred acquired loans, was primarily due to net growth in LHFI secured by real estate in Trustmark’s Texas,
Alabama, Mississippi and Tennessee market regions, partially offset by declines in commercial and industrial LHFI in the Mississippi, Tennessee and Alabama
market regions. For additional information regarding changes in LHFI and comparative balances by loan category, see the section captioned “LHFI.”
Management has continued its practice of maintaining excess funding capacity to provide Trustmark with adequate liquidity for its ongoing operations. In this
regard, Trustmark benefits from its strong deposit base, its highly liquid investment portfolio and its access to funding from a variety of external funding sources
such as upstream federal funds lines, FHLB advances and, on a limited basis, brokered deposits. See the section captioned “Liquidity” for further discussion of the
components of Trustmark’s excess funding capacity.
Total deposits were $14.049 billion at December 31, 2020, an increase of $2.803 billion, or 24.9%, compared to December 31, 2019, reflecting increases in both
noninterest-bearing and interest-bearing deposit accounts as customers deposited proceeds from line draws, PPP loans and other COVID-19 related stimulus
programs. During 2020, noninterest-bearing deposits increased $1.458 billion, or 50.4%, primarily due to growth in all categories of noninterest-bearing deposit
accounts. Interest-bearing deposits increased $1.345 billion, or 16.1%, during 2020, primarily due to growth in public and consumer interest checking accounts,
commercial and consumer money market deposit accounts and consumer savings accounts, partially offset by declines in consumer time deposits.
During the fourth quarter of 2020, Trustmark issued $125.0 million of 3.625% fixed-to-floating rate subordinated notes due in 2030 for general corporate purposes,
further strengthening its regulatory capital position.
Critical Accounting Policies
Trustmark’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the financial services
industry. Application of these accounting principles requires Management to make estimates, assumptions and judgments that affect the amounts reported in the
consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the
consolidated financial statements; accordingly, as this information changes, actual financial results could differ from those estimates.
Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results
that could be materially different than originally reported. These critical accounting policies are described below.
For additional information regarding the accounting policies discussed below, please see Note 1 – Significant Accounting Policies set forth in Part II. Item 8. –
Financial Statements and Supplementary Data of this report.
Allowance for Credit Losses (ACL)
LHFI
The ACL for LHFI 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 for LHFI is an
estimate of expected losses inherent within Trustmark’s existing LHFI portfolio. The ACL for LHFI is adjusted through the provision for credit losses and reduced
by the charge off of loan amounts, net of recoveries.
37
The credit 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. Determining the appropriateness of the ACL 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 in those future periods. Given the nature of
many of the factors, forecasts and assumptions in the ACL methodology, it is not possible to provide meaningful estimates of the impact of any such potential
change.
For a complete description of Trustmark’s ACL methodology for the LHFI portfolio, please see Note 4 – LHFI and Allowance for Credit Losses, LHFI included in
Part II. Item 8. – Financial Statements and Supplementary Data of this report.
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 are not
unconditionally cancellable. Adjustments to the ACL on off-balance sheet credit exposures are recorded to credit loss expense related to off-balance sheet credit
exposures in noninterest expense.
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. In addition to the unfunded balances,
Trustmark uses a funding rate for loan pools that are considered open-ended. In order to mitigate volatility and incorporate historical experience in the funding
rate, Trustmark uses a twelve-quarter moving average. For the closed-ended loan pools, Trustmark takes a conservative approach and uses a 100% funding
rate. The expected funding rate 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. In addition to the funding rate being applied to the unfunded commitment balance, a reserve rate is applied that
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.
Evaluations of the unfunded commitments are inherently subjective, as they require estimates, assumptions and judgments as to the facts and circumstances of
particular situations. Determining the appropriateness of the ACL is complex and requires judgement by Management about the effect of matters that are
inherently uncertain. In future periods, evaluations of off-balance sheet credit exposures, in light of the factors and forecasts then prevailing, may result in
significant changes in the allowance and credit loss expense in those future periods. Given the nature of many of the factors, forecasts and assumptions in the ACL
methodology, it is not possible to provide meaningful estimates of the impact of any such potential change.
For a complete description of Trustmark’s ACL methodology for the off-balance sheet credit exposures, please see the section captioned “Lending Related” in
Note 17 – Commitments and Contingencies included in Part II. Item 8. – Financial Statements and Supplementary Data of this report.
Mortgage Servicing Rights (MSR)
Trustmark recognizes as assets the rights to service mortgage loans based on the estimated fair value of the MSR when loans are sold and the associated servicing
rights are retained. Trustmark has elected to account for the MSR at fair value.
The fair value of the MSR is determined 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
38
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 December 31, 2020, the MSR fair value was $66.5 million. The impact on the MSR fair value of either a 10% adverse change in prepayment speeds or a 100
basis point increase in discount rates at December 31, 2020, would be a decline in fair value of approximately $4.3 million and $2.4 million, respectively. Changes
of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts.
Goodwill and Identifiable Intangible Assets
Trustmark records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value as required by FASB ASC
Topic 805. The carrying amount of goodwill at December 31, 2020 totaled $334.6 million for the General Banking Segment and $50.7 million for the Insurance
Segment, a consolidated total of $385.3 million. Trustmark’s goodwill is not amortized but is subject to annual tests for impairment or more often if events or
circumstances indicate it may be impaired. Trustmark’s identifiable intangible assets, which totaled $7.4 million at December 31, 2020, are amortized over their
estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount.
The initial recording and subsequent impairment testing of goodwill requires subjective judgments concerning estimates of the fair value of the acquired
assets. The goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value
of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. An impairment loss would be recorded for the amount
by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill allocated to that reporting unit. Trustmark performed
an annual impairment test of goodwill for reporting units contained in both the General Banking and Insurance Segments as of October 1, 2020, 2019, and 2018,
respectively, which indicated that no impairment charge was required. The impairment test for the General Banking Segment utilized valuations based on
comparable deal values for financial institutions while the test for the Insurance Segment utilizes varying valuation scenarios for the multiple of earnings before
interest, income taxes, depreciation and amortization method based on recent acquisition activity. Based on this analysis, Trustmark concluded that the fair value
of the reporting units exceeded the carrying value for both the General Banking Segment and the Insurance Segment; therefore, no impairment charge was
required. Significant changes in future profitability and value of its reporting units could affect Trustmark’s impairment evaluation.
The carrying amount of Trustmark’s identifiable intangible assets subject to amortization is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition. That assessment is based on the carrying amount of the intangible assets subject to amortization at the
date it is tested for recoverability. Intangible assets subject to amortization shall be tested for recoverability whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable.
Fair values may be determined using market prices, comparison to similar assets, market multiples and other determinants. Factors that may significantly affect the
estimates include, among others, competitive forces, customer behavior and attrition, changes in revenue growth trends and specific industry or market sector
conditions. Other key judgments in accounting for intangibles include determining the useful life of the particular asset and classifying assets as either goodwill
(which does not require amortization) or identifiable intangible assets (which does require amortization).
Contingent Liabilities
Trustmark estimates contingent liabilities based on Management’s evaluation of the probability of outcomes and their ability to estimate the range of exposure. As
stated in FASB ASC Topic 450, “Contingencies,” a liability is contingent if the amount is not presently known but may become known in the future as a result of
the occurrence of some uncertain future event. Accounting standards require that a liability be recorded if Management determines that it is probable that a loss
has occurred, and the loss can be reasonably estimated. It is implicit in this standard that it must be probable that the loss will be confirmed by some future
event. As part of the estimation process, Management is required to make assumptions about matters that are, by their nature, highly uncertain. The assessment of
contingent liabilities, including legal contingencies and income tax liabilities, involves the use of critical estimates, assumptions and judgments. Management’s
estimates are based on their belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures. However, there can
be no assurance that future events, such as court decisions or Internal Revenue Service (IRS) positions, will not differ from Management’s assessments. Whenever
practicable, Management consults with outside experts (attorneys, consultants, claims administrators, etc.) to assist with the gathering and evaluation of
information related to contingent liabilities.
39
Recent Legislative and Regulatory Developments
For information regarding legislation and regulation applicable to Trustmark, see the section captioned “Supervision and Regulation” included in Part I. Item 1. –
Business of this report.
Non-GAAP Financial Measures
In addition to capital ratios defined by GAAP and banking regulators, Trustmark utilizes various tangible common equity measures when evaluating capital
utilization and adequacy. Tangible common equity, as defined by Trustmark, represents common equity less goodwill and identifiable intangible assets.
Trustmark believes these measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally,
presentation of these measures allows readers to compare certain aspects of Trustmark’s capitalization to other organizations. These ratios differ from capital
measures defined by banking regulators principally in that the numerator excludes shareholders’ equity associated with preferred securities, the nature and extent of
which varies across organizations. In Management’s experience, many stock analysts use tangible common equity measures in conjunction with more traditional
bank capital ratios to compare capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from
the use of the purchase accounting method in accounting for mergers and acquisitions.
These calculations are intended to complement the capital ratios defined by GAAP and banking regulators. Because GAAP does not include these capital ratio
measures, Trustmark believes there are no comparable GAAP financial measures to these tangible common equity ratios. Despite the importance of these
measures to Trustmark, there are no standardized definitions for them and, as a result, Trustmark’s calculations may not be comparable with other
organizations. Also, there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its audited
consolidated financial statements and the notes related thereto in their entirety and not to rely on any single financial measure.
40
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):
TANGIBLE EQUITY
AVERAGE BALANCES
Total shareholders' equity
Less: Goodwill
Identifiable intangible assets
Total average tangible equity
PERIOD END BALANCES
Total shareholders' equity
Less: Goodwill
Identifiable intangible assets
Total tangible equity
TANGIBLE ASSETS
Total assets
Less: Goodwill
Identifiable intangible assets
Total tangible assets
Risk-weighted assets
NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION
Net income
Plus: Intangible amortization net of tax
Net income adjusted for intangible amortization
Period end common shares outstanding
TANGIBLE EQUITY MEASUREMENTS
Return on average tangible equity (1)
Tangible equity/tangible assets
Tangible equity/risk-weighted assets
Tangible book value
COMMON EQUITY TIER 1 CAPITAL (CET1) - BASEL III
Total shareholders' equity
CECL transition adjustment (2)
AOCI-related adjustments
CET1 adjustments and deductions:
Goodwill net of associated deferred tax liabilities (DTLs)
Other adjustments and deductions for CET1 (3)
CET1 capital
Additional tier 1 capital instruments plus related surplus
Tier 1 capital
Common equity tier 1 risk-based capital ratio
2020
Years Ended December 31,
2019
2018
$
$
$
$
$
$
$
$
$
$
$
$
1,681,587
(383,582)
(8,060)
1,289,945
1,741,117
(385,270)
(7,390)
1,348,457
16,551,840
(385,270)
(7,390)
16,159,180
12,017,378
160,025
2,289
162,314
63,424,526
$
$
$
$
$
$
$
$
$
12.58%
8.34%
11.22%
21.26
$
$
1,741,117
31,199
1,051
(371,333)
(6,190)
1,395,844
60,000
1,455,844
$
1,622,013
(379,627)
(9,212)
1,233,174
1,660,702
(379,627)
(7,343)
1,273,732
13,497,877
(379,627)
(7,343)
13,110,907
11,002,877
150,460
3,088
153,548
64,200,111
$
$
$
$
$
$
$
$
$
12.45%
9.72%
11.58%
19.84
$
$
1,660,702
—
23,600
(365,738)
(5,896)
1,312,668
60,000
1,372,668
$
1,586,877
(379,627)
(13,751)
1,193,499
1,591,453
(379,627)
(11,112)
1,200,714
13,286,460
(379,627)
(11,112)
12,895,721
10,803,313
149,584
3,938
153,522
65,834,395
12.86%
9.31%
11.11%
18.24
1,591,453
—
55,679
(365,779)
(9,815)
1,271,538
60,000
1,331,538
11.62%
11.93%
11.77%
(a)
(b)
(c)
(d)
(a)/(b)
(a)/(c)
(a)/(d)*1,000
(e)
(e)/(c)
(1)
(2)
(3)
Calculated using net income adjusted for intangible amortization divided by total average tangible equity.
Trustmark elected the five-year phase-in transition period related to adopting FASB ASU 2016-13 for regulatory capital purposes.
Includes other intangible assets, net of DTLs, disallowed deferred tax assets, threshold deductions and transition adjustments, as applicable.
Significant Non-routine Transactions
Trustmark discloses certain non-GAAP financial measures, including net income adjusted for significant non-routine transactions, because Management uses these
measures for business planning purposes, including to manage Trustmark’s business against internal projected results of operations and to measure Trustmark’s
performance. Trustmark views net income adjusted for significant non-routine transactions as a measure of its core operating business, which excludes the impact
of the items detailed below, as these items are generally not operational in nature. This non-GAAP measure also provides another basis for comparing period-to-
period results as presented in the accompanying selected financial data table and the audited consolidated financial statements by excluding potential differences
caused by non-operational and unusual or non-recurring items. Readers are cautioned that these adjustments are not permitted under GAAP. Trustmark
encourages readers to consider its audited consolidated financial statements and the notes related thereto, included in Part II. Item 8. – Financial Statements and
Supplementary Data of this report, in their entirety, and not to rely on any single financial measure.
41
The following table presents adjustments to net income and select financial ratios as reported in accordance with GAAP resulting from significant non-routine
items occurring during the periods presented ($ in thousands, except per share data):
Net Income (GAAP)
Significant non-routine transactions:
Voluntary early retirement program
Net Income adjusted for significant
non-routine transactions (Non-GAAP)
Return on average equity
Return on average tangible equity
Return on average assets
Voluntary Early Retirement Program
2020
Years Ended December 31,
2019
2018
Amount
$
160,025
Diluted EPS
2.51
$
Amount
$
150,460
Diluted EPS
2.32
$
Amount
$
149,584
Diluted EPS
2.21
$
3,281
0.05
—
—
—
—
$
163,306
$
2.56
$
150,460
$
2.32
$
149,584
$
2.21
Reported
(GAAP)
Adjusted
(Non-GAAP)
Reported
(GAAP)
Adjusted
(Non-GAAP)
Reported
(GAAP)
9.52%
12.58%
1.05%
9.69%
12.81%
1.07%
9.28%
12.45%
1.11%
n/a
n/a
n/a
9.43%
12.86%
1.11%
Adjusted
(Non-GAAP)
n/a
n/a
n/a
During the first quarter of 2020, Trustmark completed a voluntary early retirement program and incurred one-time charge of $4.4 million ($4.3 million of non-
routine salaries and employee benefits expense and $102 thousand of other miscellaneous expense) related to this program.
Results of Operations
Net Interest Income
Net interest income is the principal component of Trustmark’s income stream and represents the difference, or spread, between interest and fee income generated
from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning
assets and interest-bearing liabilities, can materially impact net interest income. The net interest margin is computed by dividing fully taxable equivalent (FTE) net
interest income by average interest-earning assets and measures how effectively Trustmark utilizes its interest-earning assets in relationship to the interest cost of
funding them. The accompanying Yield/Rate Analysis Table shows the average balances for all assets and liabilities of Trustmark and the interest income or
expense associated with earning assets and interest-bearing liabilities. The yields and rates have been computed based upon interest income and expense adjusted
to a FTE basis using the federal statutory corporate tax rate in effect for each of the periods shown. Loans on nonaccrual have been included in the average loan
balances, and interest collected prior to these loans having been placed on nonaccrual has been included in interest income. Loan fees included in interest
associated with the average LHFS and LHFI balances are immaterial.
Net interest income-FTE for the year ended December 31, 2020 decreased $906 thousand, or 0.2%, when compared with the year ended December 31, 2019. The
net interest margin for 2020 decreased 43 basis points to 3.19% when compared to 2019. The net interest margin excluding PPP and acquired loans, which equals
the reported net interest income-FTE excluding interest and fees on PPP and acquired loans, as a percentage of average earning assets excluding average PPP and
acquired loans, was 3.15% for 2020, a decrease of 43 basis points when compared to 2019. The decrease in the net interest margin for 2020 was principally due to
declines in the yield on the LHFI and LHFS and securities portfolios and the acquired loans that were transferred to LHFI as a result of the adoption of FASB ASC
Topic 326, partially offset by lower costs of interest-bearing deposits and the addition of the PPP loans.
As of December 31, 2020, TNB had 7,398 PPP loans outstanding totaling $623.0 million. Net of deferred fees and costs of $12.9 million, PPP loans totaled $610.1
million at December 31, 2020. Processing fees earned by TNB as the originating lender are being amortized over the life of the loans. Payments on PPP loans are
deferred until the date the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, ten months
after the end of the borrower’s loan forgiveness covered period). Trustmark cannot predict the amount of PPP loans that will be forgiven in whole or in part by the
SBA, nor can it predict the magnitude and timing of the impact the PPP loans and related fees will have on Trustmark’s net interest margin. However, TNB’s
participation in the PPP will likely have a significant impact on Trustmark’s asset mix and net interest margin in 2021 as a result of the addition of these low
interest rate loans and the related processing fees earned on these loans.
42
Average interest-earning assets for 2020 were $13.740 billion compared to $12.131 billion for 2019, an increase of $1. 609 billion, or 13.3%. The increase in
average earning assets during 2020 was primarily due to increases in average loans (LHFS and LHFI) of $694.2 million, or 7.5%, average PPP loans of $646.7
million and average other earning assets of $416.5 million, which were partially offset by decreases in average securities of $50.4 million, or 2.0%, and average
acquired loans of $88.9 million. The increase in average loans (LHFS and LHFI) was primarily attributable to the $488.9 million, or 5.2%, increase in the LHFI
portfolio and a $220.6 million, or 97.5%, increase in LHFS when balances at December 31, 2020 are compared to balances at December 31, 2019. The increase in
LHFI was principally due to net growth in LHFI secured by real estate in Trustmark’s Texas, Alabama, Mississippi and Tennessee market regions, partially offset
by declines in commercial and industrial LHFI in the Mississippi, Tennessee and Alabama market regions. The increase in LHFS was principally due to the
increase in mortgage loan originations, primarily due to lower interest rates on mortgage loans. The increase in average other earning assets when 2020 is
compared to 2019 was primarily due to an increase in interest-bearing deposits due from banks, principally related to excess reserves held at the FRB as a result of
the increase in customer deposit account balances. The decrease in average securities when 2020 is compared to 2019 was primarily due to calls, maturities and
pay-downs of the underlying loans of government-sponsored enterprise (GSE) guaranteed securities, partially offset by purchase of securities available for
sale. The decline in average acquired loans was due to the acquired loans that were transferred to LHFI as PCD loans on January 1, 2020 as part of Trustmark’s
adoption of FASB ASC Topic 326.
During 2020, interest income-FTE totaled $480.4 million, a decrease of $43.0 million, or 8.2%, while the yield on total earning assets declined 81 basis points to
3.50% when compared to 2019. The decrease in interest income-FTE in 2020 reflects declines in all categories of interest income partially offset by the addition of
interest and fees on PPP loans. Interest and fees on PPP loans totaled $26.6 million for the year ended December 31, 2020, while the yield on these loans was
4.12%. During 2020, interest and fees on LHFS and LHFI-FTE declined $50.0 million, or 11.1%, when compared to 2019, while the yield on loans (LHFS and
LHFI) decreased 84 basis points to 4.03% as a result of lower interest rates. Interest and fees on acquired loans declined $8.4 million when 2020 is compared to
2019 due to the acquired loans that were transferred to LHFI as PCD loans on January 1, 2020 as part of Trustmark’s adoption of FASB ASC Topic 326. During
2020, interest on securities-taxable decreased $6.4 million, or 11.7%, while the yield on securities-taxable declined 24 basis points to 2.01% when compared to
2019, primarily due to the run off of maturing investment securities and lower interest rates on securities available for sale purchased during 2020. Other interest
income declined $3.8 million, or 70.9%, when 2020 is compared to 2019, while the yield on other earning assets declined to 0.24% for 2020 compared to 2.23%
for 2019. The decline in other interest income and the yield on other earning assets was principally due to the decline in the interest rate paid on excess reserves
held at the FRB.
Average interest-bearing liabilities for 2020 totaled $9.627 billion compared to $8.741 billion for 2019, an increase of $886.3 million, or 10.1%. The increase in
average interest-bearing liabilities was primarily the result of the increase in average interest-bearing deposits. Average interest-bearing deposits for 2020
increased $783.5 million, or 9.2%, when compared to 2019, primarily due to growth in average interest-bearing demand deposits and savings deposits as customers
deposited proceeds from line draws, PPP loans and other COVID-19 related stimulus programs, partially offset by a decline in average time deposits.
Interest expense for 2020 totaled $41.8 million, a decrease of $42.1 million, or 50.2%, when compared with 2019, while the rate on total interest-bearing liabilities
decreased 53 basis points to 0.43%. The decrease in total interest expense for 2020 when compared to 2019 was primarily due to a decline in interest on
deposits. Interest on deposits decreased $41.7 million, or 52.7%, while the rate on interest-bearing deposits decreased 53 basis points to 0.40% when 2020 is
compared to 2019, primarily due to lower interest rates.
43
The following table provides the tax equivalent basis yield or rate for each component of the tax equivalent net interest margin for the periods presented ($ in
thousands):
Assets
Interest-earning assets:
Federal funds sold and securities purchased
under reverse repurchase agreements
Securities available for sale:
Taxable
Nontaxable
Securities held to maturity:
Taxable
Nontaxable
PPP loans
Loans (LHFS and LHFI)
Acquired loans
Other earning assets
Total interest-earning assets
Other assets
Allowance for loan losses
Total Assets
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits
Savings deposits
Time deposits
Federal funds purchased and securities sold
under repurchase agreements
Other borrowings
Subordinated notes
Junior subordinated debt securities
Total interest-bearing liabilities
Noninterest-bearing demand deposits
Other liabilities
Shareholders' equity
Total Liabilities and Shareholders' Equity
2020
Years Ended December 31,
2019
2018
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
$
221 $
1
0.45% $
9,529 $
240
2.52% $
716 $
14
1.96%
1,776,555
10,737
35,375
384
1.99%
3.58%
1,633,496
29,948
37,717
1,116
2.31%
3.73%
1,990,332
47,112
45,380
1,636
626,983
25,366
646,680
12,875
982
26,643
9,996,192 402,539
—
1,559
13,739,830 480,358
—
657,096
1,592,393
(108,567)
$ 15,223,656
799,726
26,874
—
16,932
2.05%
1,050
3.87%
—
4.12%
9,302,037 452,578
4.03%
8,373
88,903
—
0.24%
5,363
240,622
3.50% 12,131,135 523,369
1,452,012
(83,559)
$ 13,499,588
950,836
30,336
—
20,702
2.12%
1,194
3.91%
—
—
8,797,498 408,175
4.87%
17,115
179,808
9.42%
2.23%
4,196
197,431
4.31% 12,194,069 498,412
1,364,420
(85,252)
$ 13,473,237
$ 3,584,249
4,149,860
1,534,673
9,985
13,481
14,021
0.28% $ 3,051,170
3,650,178
0.32%
1,783,928
0.91%
35,428
19,462
24,281
1.16% $ 2,543,463
3,720,987
0.53%
1,823,562
1.36%
18,479
17,980
17,477
755
1,389
474
1,693
41,798
151,805
133,602
10,766
61,856
9,626,811
3,646,860
268,398
1,681,587
$ 15,223,656
0.50%
1.04%
4.40%
2.74%
0.43%
110,915
82,476
—
61,856
8,740,523
2,918,836
218,216
1,622,013
$ 13,499,588
1,420
697
—
2,615
83,903
1.28%
0.85%
—
4.23%
0.96%
329,649
317,687
—
61,856
8,797,204
2,892,033
197,123
1,586,877
$ 13,473,237
4,788
5,016
—
2,452
66,192
2.28%
3.47%
2.18%
3.94%
—
4.64%
9.52%
2.13%
4.09%
0.73%
0.48%
0.96%
1.45%
1.58%
—
3.96%
0.75%
Net Interest Margin
438,560
3.19%
439,466
3.62%
432,220
3.54%
Less tax equivalent adjustments:
Investments
Loans
Net Interest Margin per Consolidated
Statements of Income
287
11,736
455
12,422
594
12,206
$ 426,537
$ 426,589
$ 419,420
44
The table below shows the change from year to year for each component of the tax equivalent net interest margin in the amount generated by volume changes and
the amount generated by changes in the yield or rate (tax equivalent basis) for the periods presented ($ in thousands):
Interest earned on:
Federal funds sold and securities purchased under
reverse repurchase agreements
Securities available for sale:
Taxable
Nontaxable
Securities held to maturity:
Taxable
Nontaxable
PPP loans
Loans, net of unearned income (LHFS and LHFI)
Acquired loans
Other earning assets
Total interest-earning assets
Interest paid on:
Interest-bearing demand deposits
Savings deposits
Time deposits
Federal funds purchased and securities sold under
repurchase agreements
Other borrowings
Subordinated notes
Junior subordinated debt securities
Total interest-bearing liabilities
Change in net interest income on a tax
equivalent basis
2020 Compared to 2019
Increase (Decrease) Due To:
Yield/
Rate
Volume
2019 Compared to 2018
Increase (Decrease) Due To:
Yield/
Rate
Net
Net
Volume
$
(130) $
(109) $
(239) $
221 $
5 $
226
3,142
(689)
(5,484)
(43)
(2,342)
(732)
(8,252)
(634)
589
114
(3,519)
(57)
26,643
32,082
(4,187)
3,808
57,093
(538)
(11)
—
(82,121)
(4,186)
(7,612)
(100,104)
(4,057)
(68)
26,643
(50,039)
(8,373)
(3,804)
(43,011)
5,290
2,400
(3,046)
(30,733)
(8,381)
(7,214)
(25,443)
(5,981)
(10,260)
401
508
474
—
6,027
(1,066)
184
—
(922)
(48,132)
(665)
692
474
(922)
(42,105)
(3,213)
(135)
—
23,818
(8,564)
961
4,202
4,290
(346)
(385)
(2,863)
(2,659)
—
—
(1,963)
(557)
(9)
—
20,585
(178)
206
20,755
12,659
1,828
7,189
(505)
(1,660)
—
163
19,674
(7,663)
(520)
(3,770)
(144)
—
44,403
(8,742)
1,167
24,957
16,949
1,482
6,804
(3,368)
(4,319)
—
163
17,711
$
51,066 $
(51,972) $
(906) $
6,165 $
1,081 $
7,246
The change in interest due to both volume and yield or rate has been allocated to change due to volume and change due to yield or rate in proportion to the absolute
value of the change in each. Tax-exempt income has been adjusted to a tax equivalent basis using the federal statutory corporate tax rate in effect for each of the
three years presented. The balances of nonaccrual loans and related income recognized have been included for purposes of these computations.
Provision for Credit Losses
Trustmark adopted FASB ASC Topic 326, in accordance with the amendments of FASB ASU 2016-13, effective January 1, 2020. The guidance in FASB ASC
326 replaces Trustmark’s previous incurred loss methodology with a methodology that reflects the current expected credit losses and requires consideration of a
broader range of reasonable and supportable information to determine credit losses. The provision for credit losses is the amount necessary to maintain the
allowance for credit losses, LHFI at the amount of expected credit losses inherent within the LHFI portfolio. The amount of provision for credit losses and the
related ACL for LHFI are based on Trustmark’s ACL methodology.
The provision for credit losses totaled $36.1 million for 2020, compared to a provision for loan losses, LHFI of $10.8 million for 2019 and $18.0 million for
2018. The provision for credit losses for the year ended December 31, 2020 primarily reflected net changes in the economic forecast due to the current and
anticipated negative effects of the COVID-19 pandemic on the overall economy and macroeconomic factors. See the section captioned “Allowance for Credit
Losses, LHFI” for information regarding Trustmark’s ACL methodology as well as further analysis of the provision for credit losses.
45
Noninterest Income
Noninterest income represented 39.2%, 30.5% and 30.6% of total revenue, before securities gains (losses), net in 2020, 2019 and 2018, respectively. The
following table provides the comparative components of noninterest income for the periods presented ($ in thousands):
Service charges on deposit accounts
Bank card and other fees
Mortgage banking, net
Insurance commissions
Wealth management
Other, net
Total Noninterest Income
2020
Years Ended December 31,
2019
2018
Amount
% Change
Amount
% Change
Amount
% Change
$
$
32,289
31,022
125,822
45,176
31,625
8,659
274,593
-24.2% $
-2.2%
n/m
6.6%
3.1%
-11.7%
46.8% $
42,603
31,736
29,822
42,396
30,679
9,809
187,045
-2.5% $
9.8%
-14.0%
4.7%
1.1%
45.6%
1.2% $
43,702
28,905
34,674
40,481
30,338
6,736
184,836
-0.7%
2.2%
16.0%
6.1%
—
-51.7%
0.1%
n/m - percentage changes greater than +/- 100% are not considered meaningful
Changes in various components of noninterest income for the year ended December 31, 2020 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 decline in service charges on deposit accounts when 2020 is compared to 2019 was principally due to declines in NSF and overdraft fees on consumer and
commercial demand deposit accounts and consumer interest checking accounts, primarily due to declines in overdraft occurrences as a result of COVID-19 related
business closures, stay-at-home orders and government stimulus programs.
Mortgage Banking, Net
The following table illustrates the components of mortgage banking, net included in noninterest income for the periods presented ($ in thousands):
2020
Years Ended December 31,
2019
2018
Amount
% Change
Amount
% Change
Amount
% Change
Mortgage servicing income, net
Change in fair value-MSR from runoff
Gain on sales of loans, net
Mortgage banking income before net hedge
ineffectiveness
Change in fair value-MSR from market changes
Change in fair value of derivatives
Net hedge ineffectiveness
Mortgage banking, net
$
$
23,681
(16,588)
110,903
3.5% $
40.2%
n/m
22,883
(11,835)
30,296
2.9% $
0.5%
39.0%
22,248
(11,774)
21,800
117,996
(26,147)
33,973
7,826
125,822
n/m
24.0%
n/m
n/m
n/m
$
41,344
(21,078)
9,556
(11,522)
29,822
28.1%
n/m
n/m
n/m
-14.0% $
32,274
7,342
(4,942)
2,400
34,674
2.7%
9.2%
16.2%
8.9%
n/m
n/m
n/m
16.0%
n/m - percentage changes greater than +/- 100% are not considered meaningful
The increase in mortgage banking, net when 2020 is compared to 2019 was principally due to increases in gain on sales of loans, net and a positive net hedge
ineffectiveness. The positive net hedge ineffectiveness for the year ended December 31, 2020 was primarily due to widening spreads between mortgage and ten-
year Treasury rates. Mortgage loan production totaled $2.985 billion for 2020 an increase of $1.222 billion, or 69.4%, when compared to 2019. Mortgage loan
production totaled $1.762 billion for 2019 an increase of $361.1 million, or 25.8%, when compared to 2018. The increase in mortgage loan production during
2020 was primarily due to the increase in refinance activity driven by the low interest rate environment. Loans serviced for others totaled $7.657 billion at
December 31, 2020, compared with $7.157 billion at December 31, 2019, and $6.835 billion at December 31, 2018.
Representing a significant component of mortgage banking income is gain on sales of loans, net. The increase in the gain on sales of loans, net when 2020 is
compared to 2019 was primarily the result of higher profit margins in secondary marketing activities and increases in the volume of loans sold and the mortgage
valuation adjustment. Loan sales increased $1.128 billion, or 80.4%, during
46
2020 to total $2.532 billion compared to an increase of $311.3 million, or 28.5%, during 2019 to total $1.404 billion. The increases in loan sales during 2020 and
2019 were principally due to increases in mortgage lending activity as a result of lower interest rates.
Other Income, Net
The following table illustrates the components of other income, net included in noninterest income for the periods presented ($ in thousands):
Partnership amortization for tax credit purposes
Increase in life insurance cash surrender value
Other miscellaneous income
Total other, net
2020
Years Ended December 31,
2019
2018
Amount
% Change
Amount
% Change
Amount
% Change
$
$
(5,700)
6,881
7,478
8,659
-25.4% $
-4.5%
-27.1%
-11.7% $
(7,644)
7,202
10,251
9,809
-12.2% $
1.1%
23.2%
45.6% $
(8,707)
7,121
8,322
6,736
-8.9%
-0.1%
-49.2%
-51.7%
The decrease in other income, net when 2020 is compared to 2019 was primarily due to a decline in other miscellaneous income, principally due to settlement
proceeds received during the fourth quarter of 2019 as well as declines in other partnership investments and net gains on sales of premises and equipment in 2020,
partially offset by a decrease in the amortization of tax credit partnerships.
Noninterest Expense
The following table illustrates the comparative components of noninterest expense for the periods presented ($ in thousands):
$
Salaries and employee benefits
Services and fees
Net occupancy-premises
Equipment expense
Other real estate expense:
Write-downs
Net (gain)/loss on sale
Carrying costs
Total other real estate expense, net
Credit loss expense for off-balance sheet credit exposures
Other expense
Total noninterest expense
$
2020
Amount
% Change
Years Ended December 31,
2019
Amount
% Change
2018
Amount
% Change
272,257
83,816
26,489
23,277
1,786
(897)
1,067
1,956
8,934
58,506
475,235
9.9% $
14.3%
1.3%
-1.9%
247,717
73,315
26,149
23,733
4.1% $
10.4%
-2.1%
-4.4%
238,033
66,382
26,703
24,830
-29.8%
n/m
-0.4%
-49.9%
100.0%
8.0%
10.8% $
2,544
291
1,071
3,906
—
54,182
429,002
n/m
n/m
-41.4%
95.1%
—
-5.7%
3.3% $
873
(700)
1,829
2,002
—
57,465
415,415
3.8%
9.0%
3.6%
1.5%
-73.5%
-66.5%
-25.9%
-45.5%
—
-16.1%
-3.4%
n/m - percentage changes greater than +/- 100% are not considered meaningful
Changes in the various component of noninterest expense for the year ended December 31, 2020 are discussed in further detail below. Management considers
disciplined expense management a key area of focus in the support of improving shareholder value.
Salaries and Employee Benefits
During the first quarter of 2020, Trustmark completed a voluntary early retirement program and incurred $4.3 million of non-routine salaries and employee
benefits expense related to this program. Excluding these non-routine expenses, salaries and employee benefits increased $20.3 million, or 8.2%, when 2020 is
compared to 2019. The increase in salaries and employee benefits expense, excluding the non-routine expenses, for the year ended December 31, 2020 was
principally due to higher commissions expense resulting from improvements in mortgage production as well as an increase in salary expenses as a result of an
increase in performance incentives, general merit increases, an increase in overtime pay and temporary compensation adjustments and one-time payments to front-
line associates as a result of the COVID-19 pandemic.
47
Services and Fees
The increase in services and fees when 2020 is compared to 2019 was primarily due to increases in legal fees related to ongoing litigation matters and data
processing charges related to software due to continued investments in technology to enhance growth and efficiency opportunities.
Other Real Estate Expense, Net
The decrease in other real estate expense, net for 2020 compared to 2019 was principally due to an increase in net gains on sales of other real estate properties as
well as a decline in write-downs of other real estate. For additional analysis of other real estate and foreclosure expenses, please see the section captioned
“Nonperforming Assets, Excluding PPP and Acquired Loans.”
Credit Loss Expense Related to Off-Balance Sheet Credit Exposures
Trustmark adopted FASB ASC Topic 326, in accordance with the amendments of FASB ASU 2016-13, effective January 1, 2020. The guidance in FASB ASC
326 replaces Trustmark’s previous incurred loss methodology with a methodology that reflects the current expected credit losses and requires consideration of a
broader range of reasonable and supportable information to determine credit losses. FASB ASC Topic 326 also 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 as noninterest
expense in credit loss expense related to off-balance sheet credit exposures. The increase in the credit loss expense related to off-balance sheet exposures for the
year ended December 31, 2020 was primarily due to net changes in the economic forecast due to the current and anticipated negative effects of the COVID-19
pandemic on the overall economy and macroeconomic factors.
Other Expense
The following table illustrates the comparative components of other noninterest expense for the periods presented ($ in thousands):
Loan expense
Amortization of intangibles
FDIC assessment expense
Other miscellaneous expense
Total other expense
2020
Amount
% Change
Years Ended December 31,
2019
Amount
% Change
2018
Amount
% Change
$
$
12,934
3,052
6,090
36,430
58,506
11.9% $
-25.9%
-5.5%
13.6%
8.0% $
11,554
4,116
6,444
32,068
54,182
4.2% $
-21.6%
-31.7%
1.2%
-5.7% $
11,086
5,248
9,429
31,702
57,465
1.6%
-14.9%
-14.4%
-21.5%
-16.1%
The increase in other miscellaneous expense when 2020 is compared to 2019 was principally due to the settlement proceeds received during the third quarter of
2019 related to the Trust Department and increases in other miscellaneous charges, charitable contributions and sponsorships and property valuation adjustments
related to properties transferred to assets held for sale, partially offset by a decline in travel and entertainment expenses as a result of travel restrictions during the
COVID-19 pandemic. The increase in loan expense for 2020 when compared to 2019 was primarily due to increases in appraisal fees.
Results of Segment Operations
Trustmark’s operations are managed along three operating segments: General Banking, Wealth Management and Insurance. A description of each segment and the
methodologies used to measure financial performance and financial information by reportable segment are included in Note 21 – Segment Information located in
Part II. Item 8. – Financial Statements and Supplementary Data of this report. During the first quarter of 2020, Trustmark revised the composition of its operating
segments by moving the Retail Private Banking Group from the General Banking Segment to the Wealth Management Segment as a result of a change in
supervision of this group for segment reporting purposes. Prior periods include reclassifications to conform to current period presentation.
The following table provides the net income by reportable segment for the periods presented ($ in thousands):
General Banking
Wealth Management
Insurance
Consolidated Net Income
2020
Years Ended December 31,
2019
2018
$
$
145,939 $
5,556
8,530
160,025 $
136,117 $
6,388
7,955
150,460 $
137,800
4,412
7,372
149,584
48
General Banking
Net interest income for the General Banking Segment for 2020 increased $628 thousand, or 0.1%, when compared with 2019. The slight increase in net interest
income was principally due to a decline in interest on deposits and the addition of interest and fees on PPP loans, largely offset by declines in all other sources of
interest income. Net interest income for the General Banking Segment for 2019 increased $7.1 million, or 1.7%, when compared with 2018. The increase in net
interest income was principally due to increases in interest and fees on LHFS and LHFI and decreases in other interest expense and interest expense on federal
funds purchased and repurchase agreements, which were largely offset by an increase in interest on deposits and declines in interest on securities and interest and
fees on acquired loans. The provision for credit losses for 2020 totaled $36.1 million compared to a provision for loan losses, net of $10.6 million during 2019 and
$17.1 million during 2018. For more information on these net interest income items, please see the sections captioned “Financial Highlights” and “Results of
Operations.”
Noninterest income for the General Banking Segment increased $83.9 million, or 73.8%, during 2020 compared to a decrease of $174 thousand, or 0.2%, during
2019. The increase in noninterest income for the General Banking Segment during 2020 was primarily due to increase in mortgage banking, net, partially offset by
a decline in service charges on deposit accounts. The slight decrease in noninterest income for the General Banking Segment during 2019 was primarily due to the
declines in mortgage banking, net and service charges on deposit accounts, which were largely offset by increases in bank card and other fees and other noninterest
income, net. Noninterest income for the General Banking Segment represented 32.0% of total revenue for 2020, 21.3% for 2019 and 21.6% for 2018. Noninterest
income for the General Banking Segment includes service charges on deposit accounts; bank card and other fees; mortgage banking, net; other income, net and
securities gains (losses), 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 $42.8 million, or 11.6%, during 2020 compared to an increase of $14.8 million, or 4.2%, during
2019. The increase in noninterest expense for the General Banking Segment for 2020 was principally due to increases in salaries and employee benefits, services
and fees and the addition of the credit loss expense related to off-balance sheet credit exposures as a result of the adoption of FASB ASC Topic 326. During the
first quarter of 2020, Trustmark completed a voluntary early retirement program which resulted in non-routine transaction expenses of $4.4 million ($4.3 million of
salaries and employee benefits expense and $102 thousand of other expense). The increase in noninterest expense for 2019 was principally due to increases in
salaries and employee benefits, services and fees, other real estate expense, net and charitable contributions related to the Mississippi Children’s Promise Act. For
more information on these noninterest expense items, please see the analysis included in the section captioned “Noninterest Expense.”
Wealth Management
During 2020, net income for the Wealth Management Segment decreased $832 thousand, or 13.0%, compared to an increase of $2.0 million, or 44.8%, during
2019. The decrease in net income for the Wealth Management Segment during 2020 was principally due to an increase in noninterest expense as well as a decline
in net interest income, partially offset by an increase in noninterest income. Net interest income for the Wealth Management Segment decreased $668 thousand, or
9.9%, during 2020 compared to an increase of $11 thousand, or 0.2%, during 2019. Noninterest income for the Wealth Management Segment, which includes
income related to investment management, trust and brokerage services, increased $774 thousand, or 2.5%, during 2020, principally due to an increase in fees from
brokerage services. Noninterest income for the Wealth Management Segment increased $440 thousand, or 1.5%, during 2019. The slight increase in noninterest
income for the Wealth Management Segment during 2019 was primarily attributable to an increase in trust management fees. Noninterest expense increased $1.4
million, or 5.0%, during 2019 compared to a decrease of $2.5 million, or 8.0%, during 2019. The increase in noninterest expense for the Wealth Management
Segment for 2020 was principally due to the comparison impact of insurance settlement proceeds received during 2019 related to a legal case settled in 2018,
which was partially offset by declines in outside services and fees and salary and employee benefit expense. The decrease in noninterest expense for the Wealth
Management Segment during 2019 was principally due to a decrease in professional service fees, as well as insurance settlement proceeds received during 2019
related to a legal case settled in 2018.
At December 31, 2020 and 2019, Trustmark held assets under management and administration of $11.463 billion and $11.782 billion and brokerage assets of
$2.148 billion and $1.993 billion, respectively.
Insurance
Net income for the Insurance Segment during 2020 increased $575 thousand, or 7.2%, compared to an increase of $583 thousand, or 7.9%, during
2019. Noninterest income for the Insurance Segment, which predominately consists of insurance commissions, increased $2.8 million, or 6.7%, during 2020,
compared to an increase of $1.9 million, or 4.8%, during 2019. The increase in noninterest income for the Insurance Segment during 2020 was primarily due to
new business commission volume in the property and casualty business and increases in other commission income. The increase in noninterest income for the
Insurance Segment during 2019 was primarily due to new insurance commission volume across all lines of business.
49
Noninterest expense for the Insurance Segment increased $2.0 million, or 6.3%, during 2020 and $1.3 million, or 4.2%, during 2019. The increase in noninterest
expense for the Insurance Segment for 2020 was principally due to higher salaries expense resulting from modest general merit increases and higher commission
expense due to improvements in business volumes and associates added as a result of an insurance agency acquired during the period, as well as increases in
outside services and fees and other miscellaneous expense. The i ncreases in noninterest expense for the Insurance Segment during 2019 was primarily due to
higher commission expense due to improvements in business volumes and higher salaries expense resulting from modest general merit increases.
Trustmark performed an annual impairment test of the book value of goodwill held in the Insurance Segment as of October 1, 2020, 2019, and 2018. Based on this
analysis, Trustmark concluded that no impairment charge was required. A renewed period of falling prices and suppressed demand for the products of the
Insurance Segment could result in impairment of goodwill in the future. FBBI’s ability to maintain the current income trend is dependent on the success of the
subsidiary’s continued initiatives to attract new business through cross referrals between practice units and bank relationships and seeking new business in other
markets.
FBBI acquired Boyles Moak Insurance Services (Boyles), a Mississippi based insurance agency, for $5.0 million on May 1, 2020. The acquisition was accounted
for in accordance with FASB ASC Topic 805, “Business Combinations.” Accordingly, the assets and liabilities, both tangible and intangible, were recorded at
their estimated fair values as of the acquisition date. The excess of the consideration paid over the estimated fair value of the net assets acquired was $3.6 million,
which was recorded as goodwill under FASB ASC Topic 805. The identifiable intangible assets acquired represented insurance customer relationships and trade
name and totaled $2.1 million, the estimated fair value at the acquisition date.
Income Taxes
For the year ended December 31, 2020, Trustmark’s combined effective tax rate was 15.7% compared to 13.4% in 2019 and 13.0% in 2018. 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 purchased under reverse
repurchase agreements and other earning assets. Average earning assets totaled $13.740 billion, or 90.3% of total average assets, at December 31, 2020, compared
with $12.131 billion, or 89.9% of total average assets, at December 31, 2019, an increase of $1.609 billion, or 13.3%.
Securities
The securities portfolio is utilized by Management to manage interest rate risk, generate interest income, provide liquidity and use as collateral for public 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 at
December 31, 2020 and 2019 was 2.9 and 3.5 years, respectively.
When compared with December 31, 2019, total investment securities increased by $189.4 million, or 8.1%, during 2020. This increase resulted primarily from
purchases of available for sale securities partially offset by calls, maturities and pay-downs of the underlying loans of GSE guaranteed securities. Trustmark sold
no securities during 2020 or 2019.
During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale as securities held to maturity to mitigate the potential adverse
impact of a rising interest rate environment on the fair value of the available for sale securities and the related impact on tangible common equity. The resulting
net unrealized holding loss is being amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or
accretion of the original purchase premium or discount on the associated security. At December 31, 2020, the net unamortized, unrealized loss on the transferred
securities included in accumulated other comprehensive income (loss), net of tax, (AOCI) in the accompanying consolidated balance sheets totaled $8.9 million
($6.7 million net of tax) compared to $12.1 million ($9.1 million net of tax) at December 31, 2019.
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 December 31, 2020, available for sale securities totaled $1.992 billion, which represented 78.7% of the securities portfolio, compared to
$1.602 billion, or 68.5%, at December 31, 2019. At December 31, 2020, unrealized gains, net on available for sale securities totaled $32.0 million compared to
unrealized gains, net of $1.4 million at December 31, 2019. At December 31, 2020, available for sale securities consisted of obligations of states and political
subdivisions, GSE guaranteed mortgage-related securities and direct obligations of government agencies and GSEs.
50
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
December 31, 2020, held to maturity securities totaled $538.1 million and represented 21.3% of the total securities portfolio, compared with $738.1 million, or
31.5%, at December 31, 2019.
The table below indicates the amortized cost of securities available for sale and held to maturity by type at December 31, 2020, 2019 and 2018 ($ in thousands):
Securities available for sale
U.S. Government agency obligations
Obligations of states and political subdivisions
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA
Issued by FNMA and FHLMC
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA
Total securities available for sale
Securities held to maturity
U.S. Government agency obligations
Obligations of states and political subdivisions
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA
Issued by FNMA and FHLMC
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA
Total securities held to maturity
2020
December 31,
2019
2018
$
18,378 $
5,198
22,965 $
24,952
31,235
50,503
$
$
55,193
1,421,861
69,196
714,350
69,648
685,520
409,883
656,162
830,129
49,260
1,959,773 $
113,359
1,600,984 $
187,494
1,854,529
— $
26,584
3,781 $
31,781
3,736
35,783
7,598
67,944
10,820
96,631
12,090
115,133
360,361
485,324
578,827
$
75,585
538,072 $
109,762
738,099 $
164,074
909,643
51
The following table details the maturities of securities available for sale and held to maturity using the amortized cost at December 31, 2020, and the weighted-
average yield for each range of maturities (tax equivalent basis) ($ in thousands):
Securities available for sale
U.S. Government agency obligations
Obligations of states and political
subdivisions
Mortgage-backed securities
Residential mortgage pass-through
securities
Guaranteed by GNMA
Issued by FNMA and FHLMC
Other residential mortgage-backed
securities
Issued or guaranteed by FNMA,
FHLMC, or GNMA
Commercial mortgage-backed
securities
Issued or guaranteed by FNMA,
FHLMC, or GNMA
Total securities available for sale
Securities held to maturity
Obligations of states and political
subdivisions
Mortgage-backed securities
Residential mortgage pass-through
securities
Guaranteed by GNMA
Issued by FNMA and FHLMC
Other residential mortgage-backed
securities
Issued or guaranteed by FNMA,
FHLMC, or GNMA
Commercial mortgage-backed
securities
Issued or guaranteed by FNMA,
FHLMC, or GNMA
Total securities held to maturity
Within
One Year
Yield
After One,
But Within
Five Years
Yield
Maturing
After Five,
But Within
Ten Years
Yield
After
Ten Years
Yield
Total
$ 1,570
4.10% $
210
3.05% $
2,031
1.97% $
14,567
2.32% $
18,378
—
—
1,317
2.63%
—
—
3,881
4.52%
5,198
—
—
—
—
2,033
16,662
1.76%
2,193
2.60% 275,628
2.48%
50,967
1.82% 1,129,571
2.03%
55,193
1.28% 1,421,861
120
2.00%
663
1.19% 17,800
2.25%
391,300
2.13%
409,883
—
$ 1,690
—
43,772
3.95% $ 64,657
2.31%
1,374
2.36% $ 299,026
3.41%
4,114
1.85% $ 1,594,400
2.97%
49,260
1.53% $ 1,959,773
$ 19,237
4.05% $
7,347
4.16% $
—
—
$
—
—
$
26,584
—
—
—
—
—
—
—
—
—
25,782
—
1.72%
7,598
42,162
2.02%
1.86%
7,598
67,944
—
—
—
—
—
—
360,361
1.88%
360,361
—
$ 19,237
—
62,375
4.05% $ 69,722
2.29%
—
2.48% $ 25,782
—
13,210
1.72% $ 423,331
2.47%
75,585
1.90% $ 538,072
Mortgage-backed securities and collateralized mortgage obligations are included in maturity categories based on their stated maturity date. Expected maturities
may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of approximately
98.7% 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 Federal Reserve Bank of Atlanta, Trustmark does not hold any other equity investment in a GSE.
As of December 31, 2020, Trustmark did not hold securities of any one issuer with a carrying value exceeding ten percent 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.
52
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
December 31, 2020 ($ in thousands):
Securities Available for Sale
Aaa
Baa1 to Baa3
Not Rated (1)
Total securities available for sale
Securities Held to Maturity
Aaa
Aa1 to Aa3
Not Rated (1)
Total securities held to maturity
Amortized Cost
Amount
%
Estimated Fair Value
Amount
%
$
$
$
$
1,954,575
1,064
4,134
1,959,773
511,488
22,528
4,056
538,072
99.7% $
0.1%
0.2%
100.0% $
1,985,980
1,105
4,730
1,991,815
95.1% $
4.1%
0.8%
100.0% $
536,276
22,650
4,189
563,115
99.7%
0.1%
0.2%
100.0%
95.2%
4.0%
0.8%
100.0%
(1)
Not rated issues 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 December 31, 2020, approximately 99.7% of the available for sale securities, measured at the estimated fair value, and 95.1% of the
held to maturity securities, measured at amortized cost, were rated Aaa.
LHFS
At December 31, 2020, LHFS totaled $447.0 million, consisting of $305.8 million of residential real estate mortgage loans in the process of being sold to third
parties and $141.2 million of Government National Mortgage Association (GNMA) optional repurchase loans. At December 31, 2019, LHFS totaled $226.3
million, consisting of $169.3 million of residential real estate mortgage loans in the process of being sold to third parties and $57.1 million of GNMA optional
repurchase loans. Please refer to the nonperforming assets table that follows for information on GNMA loans eligible for repurchase which are past due 90 days or
more.
Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during 2020 or 2019.
For additional information regarding the GNMA optional repurchase loans, please see the section captioned “Past Due LHFS” included in Note 4 – LHFI and
Allowance for Credit Losses, LHFI of Part II. Item 8. – Financial Statements and Supplementary Data of this report.
LHFI
The full impact of the COVID-19 pandemic is unknown and rapidly evolving. It has caused substantial disruption in international and the United States economies,
markets and employment. The outbreak may have a significant adverse impact on certain industries Trustmark serves, including the restaurant and food services,
hotel, retail and energy industries. See the section captioned “COVID-19 Update” for further information and discussion regarding the current and anticipated
impact of the COVID-19 pandemic.
53
The table below provides the carrying value of the LHFI portfolio by loan class for each year of the five-year period ended
December 31, 2020 ($ in thousands):
2020 (1)
2019
December 31,
2018
2017
2016
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Loans secured by real estate:
Construction, land development
and other land (2)
Other secured by 1-4 family
residential properties (2)
Secured by nonfarm,
nonresidential properties
Other real estate secured
Other loans secured by real estate: (2)
Other construction
Secured by 1-4 family
residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans (2)
LHFI
$ 514,056
5.2% $ 1,162,791
12.4% $ 1,056,601
12.0% $ 987,624
11.5% $ 831,437
10.6%
524,732
5.3% 1,855,913
19.9%
1,825,492
20.7%
1,675,311
19.6%
1,660,043
21.1%
2,709,026
1,065,964
27.6% 2,475,245
724,480
10.9%
26.5%
7.8%
2,220,914
543,820
25.1%
6.1%
2,193,823
517,956
25.6%
6.1%
2,034,176
318,148
25.9%
4.0%
794,983
8.1%
—
—
—
—
—
—
—
—
1,216,400
1,309,078
164,386
1,000,776
525,123
$ 9,824,524
—
12.4%
13.3% 1,477,896
175,738
967,944
495,621
100.0% $ 9,335,628
1.7%
10.2%
5.3%
—
15.8%
1.9%
10.4%
5.3%
—
1,538,715
182,448
973,818
494,060
100.0% $ 8,835,868
—
17.4%
2.1%
11.0%
5.6%
—
1,570,345
171,918
952,483
500,507
100.0% $ 8,569,967
—
18.3%
2.0%
11.1%
5.8%
—
1,528,434
170,562
917,515
390,898
100.0% $ 7,851,213
—
19.5%
2.2%
11.7%
5.0%
100.0%
(1)
(2)
Effective January 1, 2020, Trustmark adopted FASB ASU 2016-13 using the modified retrospective approach; therefore, prior period balances are
presented under legacy GAAP and may not be comparable to current period presentation.
In accordance with the guidance in FASB ASC Topic 326, Trustmark redefined its LHFI portfolio segments and related loan classes based on the level at
which risk is monitored within the ACL methodology. The other loans secured by real estate portfolio segment and related loan classes were separated
from the loans secured by real estate portfolio segment. The other construction loans were segregated from the construction, land development and other
land loans. The other loans secured by 1-4 family residential properties were segregated from the loans secured by 1-4 family residential properties and
the loans secured by 1-4 family residential properties were redefined in the other loans secured by real estate portfolio segment. Other loans were
redefined as other commercial loans.
LHFI at December 31, 2020 increased $488.9 million, or 5.2%, compared to December 31, 2019. On January 1, 2020, Trustmark transferred $72.6 million, the
remaining balance of the loans acquired in the BancTrust merger, from acquired impaired loans to LHFI as PCD loans as part of its adoption of FASB ASC Topic
326. For additional information regarding the acquired loans transferred to LHFI, see the section captioned “Acquired Loans.” Excluding the transferred acquired
loans, LHFI increased $416.3 million, or 4.4%, compared to December 31, 2019. The increase in LHFI during 2020, excluding the transferred acquired loans, was
primarily due to net growth in LHFI secured by real estate in the Texas, Alabama, Mississippi and Tennessee market regions, partially offset by declines in
commercial and industrial LHFI in the Mississippi, Tennessee and Alabama market regions. The following discussion of changes in LHFI excludes the acquired
loans transferred on January 1, 2020.
LHFI secured by real estate increased $542.3 million, or 8.6%, during 2020 primarily due to net growth in other real estate secured loans, NFNR LHFI and other
construction loans partially offset by loans secured by 1-4 family residential properties. LHFI secured by other real estate increased $337.5 million, or 46.3%,
during 2020, primarily due to other construction loans that moved to LHFI secured by multi-family residential properties in the Texas, Alabama, Mississippi and
Florida market regions. NFNR LHFI increased $195.6 million, or 7.8%, during 2020, principally due to movement from the other construction loans
category. Excluding other construction loan reclassifications, the NFNR LHFI portfolio decreased $48.0 million, or 1.9%, during 2020 primarily due to declines in
nonowner-occupied loans in the Texas, Mississippi, Florida and Alabama market regions, which were partially offset by growth in owner-occupied loans in the
Texas, Tennessee, Florida and Alabama market regions. Other construction loans increased $116.8 million, or 17.2%, during 2020 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 2020, $873.7 million loans were moved from other construction to other loan categories, including $629.5 million to multi-family
residential loans, $169.6 million to nonowner-occupied loans and $74.3 million to owner-occupied loans. Excluding all reclassifications between loan categories,
growth in other construction loans across all five market regions totaled $963.3 million during 2020. LHFI secured by 1-4 family residential properties declined
$132.3 million, or 7.1%, during 2020 across all five market regions, primarily due to increases in mortgage loan refinance and secondary marketing activities due
to lower interest rates.
Commercial and industrial LHFI declined $173.9 million, or 11.7%, during 2020, primarily due to declines in Trustmark’s Mississippi, Tennessee and Alabama
market regions. Trustmark’s exposure to the energy sector is primarily included in the commercial and industrial loan portfolio in Trustmark’s Mississippi and
Texas market regions. At December 31, 2020 and 2019, energy-related LHFI had outstanding balances of $102.3 million and $122.9 million, respectively, which
represented 1.0% and 1.3% of Trustmark’s total LHFI portfolio at December 31, 2020 and 2019, respectively. Trustmark has no loan exposure where the source
54
of repayment, or the underlying security of such exposure, is tied to the realization of value from energy reserves. Should oil prices fall below current levels for a
prolonged period of time, there is potential for downgrades to occur. Management will continue to monitor this exposure.
The following table provides information regarding Trustmark’s home equity loans and home equity lines of credit which are included in the LHFI secured by 1-4
family residential properties as of December 31, 2020 and 2019 ($ in thousands):
Home equity loans
Home equity lines of credit
Percentage of loans and lines for which Trustmark holds first lien
Percentage of loans and lines for which Trustmark does not hold first lien
$
December 31,
2020
2019
40,730
352,309
$
59.5%
40.5%
52,348
388,217
59.4%
40.6%
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 higher than that of term loans. The
allowance for loan losses, 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.
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 market
region because they are centrally analyzed and approved as part of a specific line of business located at Trustmark’s headquarters in Jackson, Mississippi.
55
The following table presents the LHFI composition by region at December 31, 2020 and reflects a diversified mix of loans by region ($ in thousands):
Total
Alabama
Florida
Mississippi
Tennessee
Texas
December 31, 2020
LHFI Composition by Region
Loans secured by real estate:
Construction, land development and
other land
Other secured by 1-4 family residential
properties
Secured by nonfarm, nonresidential
properties
Other real estate secured
Other loans secured by real estate:
Other construction
Secured by 1-4 family residential
properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
LHFI
$
514,056 $
205,348 $
52,764 $
158,162 $
29,543 $
68,239
524,732
118,205
37,062
294,012
64,132
11,321
2,709,026
1,065,964
710,266
312,295
262,697
6,332
984,508
392,986
186,405
6,621
565,150
347,730
794,983
289,138
10,199
157,393
1,075
337,178
1,216,400
1,309,078
164,386
1,000,776
525,123
9,824,524 $
—
199,301
23,263
87,468
81,770
2,027,054 $
—
22,774
6,615
35,179
14,273
447,895 $
1,207,493
611,743
110,605
670,883
345,745
4,933,530 $
8,907
271,940
19,961
41,698
61,810
692,092 $
—
203,320
3,942
165,548
21,525
1,723,953
$
Construction, Land Development and Other Land Loans by Region
Lots
Development
Unimproved land
1-4 family construction
74,177 $
94,443
99,857
245,579
$
24,842 $
37,537
30,260
112,709
12,945 $
315
15,863
23,641
28,546 $
33,059
24,742
71,815
1,231 $
12,505
10,746
5,061
6,613
11,027
18,246
32,353
Construction, land development and
other land loans
$
514,056 $
205,348 $
52,764 $
158,162 $
29,543 $
68,239
Loans Secured by Nonfarm, Nonresidential (NFNR) Properties by Region
Nonowner-occupied:
$
Retail
Office
Hotel/motel
Mini-storage
Industrial
Health care
Convenience stores
Nursing homes/senior living
Other
Total nonowner-occupied loans
Owner-occupied:
Office
Churches
Industrial warehouses
Health care
Convenience stores
Retail
Restaurants
Auto dealerships
Nursing homes/senior living
Other
Total owner-occupied loans
Loans secured by NFNR properties
$
389,905 $
228,094
341,972
130,995
183,795
46,597
16,148
112,256
71,670
1,521,432
188,960
105,832
161,050
136,246
122,155
73,832
59,856
54,805
175,442
109,416
1,187,594
2,709,026 $
149,401 $
64,625
146,542
23,499
47,135
23,088
3,304
35,941
4,505
498,040
42,679
22,604
13,732
24,485
18,744
15,308
4,255
7,542
57,846
5,031
212,226
710,266 $
56
31,965 $
26,697
91,819
2,344
15,805
2,462
—
—
6,715
177,807
45,651
6,768
3,097
4,466
9,516
6,574
4,446
279
—
4,093
84,890
262,697 $
108,724 $
68,056
52,883
61,359
40,308
18,462
3,351
31,456
24,133
408,732
49,120
51,499
50,969
94,695
65,919
26,447
34,681
21,009
117,596
63,841
575,776
984,508 $
26,257 $
12,122
39,728
397
1,087
389
383
6,923
8,450
95,736
8,814
10,231
16,362
2,341
556
10,653
15,097
25,975
—
640
90,669
186,405 $
73,558
56,594
11,000
43,396
79,460
2,196
9,110
37,936
27,867
341,117
42,696
14,730
76,890
10,259
27,420
14,850
1,377
—
—
35,811
224,033
565,150
Due to the short-term nature of most commercial real estate lending and the practice of annual renewal of commercial lines of credit, approximately 46.8% of
Trustmark’s portfolio matures in less than one year. Such a short-term maturity profile is not unusual for a commercial bank and provides Trustmark the
opportunity to obtain updated financial information from its borrowers and to actively monitor its borrowers’ creditworthiness. This maturity profile is well
matched with many of Trustmark’s sources of funding, which are also short-term in nature.
The following table provides information regarding Trustmark’s LHFI maturities by loan class at December 31, 2020 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Other secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Other loans secured by real estate:
Other construction
Secured by 1-4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other loans
LHFI
Within
One Year
or Less
Maturing
One Year
Through
Five
Years
After
Five
Years
$
369,640 $
402,555
1,316,607
776,957
96,210 $
87,811
1,042,693
270,921
620,189
66,923
548,011
48,366
149,104
296,268
139,477
150,275
661,743
112,279
321,234
154,078
$
4,594,620 $
3,036,721 $
48,206 $
34,366
349,726
18,086
35,317
999,202
99,324
3,741
530,438
74,777
2,193,183 $
Total
514,056
524,732
2,709,026
1,065,964
794,983
1,216,400
1,309,078
164,386
1,000,776
525,123
9,824,524
The following table provides information regarding Trustmark’s LHFI maturities by interest rate sensitivity at December 31, 2020 ($ in thousands):
Loan Type
Predetermined interest rates
Floating interest rates:
Loans which are at contractual floor
Loans which are free to float
Total floating interest rates
LHFI
Within
One Year
or Less
Maturing
One Year
Through
Five
Years
After
Five
Years
Total
$
931,635 $
2,380,264 $
1,629,451 $
4,941,350
373,041
3,289,944
3,662,985
235,650
420,807
656,457
$
4,594,620 $
3,036,721 $
161,327
402,405
563,732
2,193,183 $
770,018
4,113,156
4,883,174
9,824,524
57
Trustmark’s variable rate LHFI are based primarily on various prime and LIBOR interest rate bases. The following tables provide information regarding the
interest rate terms of Trustmark’s LHFI as of December 31, 2020 and 2019 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Other secured by 1- 4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Other loans secured by real estate:
Other construction
Secured by 1- 4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
LHFI
Loans secured by real estate:
Construction, land development and other land
Secured by 1- 4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other loans
LHFI
Allowance for Credit Losses
LHFI
Fixed
December 31, 2020
Variable
Total
$
$
147,640
17,751
1,506,066
292,878
134,114
732,050
752,502
138,989
970,500
248,860
$
4,941,350 $
366,416 $
506,981
1,202,960
773,086
660,869
484,350
556,576
25,397
30,276
276,263
4,883,174 $
514,056
524,732
2,709,026
1,065,964
794,983
1,216,400
1,309,078
164,386
1,000,776
525,123
9,824,524
Fixed
December 31, 2019
Variable
Total
$
$
201,055
1,004,079
1,430,132
189,023
636,518
152,970
925,990
310,475
$
4,850,242 $
961,736 $
851,834
1,045,113
535,457
841,378
22,768
41,954
185,146
4,485,386 $
1,162,791
1,855,913
2,475,245
724,480
1,477,896
175,738
967,944
495,621
9,335,628
Trustmark adopted FASB ASC Topic 326, in accordance with the amendments of FASB ASU 2016-13, effective January 1, 2020. The guidance in FASB ASC
326 replaces Trustmark’s previous incurred loss methodology with a methodology that reflects the current expected credit losses and requires consideration of a
broader range of reasonable and supportable information to determine credit losses. 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 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 provision for credit losses and reduced by the
charge off of loan amounts, net of recoveries.
The loan loss estimation process involves procedures to appropriately consider the unique characteristics of Trustmark’s LHFI portfolio segments. These segments
are further disaggregated into loan classes, the level at which credit risk is estimated. When computing allowance levels, credit loss assumptions are estimated
using a model that categorizes loan pools based on loss history, delinquency status and other credit trends and risk characteristics, including current conditions and
reasonable and supportable forecasts about the future. Evaluations of the portfolio and individual credits are inherently subjective, as they require estimates,
assumptions and judgments as to the facts and circumstances of particular situations.
The econometric models in production today reflect segment or pool level sensitivities of probability of default (PD) to changes in macroeconomic variables. By
measuring the relationship between defaults and changes in the economy, the quantitative reserve incorporates reasonable and supportable forecasts of future
conditions that will affect the value of its assets, as required by FASB ASC Topic 326. Under stable forecasts, these linear regressions will reasonably predict a
pool’s PD. However, due to the COVID-19
58
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
2017. 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, 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 fourth quarter of 2020, the forecast related to the macroeconomic variables used in the
quantitative modeling process were positively impacted due to the updated forecast effects related to the COVID-19 pandemic, causing an overall decrease in
quantitative reserve levels.
The external factors qualitative factor is Management’s best judgement on the loan or pool level impact of all factors that affect the portfolio that are not accounted
for using any other part of the ACL methodology, e.g., natural disasters, changes in legislation, impacts due to technology and pandemics. During the third quarter
of 2020, Trustmark activated the External Factor – Pandemic to ensure reserve adequacy for collectively evaluated loans most likely to be impacted by the unique
economic and behavioral conditions created by the COVID-19 pandemic. Additional qualitative reserves are derived based on two principles. The first is the
disconnect of economic factors to Trustmark’s modeled PD (the econometric models underpinning the quantitative pooled reserves). During the pandemic,
extraordinary measures by the federal government were made available to consumers and businesses, including COVID-19 loan payment concessions, direct
transfer payments to households, tax deferrals and reduced interest rates, among others. These government interventions may have extended the lag between
economic conditions and default, relative to what was captured in the model development data. Because Trustmark’s econometric PD models rely on the observed
relationship from the economic downturn from 2007 to 2009 in both timing and severity, Management does not expect the models to reflect these current
conditions. For example, while the models would predict contemporaneous unemployment peaks and loan defaults, this may not occur when borrowers can request
payment deferrals. Thus, for the affected population, economic conditions are not fully considered as a part of Trustmark’s quantitative reserve. The second
principle is the change in risk that is identified by rating changes. As a part of Trustmark’s credit review process, loans in the affected population have been given
more frequent screening to ensure accurate ratings are maintained through this dynamic period. Trustmark’s quantitative reserve does not directly address changes
in ratings; thus, a migration qualitative factor was designed to work in concert with the quantitative reserve. In a downturn, the qualitative factor is inactive for
most pools because changes in ratings are congruent with changes in macroeconomic conditions, which directly influence the PD models in the quantitative
reserve.
As discussed above, the disconnect of economic factors means that changes in rating caused by deteriorating and weak economic conditions as a result of the
pandemic are not being captured in the quantitative reserve. During the fourth quarter of 2020, due to unforeseen pandemic conditions that varied from
Management’s expectations during the third quarter of 2020, additional reserves were further dimensioned in order to appropriately reflect the risk within the
portfolio related to the COVID-19 pandemic. In an effort to ensure the External Factor – Pandemic qualitative factor is reasonable and supportable, historical
Trustmark loss data was leveraged to construct a framework that is quantitative in nature. To dimension the additional reserve, Management uses the sensitivity of
the quantitative commercial loan reserve to changes in macroeconomic conditions to apply to loans rated acceptable or better (risk rates 1-4). In addition, to
account for the known changes in risk, a weighted average of the commercial loan portfolio loss rate, derived from the performance trends qualitative factor, is
used to dimension additional reserves for downgraded credits. Loans rated acceptable with risk (risk rate 5) or watch (risk rate 6) received the additional reserves
based on the average of the macroeconomic conditions and weighted average of the commercial loan portfolio loss rate while the loans rated special mention (risk
rate 7) and substandard (risk rate 8) received additional reserves based on the weighted-average described above.
Determining the appropriateness of the allowance is complex and requires judgement by Management about the effect of matters that are inherently uncertain. In
future periods, evaluations of the overall LHFI portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and
credit loss expense.
For a complete description of Trustmark’s ACL methodology and the quantitative and qualitative factors included in the calculation, please see Note 4 – LHFI and
Allowance for Credit Losses, LHFI included in Part II. Item 8. – Financial Statements and Supplementary Data of this report.
Upon adoption of FASB ASC Topic 326 on January 1, 2020, Trustmark recorded a decrease to the ACL on LHFI of $3.0 million and an increase of $1.8 million
for the ACL calculated on the acquired loans transferred to LHFI as PCD loans. At December 31, 2020, the ACL on LHFI was $117.3 million, an increase of
$34.2 million, or 41.2%, when compared with January 1, 2020. The increase in the ACL during 2020 was principally due to net changes in the economic forecast
due to the current and anticipated negative effects of
59
the COVID-19 pandemic on the overall economy and macroeconomic factors. Allocation of Trustmark’s ACL represented 1.20% of commercial LHFI and 1.16%
of consumer and home mortgage LHFI, resulting in an ACL to total LHFI of 1.19% as of December 31, 2020. This compares with an allowance to total LHFI of
0.90% at December 31, 2019, which was allocated to commercial LHFI at 0.98% and to consumer and home mortgage LHFI at 0.61%.
The table below illustrates the changes in Trustmark’s ACL as well as Trustmark’s loan loss experience for the periods presented ($ in thousands):
2020
2019
Years Ended December 31,
2018
2017
2016
Balance at beginning of period
Transfers (1)
FASB ASU 2016-03 Adoption Adjustment
LHFI charged off:
Construction, land development and other land loans
Other loans secured by 1-4 family residential properties
Loans secured by nonfarm, nonresidential properties
Other loans secured by real estate
Other construction loans
Loans secured by 1-4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
Total charge-offs
Recoveries on LHFI previously charged off:
Construction, land development and other land loans
Other loans secured by 1-4 family residential properties
Loans secured by nonfarm, nonresidential properties
Other loans secured by real estate
Other construction loans
Loans secured by 1-4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
Total recoveries
Net (charge-offs) recoveries
Provision for credit losses
Balance at end of period
Percentage of net charge-offs (recoveries) during
period to average loans (LHFS and LHFI)
outstanding during the period
$
$
84,277
—
(1,217)
$
79,290
—
—
$
76,733
1,554
—
$
71,265
—
—
(12)
(117)
(3,777)
(8)
—
(43)
(1,557)
(2,039)
—
(3,922)
(11,475)
716
378
546
68
208
203
1,736
1,824
—
3,929
9,608
(1,867)
36,113
117,306
$
(40)
(531)
(322)
—
—
—
(5,344)
(2,278)
—
(5,966)
(14,481)
894
666
472
29
—
—
1,257
1,829
—
3,524
8,671
(5,810)
10,797
84,277
$
(123)
(1,629)
(1,184)
—
—
—
(18,823)
(2,089)
—
(5,641)
(29,489)
1,124
646
133
23
—
—
5,410
2,019
—
3,144
12,499
(16,990)
17,993
79,290
$
(79)
(950)
(4,231)
(5)
—
—
(8,286)
(2,546)
—
(5,050)
(21,147)
1,428
1,833
396
69
—
—
2,578
1,938
—
3,279
11,521
(9,626)
15,094
76,733
$
$
67,619
—
—
(311)
(1,319)
(3,067)
(27)
—
—
(6,602)
(1,864)
—
(5,740)
(18,930)
1,380
1,122
976
7
—
—
732
4,007
—
3,395
11,619
(7,311)
10,957
71,265
0.02%
0.06%
0.19%
0.11%
0.10%
(1)
The allowance for loan losses balance related to the remaining loans acquired in the Bay Bank, Heritage and Reliance acquisitions, which were
reclassified from acquired impaired loans to LHFI during 2018.
Charge-offs exceeded recoveries for 2020 resulting in a net charge-off of $1.9 million, or 0.02% of average loans (LHFS and LHFI), compared to a net charge-off
of $5.8 million, or 0.06% of average loans (LHFS and LHFI), in 2019, and a net charge-off of $17.0 million, or 0.19% of average loans (LHFS and LHFI), in
2018. The decrease in net charge-offs during 2020 was principally due to declines in charge-offs in the Mississippi and Texas market regions as well as an
increase in recoveries in the Alabama market region, partially offset by an increase in charge-offs in the Alabama and Tennessee market regions. The increases in
charge-offs in the Alabama and Tennessee market regions were principally due to the charge off of one substandard commercial credit in each of these market
regions.
60
The following table presents the net (charge-offs) recoveries by geographic market region for the periods presented ($ in thousands):
Alabama
Florida
Mississippi
Tennessee
Texas
Total net (charge-offs) recoveries
2020
Years Ended December 31,
2019
2018
$
$
(1,448) $
390
814
(1,775)
152
(1,867) $
(754) $
850
(4,438)
(708)
(760)
(5,810) $
(597)
1,906
(4,776)
(7,958)
(5,565)
(16,990)
The provision for credit losses for 2020 totaled 0.36% of average loans (LHFS and LHFI), compared to 0.12% of average loans (LHFS and LHFI) in 2019 and
0.20% of average loans (LHFS and LHFI) in 2018. The provision for credit losses for 2020 primarily reflected net changes in the economic forecast due to the
current and anticipated negative effects of the COVID-19 pandemic on the overall economy and macroeconomic factors.
The provision for credit losses for LHFI secured by NFNR properties, LHFI secured by other real estate, other construction loans and consumer LHFI totaled $33.8
million, $4.1 million, $2.9 million and $615 thousand, respectively, for the year ended December 31, 2020, primarily due to the negative impact of COVID-19
pandemic on the overall economy and macroeconomic factors.
The provision for credit losses for commercial and industrial LHFI totaled a negative $2.4 million for the year ended December 31, 2020, primarily due to loans
that had been specifically reserved for being charged down, upgrades on loans from substandard to pass, paydowns as well as a slight decrease in the calculated PD
and LGD, which uses Trustmark’s historical data. The provision for credit losses for state and other political subdivision loans totaled a negative $1.5 million for
2020, primarily due to a decrease in reserves based on routine updates to the qualitative portion of the ACL calculation.
Off-Balance Sheet Credit Exposures
FASB ASC Topic 326 requires Trustmark to estimate expected credit losses for off-balance sheet credit exposures which are not unconditionally
cancellable. 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 December 31, 2020. Upon adoption of FASB ASC Topic 326 on January 1, 2020, Trustmark
recorded an ACL on off-balance sheet credit exposures of $29.6 million.
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 17 – Commitments and Contingencies included in Part II. Item 8. – Financial Statements
and Supplementary Data 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 credit loss expense related to off-balance sheet credit exposures in noninterest
expense. Trustmark recorded a credit loss expense related to off-balance sheet credit exposures of $8.9 million for 2020, resulting in an ACL on off-balance sheet
credit exposures of $38.6 million as of December 31, 2020. The increase in the ACL on off-balance sheet credit exposures for 2020 was primarily due to net
changes in the economic forecast due to the current and anticipated negative effects of the COVID-19 pandemic on the overall economy and macroeconomic
factors.
61
Nonperforming Assets, Excluding PPP and Acquired Loans
The table below provides the components of the nonperforming assets, excluding PPP and acquired loans, by geographic market region for each year in the five-
year period ended December 31, 2020 ($ in thousands):
Nonaccrual LHFI
Alabama
Florida
Mississippi
Tennessee
Texas
Total nonaccrual LHFI
Other real estate
Alabama
Florida
Mississippi
Tennessee
Texas
Total other real estate
Total nonperforming assets
2020
2019
December 31,
2018
2017
2016
$
$
9,221
572
35,015
12,572
5,748
63,128
3,271
—
8,330
50
—
11,651
74,779
$
$
1,870
267
41,493
8,980
616
53,226
8,133
5,877
14,919
319
—
29,248
82,474
$
$
3,361
1,175
44,331
8,696
4,061
61,624
6,873
8,771
17,255
1,025
744
34,668
96,292
$
$
3,083
3,034
49,129
4,436
7,893
67,575
11,714
13,937
14,260
2,535
782
43,228
110,803
$
$
665
3,644
37,771
6,213
941
49,234
15,989
22,582
15,646
6,183
1,651
62,051
111,285
Nonperforming assets/total loans (LHFS and LHFI)
and other real estate
0.73%
0.86%
1.07%
1.26%
1.38%
Loans Past Due 90 days or more
LHFI
LHFS - Guaranteed GNMA services loans (1)
(1)
No obligation to repurchase.
$
$
1,576
119,409
$
$
642
41,648
$
$
856
37,384
$
$
2,171
35,544
$
$
1,832
28,345
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 December 31, 2020, nonaccrual LHFI totaled $63.1 million, or 0.61% of total LHFS and LHFI, reflecting an increase of $9.9 million, or 0.10% of total LHFS
and LHFI, relative to December 31, 2019. The increase in nonaccrual LHFI was primarily due to LHFI placed on nonaccrual status in Trustmark’s Alabama,
Tennessee, Texas and Mississippi market regions, partially offset by reductions, pay-offs and charge-offs of nonaccrual LHFI in Trustmark’s Mississippi and
Tennessee market regions.
As of December 31, 2020, nonaccrual energy-related LHFI totaled $10.4 million and represented 10.2% of Trustmark’s total energy-related portfolio, compared to
$10.6 million, or 8.6% of Trustmark’s total energy-related portfolio at December 31, 2019. For additional information regarding nonaccrual LHFI, see the section
captioned “Nonaccrual and Past Due LHFI” in Note 4 – LHFI and Allowance for Credit Losses, LHFI included in Part II. Item 8. – Financial Statements and
Supplementary Data of this report.
62
The following table illustrates nonaccrual LHFI by loan class for each year in the five-year period ended December 31, 2020 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Other secured by 1- 4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Other loans secured by real estate:
Other construction
Secured by 1- 4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
Total nonaccrual LHFI
Other Real Estate
2020
2019
December 31,
2018
2017
2016
$
$
5,985 $
4,487
15,197
185
—
11,807
15,618
86
3,970
5,793
63,128 $
897 $
16,810
7,700
1,032
—
—
21,775
108
4,079
825
53,226 $
2,218 $
14,718
9,621
927
—
—
23,938
205
8,595
1,402
61,624 $
2,105 $
19,022
12,608
212
—
—
33,338
135
—
155
67,575 $
3,323
20,329
8,482
402
—
—
15,824
300
—
574
49,234
Other real estate at December 31, 2020 decreased $17.6 million, or 60.2%, when compared with December 31, 2019, principally due to properties sold in
Trustmark’s Mississippi, Florida, Alabama, and Tennessee market regions.
The following tables illustrate changes in other real estate by geographic market region for the periods presented ($ in thousands):
Balance at beginning of period
Additions
Disposals
Write-downs
Balance at end of period
Balance at beginning of period
Additions
Disposals
Write-downs
Balance at end of period
Balance at beginning of period
Additions
Disposals
Write-downs
Adjustments
Balance at end of period
Year Ended December 31, 2020
Total
Alabama
Florida
Mississippi
Tennessee
Texas
29,248 $
635
(16,446)
(1,786)
11,651 $
8,133 $
77
(3,887)
(1,052)
3,271 $
5,877 $
—
(5,861)
(16)
— $
14,919 $
339
(6,230)
(698)
8,330 $
319 $
219
(468)
(20)
50 $
—
—
—
—
—
Total
Alabama
Year Ended December 31, 2019
Mississippi
Florida
34,668 $
8,598
(11,474)
(2,544)
29,248 $
6,873 $
2,908
(1,198)
(450)
8,133 $
8,771 $
—
(2,783)
(111)
5,877 $
17,255 $
5,575
(5,967)
(1,944)
14,919 $
Tennessee
Texas
1,025 $
115
(800)
(21)
319 $
744
—
(726)
(18)
—
Total
Alabama
Year Ended December 31, 2018
Mississippi
Florida
Tennessee
Texas
43,228 $
12,115
(19,802)
(873)
—
34,668 $
11,714 $
1,563
(5,217)
(133)
(1,054)
6,873 $
13,937 $
2,637
(7,747)
(56)
—
8,771 $
14,260 $
7,533
(5,035)
(557)
1,054
17,255 $
2,535 $
382
(1,803)
(89)
—
1,025 $
782
—
—
(38)
—
744
$
$
$
$
$
$
Write-downs of other real estate decreased $758 thousand, or 29.8%, during 2020 compared to an increase of $1.7 million during 2019. The decrease in write-
downs of other real estate during 2020 compared to 2019 was primarily due to a decrease in write-downs of other real estate properties in the Mississippi market
region and properties sold for which a reserve for write-down was previously recorded, partially offset by write-downs of other real estate properties in the
Alabama market region.
63
The following table illustrates other real estate by type of property for each year in the five-year period ended December 31, 2020 ($ in thousands):
Construction, land development and other land properties
1-4 family residential properties
Nonfarm, nonresidential properties
Other real estate properties
Total other real estate
Acquired Loans
2020
2019
3,857 $
1,349
6,445
—
11,651 $
11,482 $
3,453
14,313
—
29,248 $
$
$
December 31,
2018
2017
2016
16,206 $
4,983
13,296
183
34,668 $
27,491 $
5,081
10,468
188
43,228 $
36,871
7,926
16,817
437
62,051
Trustmark’s loss share agreement with the FDIC covering the acquired covered loans secured by 1-4 family residential properties will expire in 2021.
Upon adoption of FASB ASC Topic 326, which was effective for Trustmark on January 1, 2020 in accordance with the amendments in FASB ASU 2016-13,
Trustmark elected to account for its existing acquired loans as PCD loans included within the LHFI portfolio. Trustmark elected to maintain pools of loans that
were previously accounted for under FASB ASC Subtopic 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality,” and will
continue to account for these pools as a unit of account. Loans are only removed from the existing loan pools if they are written off, paid off or sold. Upon
adoption of FASB ASC Topic 326, the ACL was determined for each pool and added to the pool’s carrying value to establish a new amortized cost basis. The
difference between the unpaid principal balance of the pool and the new amortized cost basis is the noncredit premium or discount which will be amortized into
interest income over the remaining life of the pool. Changes to the ACL after adoption of FASB ASC Topic 326 are recorded through the provision for credit
losses.
As a result of adopting FASB ASC Topic 326, Trustmark transferred $72.6 million of acquired loans, $815 thousand of related allowance for loan losses, acquired
loans as well as $1.0 million of ACL calculated for these loans to LHFI on January 1, 2020. The acquired loans and related allowance transferred were acquired in
the BancTrust merger.
The table below provides the carrying value of the acquired loan portfolio by loan class for each year of the five-year period ended December 31, 2020 ($ in
thousands):
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
Other loans
Acquired loans
Less allowance for loan losses, acquired loans
Net acquired loans
2020
2019
2018
2017
2016
December 31,
$
$
$
—
—
—
—
—
—
—
—
—
— $
$
4,771
17,525
38,206
3,946
5,035
520
2,598
72,601
815
71,786 $
$
5,878
22,556
47,979
8,253
15,267
1,356
5,643
106,932
1,231
105,701 $
$
23,586
61,751
114,694
16,746
31,506
2,600
10,634
261,517
4,079
257,438 $
20,850
69,540
103,820
19,010
36,896
3,365
18,766
272,247
11,397
260,850
For additional information regarding acquired loans, including changes in the net carrying value, see Note 5 – Acquired Loans included in Part II. Item 8. –
Financial Statements and Supplementary Data of this report.
Deposits
Trustmark’s deposits are its primary source of funding and consist primarily 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 $14.049
billion at December 31, 2020 compared to $11.246 billion at December 31, 2019, an increase of $2.803 billion, or 24.9%, reflecting increases in both noninterest-
bearing and interest-bearing deposit accounts as customers deposited proceeds from line draws, PPP loans and other COVID-19 related stimulus programs. During
2020, noninterest-bearing deposits increased $1.458 billion, or 50.4%, primarily due to growth in all categories of noninterest-bearing deposit accounts. Interest-
bearing deposits increased $1.345 billion, or 16.1%, during 2020, primarily due to growth in public and
64
consumer interest checking accounts, commercial and consumer money market deposit accounts and consumer savings accounts, partially offset by declines in
consumer time deposits.
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 repurchase agreements totaled $164.5 million at December 31, 2020 compared to $256.0 million at December 31, 2019, a decrease of
$91.5 million, or 35.7%. Of these amounts $164.5 million and $62.5 million, respectively, represented customer related transactions, such as commercial sweep
repurchase balances. Excluding customer related transactions, Trustmark had no upstream federal funds purchased at December 31, 2020 compared to $193.5
million at December 31, 2019. The decrease in the upstream federal funds purchased during 2020 was due primarily to reduced funding needs caused by the
increases in deposit balances as customers deposited proceeds from line draws, PPP loans and other COVID-19 related stimulus programs, as well as the FRB’s
decision to reduce reserve requirement ratios to zero.
Other borrowings totaled $168.3 million at December 31, 2020, an increase of $82.9 million, or 97.0%, when compared with $85.4 million at December 31, 2019,
primarily due to an increase in GNMA optional repurchase loans.
The table below presents information concerning qualifying components of Trustmark’s borrowings for each of the last three years ($ in thousands):
2020
2019
2018
Federal funds purchased and securities sold under
repurchase agreements:
Amount outstanding at end of period
Weighted average interest rate at end of period
Maximum amount outstanding at any month end during each period
Average amount outstanding during each period
Weighted average interest rate during each period
Other borrowings:
Amount outstanding at end of period
Weighted average interest rate at end of period
Maximum amount outstanding at any month end during each period
Average amount outstanding during each period
Weighted average interest rate during each period
Benefit Plans
Defined Benefit Plans
$
$
$
$
164,519
$
256,020
$
0.13%
454,238
151,805
$
0.50%
168,252
$
0.68%
178,599
133,602
$
1.04%
1.31%
376,712
110,915
$
1.28%
85,396
$
1.48%
$
85,396
82,476
0.85%
50,471
0.37%
524,208
329,649
1.45%
79,885
1.05%
977,011
317,687
1.58%
As disclosed in Note 15 – Defined Benefit and Other Postretirement Benefits included in Part II. Item 8. – Financial Statements and Supplementary Data of this
report, 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.
At December 31, 2020, the fair value of the Continuing Plan’s assets totaled $2.9 million and was exceeded by the projected benefit obligation of $9.5 million by
$6.7 million. Net periodic benefit cost equaled $786 thousand in 2020, compared to $1.1 million in both 2019 and 2018.
The fair value of plan assets is determined utilizing current market quotes, while the benefit obligation and periodic benefit costs are determined utilizing actuarial
methodology with certain weighted-average assumptions. For 2020, 2019 and 2018, the process used to select the discount rate assumption under FASB ASC
Topic 715 takes into account the benefit cash flow and the segmented yields on high-quality corporate bonds that would be available to provide for the payment of
the benefit cash flow. Assumptions, which have been chosen to represent the estimate of a particular event as required by GAAP, have been reviewed and
approved by Management based on recommendations from its actuaries.
65
The range of potential contributions to the Continuing Plan is determined annually by the Continuing Plan’s actuary in accordance with applicable IRS rules and
regulations. Trustmark’s policy is to fund amounts that are sufficient to satisfy the annual minimum funding requirements and do not exceed the maximum that is
deductible for federal income tax purposes. The actual amount of the contribution is determined annually based on the Continuing Plan’s funded status and return
on plan assets as of the measurement date, which is December 31. For the plan year ending December 31, 2020, Trustmark’s minimum required contribution to the
Continuing Plan was $306 thousand; however, Trustmark contributed $563 thousand, $257 thousand in excess of the minimum required. For the plan year ending
December 31, 2021, Trustmark’s minimum required contribution to the Continuing Plan is expected to be $327 thousand; however, Management and the Board of
Directors of Trustmark will monitor the Continuing Plan throughout 2021 to determine any additional funding requirements by the plan’s measurement date.
Supplemental Retirement Plans
As disclosed in Note 15 – Defined Benefit and Other Postretirement Benefits included in Part II. Item 8. – Financial Statements and Supplementary Data of this
report, 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 measurement date for the plan is December 31. As a result of mergers prior to 2014, Trustmark became the administrator of
small nonqualified supplemental retirement plans, for which the plan benefits were frozen prior to the merger dates.
At December 31, 2020, the accrued benefit obligation for the supplemental retirement plans equaled $59.6 million, while the net periodic benefit cost equaled $2.8
million in 2020, $3.0 million in 2019 and $3.1 million in 2018. The net periodic benefit cost and projected benefit obligation are determined using actuarial
assumptions as of the plans’ measurement date. The process used to select the discount rate assumption under FASB ASC Topic 715 takes into account the benefit
cash flow and the segmented yields on high-quality corporate bonds that would be available to provide for the payment of the benefit cash flow. At December 31,
2020, unrecognized actuarial losses and unrecognized prior service costs continue to be amortized over future service periods.
Legal Environment
Information required in this section is set forth under the heading “Legal Proceedings” of Note 17 – Commitments and Contingencies in Part II. Item 8. – Financial
Statements and Supplementary Data of this report.
Off-Balance Sheet Arrangements
Information required in this section is set forth under the heading “Lending Related” of Note 17 – Commitments and Contingencies in Part II. Item 8. – Financial
Statements and Supplementary Data of this report.
Contractual Obligations
Trustmark is obligated to make payments under specific long-term and certain other binding contractual arrangements. The following table provides a schedule of
the amount of the payments due under those obligations as of December 31, 2020 ($ in thousands):
Time deposits
Securities sold under repurchase agreements
FHLB advances
Subordinated notes
Junior subordinated debt securities
Finance lease obligations
Operating lease obligations
Total
Capital Resources
Less than
One Year
One to Three
Years
Three to Five
Years
After
Five Years
$
$
1,152,489 $
128,053
625
—
—
1,396
3,683
1,286,246 $
223,171 $
—
—
—
—
2,075
7,095
232,341 $
27,068 $
—
—
—
—
876
7,712
35,656 $
3,170 $
—
116
122,921
61,856
3,458
13,800
205,321 $
Total
1,405,898
128,053
741
122,921
61,856
7,805
32,290
1,759,564
At December 31, 2020, Trustmark’s total shareholders’ equity was $1.741 billion, an increase of $80.4 million, or 4.8%, when compared to December 31,
2019. During 2020, shareholders’ equity increased primarily as a result of net income of $160.0 million as well as an increase in the fair market value of available
for sale securities, net of tax, of $23.0 million, partially offset by common stock dividends of $58.8 million, common stock repurchases of $27.5 million and a
$19.9 million, net of tax, adjustment to the
66
beginning balance of retained earnings as a result of the adoption of FASB ASU 2016-13. 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 this 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 the phased in capital conservation buffer of 2.500% at December 31, 2020 and 2019. AOCI is not included in computing
regulatory capital. Trustmark has elected the five-year phase-in transition period 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 December 31, 2020,
Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered
well-capitalized at December 31, 2020. To be categorized in this manner, Trustmark and TNB maintained 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 December 31, 2020, which Management believes have affected Trustmark’s or TNB’s present classification.
During the fourth quarter of 2020, Trustmark enhanced its capital structure with the issuance of $125.0 million of subordinated notes. The subordinated notes were
sold at an underwriting discount of 1.2%, resulting in net proceeds to Trustmark of $123.5 million before deducting offering expenses of $600 thousand. At
December 31, 2020, the carrying amount of the subordinated notes was $122.9 million. The subordinated notes mature December 1, 2030 and are redeemable at
Trustmark’s option under certain circumstances. For regulatory capital purposes, the subordinated notes qualify as Tier 2 capital for Trustmark at December 31,
2020. Trustmark may utilize the full carrying value of the subordinated notes as Tier 2 capital until December 1, 2025 (five years prior to maturity). Beginning
December 1, 2025, the subordinated notes will phase out of Tier 2 capital 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 December 31, 2020 and 2019. Trustmark intends to continue to utilize $60.0 million in trust preferred securities issued by the Trust as
Tier 1 capital up to the regulatory limit, as permitted by the grandfather provision in the Dodd-Frank Act and the Basel III Final Rule.
Refer to the section captioned “Regulatory Capital” included in Note 18 – Shareholders’ Equity in Part II. Item 8. – Financial Statements and Supplementary Data
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 December 31,
2020 and 2019.
Dividends on Common Stock
Dividends per common share for each of the years ended December 31, 2020, 2019 and 2018 were $0.92. Trustmark’s dividend payout ratio for 2020, 2019 and
2018 was 36.51%, 39.48%, and 41.44%, respectively. Approval by TNB’s regulators is required if the total of all dividends declared in any calendar year exceeds
the total of its net income for that year combined with its retained net income of the preceding two years. In 2021, TNB will have available approximately $86.7
million plus its net income for that year to pay as dividends to Trustmark. The actual amount of any dividends declared in 2021 by Trustmark will be determined
by Trustmark’s Board of Directors.
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.
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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, repurchase agreements as well as the Discount Window and, on a limited basis as discussed below, brokered
deposits to provide additional liquidity. Access to these additional sources represents Trustmark’s incremental borrowing capacity.
Deposit accounts represent Trustmark’s largest funding source. Average deposits totaled to $12.916 billion for 2020 and represented approximately 84.8% of
average liabilities and shareholders’ equity, compared to average deposits of $11.404 billion, which represented 84.5% of average liabilities and shareholders’
equity for 2019.
Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. At December 31, 2020, brokered sweep Money Market
Deposit Account (MMDA) deposits totaled $28.1 million compared to $26.2 million at December 31, 2019.
At December 31, 2020, Trustmark had no upstream federal funds purchased, compared to $193.5 million at December 31, 2019. The decrease in the upstream
federal funds purchased during 2020 was due primarily to the increases in deposit balances as customers deposited proceeds from line draws, PPP loans and other
stimulus programs, as well as the FRB’s decision to reduce reserve requirement ratios to zero. 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 December 31, 2020 and
2019. Trustmark had $600.0 million in letters of credit outstanding with the FHLB of Dallas at December 31, 2020, compared to no outstanding letters of credit at
December 31, 2019. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances with the FHLB of Dallas
by $2.725 billion at December 31, 2020.
In addition, at December 31, 2020, Trustmark had $625 thousand in short-term and $116 thousand in long-term FHLB advances outstanding with the FHLB of
Atlanta, which were acquired in the BancTrust merger, compared to no short-term and $811 thousand in long-term FHLB advances outstanding at December 31,
2019. 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 December 31, 2020, Trustmark had approximately
$560.0 million available in unencumbered agency securities compared to $546.0 million at December 31, 2019.
Another borrowing source is the Discount Window. At December 31, 2020, Trustmark had approximately $893.5 million available in collateral capacity at the
Discount Window primarily from pledges of commercial and industrial LHFI, compared with $982.7 million at December 31, 2019.
Additionally, on March 15, 2020, in response to the COVID-19 pandemic, the FRB reduced reserve requirements for insured depository institutions to zero
percent, which increased TNB’s available liquidity.
During the fourth quarter of 2020, Trustmark agreed to issue and sell $125.0 million aggregate principal amount of its 3.625% fixed-to-floating rate subordinated
notes. The subordinated notes were sold at an underwriting discount of 1.2%, resulting in net proceeds to Trustmark of $123.5 million before deducting offering
expenses of $600 thousand. At December 31, 2020, the carrying amount of the subordinated notes was $122.9 million. The subordinated notes mature December
1, 2030 and are redeemable at Trustmark’s option under certain circumstances. The subordinated notes are unsecured obligations and are subordinated in right of
payment to all of Trustmark’s existing and future senior indebtedness, whether secured or unsecured. The subordinated notes are obligations of Trustmark only and
are not obligations of, and are not guaranteed by, any of its subsidiaries, including TNB. Trustmark intends to use the net proceeds for general corporate purposes.
During 2006, Trustmark completed a private placement of $60.0 million of trust preferred securities through a newly formed Delaware trust affiliate, the
Trust. The trust preferred securities mature September 30, 2036 and are redeemable at Trustmark’s option. The proceeds from the sale of the trust preferred
securities were used by the Trust to purchase $61.9 million in aggregate principal amount of Trustmark’s junior subordinated debentures.
The Board of Directors of Trustmark currently has the authority to issue up to 20.0 million preferred shares with no par value. The ability to issue preferred shares
in the future will provide Trustmark with additional financial and management flexibility for general corporate and acquisition purposes. At December 31, 2020,
Trustmark had no shares of preferred stock issued and outstanding.
Liquidity position and strategy are reviewed regularly by Management and continuously adjusted in relationship to Trustmark’s overall strategy. Management
believes that Trustmark has sufficient liquidity and capital resources to meet presently known cash flow requirements arising from ongoing business transactions.
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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.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate
LIBOR, indicating that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Trustmark has a significant number of loans,
derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from
LIBOR could create considerable costs and additional risk. Trustmark cannot predict what the ultimate impact of the transition from LIBOR will be; however,
failure to adequately manage the transition could have a material adverse effect on Trustmark’s business, financial condition and results of operations. Trustmark
has organized an internal LIBOR Transition Working Group to identify operational and contractual best practices, assess its risk, manage the transition, facilitate
communication with its customers and monitor the impacts. For additional information regarding the transition from LIBOR and Trustmark’s management of this
transition, please see the respective risk factor included in Part I. Item 1A. – Risk Factors of this 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 $706.8
million at December 31, 2020, with a positive valuation adjustment of $6.4 million, compared to $301.1 million, with a positive valuation adjustment of $953
thousand at December 31, 2019.
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 $326.5 million at December 31, 2020
compared to $564.0 million at December 31, 2019. These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value
recorded as noninterest income in mortgage banking, net and are offset by the changes in the fair value of the MSR. The MSR fair value represents the present
value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is
measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other
market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net positive ineffectiveness of $7.8 million for the year ended
December 31, 2020, compared to a net negative ineffectiveness of $11.5 million for the year ended December 31, 2019 and a net positive ineffectiveness of $2.4
million for the year ended December 31, 2018.
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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 December 31, 2020, Trustmark had interest rate swaps with an aggregate notional amount of $1.125 billion related to this program, compared to
$893.1 million as of December 31, 2019.
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 deemed to be in default on its
derivatives obligations.
As of December 31, 2020 and 2019, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment
for nonperformance risk, related to these agreements was $1.3 million and $1.0 million, respectively. As of December 31, 2020, Trustmark had posted collateral of
$1.6 million against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of
these triggering provisions at December 31, 2020, it could have been required to settle its obligations under the agreements at the termination value (which is
expected to approximate fair market value).
Credit risk participation agreements arise when Trustmark contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated
with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third-party default on the underlying swap. At both
December 31, 2020 and 2019, Trustmark had entered into three risk participation agreements as a beneficiary with aggregate notional amounts of $41.1 million and
$37.6 million, respectively. As of December 31, 2020, Trustmark had entered into twenty-four risk participation agreements as a guarantor with an aggregate
notional amount of $172.0 million compared to ten risk participation agreements as a guarantor with an aggregate notional amount of $79.3 million at December
31, 2019. The aggregate fair values of these risk participation agreements were immaterial at December 31, 2020 and 2019.
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.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market/Interest Rate Risk Management
The primary purpose in managing interest rate risk is to invest capital effectively and preserve the value created by the core banking business. This is
accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income
performance under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.
Financial simulation models are the primary tools used by 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 December 31, 2020 and 2019. At
70
December 31, 2020 and 2019, the impact of a 200-basis point drop scenario was not calculated due to the low interest rate environment.
Change in Interest Rates
+200 basis points
+100 basis points
-100 basis points
Estimated % Change
in Net Interest Income
2020
2019
20.4%
10.8%
-5.7%
5.7%
3.0%
-5.2%
Management cannot provide any assurance about the actual effect of changes in interest rates on net interest income. The estimates provided do not include the
effects of possible strategic changes in the balances of various assets and liabilities throughout 2021 or additional actions Trustmark could undertake in response to
changes in interest rates. Management will continue to prudently manage the balance sheet in an effort to control interest rate risk and maintain profitability over
the long term.
Another component of interest rate risk management is measuring the economic value-at-risk for a given change in market interest rates. The economic value-at-
risk may indicate risks associated with longer-term balance sheet items that may not affect net interest income at risk over shorter time periods. Trustmark uses
computer-modeling techniques to determine the present value of all asset and liability cash flows (both on- and off-balance sheet), adjusted for prepayment
expectations, using a market discount rate. The economic value of equity (EVE), also known as net portfolio value, is defined as the difference between the
present value of asset cash flows and the present value of liability cash flows. The resulting change in EVE in different market rate environments, from the base
case scenario, is the amount of EVE at risk from those rate environments. The following table summarizes the effect that various interest rate shifts would have on
net portfolio value at December 31, 2020 and 2019. 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 December 31, 2020 and 2019, 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.
Change in Interest Rates
+200 basis points
+100 basis points
Estimated % Change
in Net Portfolio Value
2020
2019
22.1%
12.7%
5.3%
3.4%
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 December 31, 2020, the MSR fair value was $66.5 million, compared to $79.4 million at December 31, 2019. The impact on the MSR fair value of a 10%
adverse change in prepayment speeds or a 100 basis point increase in discount rates at December 31, 2020, would be a decline in fair value of approximately $4.3
million and $2.4 million, respectively, compared to a decline in fair value of approximately $3.5 million and $2.7 million, respectively, at December 31,
2019. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts.
71
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of Trustmark Corporation
Jackson, Mississippi
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Trustmark Corporation and subsidiaries (the "Corporation") as of December 31, 2020 and 2019,
the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). We also have audited the Corporation’s internal
control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020
and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020 in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, the Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Corporation has changed its method of accounting for credit losses effective January 1, 2020 due to the
adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The
Corporation adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be
reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent
application is also related to the critical audit matter communicated below.
Basis for Opinions
The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Corporation’s financial statements and an opinion on the Corporation’s internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and
are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over
financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in
72
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or
disclosures to which it relates.
Allowance for Credit Losses, LHFI - Reasonable and Supportable Forecasts
As described in Note 1 - Significant Accounting Policies and Note 3 – LHFI and Allowance for Credit Losses, LHFI to the consolidated financial statements, the
Corporation adopted ASU 2016-13, as amended, effective January 1, 2020 (see change in accounting principle explanatory paragraph above). Upon adoption, the
Corporation estimates and records an allowance for credit losses (ACL) which represents credit losses expected over the remaining contractual life of the loans.
The Corporation measures expected credit losses on a collective, or pooled, basis which is done by segregating loans into pools based on loan product types and
similar risk characteristics. The Corporation disclosed the impact of adoption of this standard on January 1, 2020 with a $3.0 million decrease to the allowance for
credit losses, a $29.6 million increase for off-balance sheet credit exposures and a $26.6 million decrease to retained earnings, or $19.9 million net of tax, for the
cumulative effect adjustment recorded. Provision expense for the year ending December 31, 2020 was $36.1 million and the Allowance for Credit Losses, LHFI at
December 31, 2020 was $117.3 million.
The Corporation uses a third-party software application to calculate the quantitative portion of the allowance for credit losses which employs a discounted cash
flow (DCF) or weighted average remaining maturity (WARM) method by loan pool. A reasonable and supportable forecast is developed through a Loss Driver
Analysis (LDA) by loan class. The LDA is performed by the Corporation’s third-party service provider and uses charge off data from Trustmark National Bank’s
Federal Financial Institutions Examination Council (FFIEC) reports to construct a periodic default rate (PDR). The PDR is decomposed into a probability of
default (PD). Regressions are run using the data for various macroeconomic variables in order to determine which correlate to Trustmark’s losses. These variables
are then incorporated into the application to calculate a quarterly PD using a third-party baseline forecast. Loss given default (LGD) is derived from a method that
traces the relationship between LGD and PD over a period of time and projects LGD based on the PD forecast. 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.
Trustmark determined that reasonable and supportable forecasts could be made for a twelve-month period for all of its loan pools in which models were developed
through the LDA. 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.
Estimating reasonable and supportable forecasts requires significant judgment and could have a material effect on the Corporations financial statements.
Management leverages economic projections from an independent third party for its forecasts over the forecast period. We identified auditing the reasonableness of
forecasts, including the LDA, as a critical audit matter as it involves especially subjective auditor judgment and increased audit effort, including the involvement of
specialists.
The primary audit procedures we performed to address this critical audit matter included the following:
Tested the effectiveness of controls over the LDA and reasonable and supportable forecast including:
•
•
•
Completeness, accuracy, and relevance of the underlying data including FFIEC data
Model validation performed by a third-party specialist
Relevance and reliability of the forecasts applied and results of the calculation
73
Performed substantive testing over the LDA and reasonable and supportable forecast including:
•
•
•
Tested completeness and accuracy of underlying data.
Utilized the work of internal specialists to assist in evaluating the appropriateness and mathematical accuracy of the LDA, methodologies applied, and
the relevance and reliability of data used in the development of the forecast models.
Evaluated reasonableness of significant assumptions and judgments.
We have served as the Corporation’s auditor since 2015, which is the year the engagement letter was signed for the audit of the 2016 financial statements.
/s/ Crowe LLP
Atlanta, Georgia
February 18, 2021
74
Trustmark Corporation and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
Assets
Cash and due from banks
Federal funds sold and securities purchased under reverse repurchase agreements
Securities available for sale, at fair value (amortized cost: $1,959,773-2020;
$1,600,984-2019; allowance for credit losses: $0-2020)
Securities held to maturity, net of allowance for credit losses of $0
(fair value: $563,115-2020; $746,202-2019)
Paycheck Protection Program (PPP) loans
Loans held for sale (LHFS)
Loans held for investment (LHFI) (1)
Less allowance for credit losses (ACL), LHFI (1)
Net LHFI
Acquired loans (1)
Less allowance for loan losses, acquired loans (1)
Net acquired loans
Net LHFI and acquired loans
Premises and equipment, net
Mortgage servicing rights
Goodwill
Identifiable intangible assets, net
Other real estate
Operating lease right-of-use assets
Other assets
Total Assets
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Federal funds purchased and securities sold under repurchase agreements
Other borrowings
Subordinated notes
Junior subordinated debt securities
ACL on off-balance sheet credit exposures (1)
Operating lease liabilities
Other liabilities
Total Liabilities
Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares
Issued and outstanding: 63,424,526 shares - 2020; 64,200,111 shares - 2019
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
December 31,
2020
2019
$
1,952,504 $
50
1,991,815
538,072
610,134
446,951
9,824,524
117,306
9,707,218
—
—
—
9,707,218
194,278
66,464
385,270
7,390
11,651
30,901
609,142
16,551,840 $
4,349,010 $
9,699,754
14,048,764
164,519
168,252
122,921
61,856
38,572
32,290
173,549
14,810,723
358,916
—
1,602,404
738,099
—
226,347
9,335,628
84,277
9,251,351
72,601
815
71,786
9,323,137
189,791
79,394
379,627
7,343
29,248
31,182
532,389
13,497,877
2,891,215
8,354,342
11,245,557
256,020
85,396
—
61,856
—
32,354
155,992
11,837,175
13,215
233,120
1,495,833
(1,051)
1,741,117
16,551,840 $
13,376
256,400
1,414,526
(23,600)
1,660,702
13,497,877
$
$
$
(1)
Effective January 1, 2020, Trustmark adopted FASB ASU 2016-13 using the modified retrospective approach. Therefore, prior period balances are
presented under legacy GAAP and may not be comparable to current period presentation.
See notes to consolidated financial statements.
75
Trustmark Corporation and Subsidiaries
Consolidated Statements of Income
($ in thousands, except per share data)
Interest Income
Interest and fees on LHFS & LHFI
Interest and fees on PPP loans
Interest and fees on acquired loans (1)
Interest on securities:
Taxable
Tax exempt
Interest on federal funds sold and securities purchased under
reverse repurchase agreements
Other interest income
Total Interest Income
Interest Expense
Interest on deposits
Interest on federal funds purchased and securities sold under
repurchase agreements
Other interest expense
Total Interest Expense
Net Interest Income
Provision for credit losses (PCL) (1)
Provision for loan losses, acquired loans (1)
Net Interest Income After PCL
Noninterest Income
Service charges on deposit accounts
Bank card and other fees
Mortgage banking, net
Insurance commissions
Wealth management
Other, net
Total Noninterest Income
Noninterest Expense
Salaries and employee benefits
Services and fees
Net occupancy - premises
Equipment expense
Other real estate expense, net
Credit loss expense related to off-balance sheet credit exposures (1)
Other expense
Total Noninterest Expense
Income Before Income Taxes
Income taxes
Net Income
Earnings Per Share
Basic
Diluted
2020
Years Ended December 31,
2019
2018
$
390,803 $
26,643
—
440,156 $
—
8,373
48,250
1,079
1
1,559
468,335
54,649
1,711
240
5,363
510,492
395,969
—
17,115
66,082
2,236
14
4,196
485,612
37,487
79,171
53,936
755
3,556
41,798
426,537
36,113
—
390,424
32,289
31,022
125,822
45,176
31,625
8,659
274,593
272,257
83,816
26,489
23,277
1,956
8,934
58,506
475,235
189,782
29,757
160,025 $
1,420
3,312
83,903
426,589
10,797
42
415,750
42,603
31,736
29,822
42,396
30,679
9,809
187,045
247,717
73,315
26,149
23,733
3,906
—
54,182
429,002
173,793
23,333
150,460 $
4,788
7,468
66,192
419,420
17,993
(1,005)
402,432
43,702
28,905
34,674
40,481
30,338
6,736
184,836
238,033
66,382
26,703
24,830
2,002
—
57,465
415,415
171,853
22,269
149,584
2.52
2.51
$
$
2.33
2.32
$
$
2.22
2.21
$
$
$
(1)
Effective January 1, 2020, Trustmark adopted FASB ASU 2016-13 using the modified retrospective approach. Therefore, prior period balances are
presented under legacy GAAP and may not be comparable to current period presentation.
See notes to consolidated financial statements.
76
Trustmark Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
($ in thousands)
Net income per consolidated statements of income
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on available for sale securities and
transferred securities:
Net unrealized holding gains (losses) arising during the period
Change in net unrealized holding loss on securities transferred to
held to maturity
Pension and other postretirement benefit plans:
Change in the actuarial loss of pension and other postretirement
benefit plans
Reclassification adjustments for changes realized in net income:
Net change in prior service costs
Recognized net loss due to lump sum settlements
Change in net actuarial loss
Derivatives:
Change in the accumulated gain (loss) on effective cash flow
hedge derivatives
Reclassification adjustment for (gain) loss realized in net income
Other comprehensive income (loss), net of tax
Comprehensive income
See notes to consolidated financial statements.
77
2020
Years Ended December 31,
2019
2018
$
160,025 $
150,460 $
149,584
22,965
33,103
(14,416)
2,383
2,704
(3,846)
(4,278)
112
89
846
187
235
597
2,821
2,806
187
122
919
—
—
22,549
182,574 $
(109)
(360)
32,079
182,539 $
373
(242)
(7,430)
142,154
$
Trustmark Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
($ in thousands, except per share data)
Balance, January 1, 2018
Net income per consolidated statements of
income
Other comprehensive income (loss),
net of tax
Cash dividends paid on common stock
($0.92 per share)
Shares withheld to pay taxes, long-term
incentive plan
Accumulated other comprehensive loss
adjustment, Tax Reform Act
Repurchase and retirement of common
stock
Compensation expense, long-term
incentive plan
Balance, December 31, 2018
Net income per consolidated statements of
income
Other comprehensive income (loss),
net of tax
Cash dividends paid on common stock
($0.92 per share)
Shares withheld to pay taxes, long-term
incentive plan
Repurchase and retirement of common
stock
Compensation expense, long-term
incentive plan
Balance, December 31, 2019
FASB ASU 2016-13 adoption adjustment
Net income per consolidated statements of
income
Other comprehensive income (loss),
net of tax
Cash dividends paid on common stock
($0.92 per share)
Shares withheld to pay taxes, long-term
incentive plan
Repurchase and retirement of common
stock
Compensation expense, long-term
incentive plan
Balance, December 31, 2020
See notes to consolidated financial statements.
Common Stock
Shares
Outstanding
67,746,094
Amount
Capital
Surplus
$
14,115
$
369,124
$
—
—
—
118,108
—
—
—
—
25
—
—
—
—
Accumulated
Other
Comprehensive
Income
(Loss)
$
(39,725) $
Retained
Earnings
1,228,187
Total
1,571,701
149,584
—
149,584
—
(7,430)
(7,430)
(62,425)
(1,451)
—
—
—
(62,425)
(1,426)
—
8,524
(8,524)
—
(2,029,807)
(423)
(61,998)
—
—
(62,421)
—
65,834,395
—
13,717
3,870
309,545
—
1,323,870
—
(55,679)
3,870
1,591,453
—
—
—
134,564
—
—
—
28
—
—
—
(1,686)
(1,768,848)
(369)
(56,246)
150,460
—
150,460
—
32,079
32,079
(59,804)
—
—
—
—
—
(59,804)
(1,658)
(56,615)
—
64,200,111
—
—
13,376
—
4,787
256,400
—
—
1,414,526
(19,949)
—
(23,600)
—
4,787
1,660,702
(19,949)
—
—
—
111,373
—
—
—
23
—
—
—
(1,123)
(886,958)
(184)
(27,354)
160,025
—
160,025
—
22,549
22,549
(58,769)
—
—
—
—
—
(58,769)
(1,100)
(27,538)
—
63,424,526
$
—
13,215
$
5,197
233,120
$
—
1,495,833
$
—
(1,051) $
5,197
1,741,117
78
Trustmark Corporation and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
Operating Activities
Net income per consolidated statements of income
Adjustments to reconcile net income to net cash provided by operating activities:
Credit loss expense, net (1)
Depreciation and amortization
Net amortization of securities
Gains on sales of loans, net
Compensation expense, long-term incentive plan
Deferred income tax provision
Proceeds from sales of loans held for sale
Purchases and originations of loans held for sale
Originations of mortgage servicing rights
Earnings on bank-owned life insurance
Net change in other assets
Net change in other liabilities
Other operating activities, net
Net cash from operating activities
Investing Activities
Proceeds from maturities, prepayments and calls of securities held to maturity
Proceeds from maturities, prepayments and calls of securities available for sale
Purchases of securities available for sale
Net proceeds from bank-owned life insurance
Net change in federal funds sold and securities purchased under reverse
repurchase agreements
Net change in member bank stock
Net change in loans
Purchases of premises and equipment
Proceeds from sales of premises and equipment
Proceeds from sales of other real estate
Purchases of software
Investments in tax credit and other partnerships
Purchase of insurance book of business
Net cash used in business acquisition
Net cash from investing activities
Financing Activities
Net change in deposits
Net change in federal funds purchased and securities sold under
repurchase agreements
Net change in short-term borrowings
Payments on long-term FHLB advances
Payments under finance lease obligations
Proceeds from subordinated notes
Common stock dividends
Repurchase and retirement of common stock
Shares withheld to pay taxes, long-term incentive plan
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2020
Years Ended December 31,
2019
2018
$
160,025
$
150,460
$
149,584
45,047
41,325
13,247
(94,986)
5,197
(19,800)
2,627,122
(2,668,642)
(29,805)
(5,099)
(49,653)
13,669
27,699
65,346
201,888
680,294
(1,051,014)
3,280
(50)
269
(1,027,924)
(22,577)
2,803
17,343
(8,252)
(5,844)
(3,097)
(4,834)
(1,217,715)
10,839
39,420
7,789
(27,301)
4,787
(3,880)
1,431,003
(1,480,752)
(16,711)
(5,592)
(30,729)
13,276
23,838
116,447
173,385
425,260
(177,739)
4,140
830
262
(480,295)
(17,327)
3,248
11,182
(13,412)
(3,426)
(347)
—
(74,239)
2,803,207
(118,854)
(91,501)
517
(44)
(1,715)
122,900
(58,769)
(27,538)
(1,100)
2,745,957
1,593,588
358,916
$
1,952,504
$
205,549
561
(68)
(1,964)
—
(59,804)
(56,615)
(1,658)
(32,853)
9,355
349,561
358,916
$
16,988
38,940
9,181
(21,615)
3,870
11,740
1,114,020
(1,052,339)
(15,759)
(5,358)
(1,891)
(1,277)
(6,886)
239,198
149,308
423,617
(23,901)
1,824
(215)
35,451
(140,710)
(14,644)
772
20,502
(13,195)
(22)
—
—
438,787
786,899
(419,356)
(905,396)
(67)
—
—
(62,425)
(62,421)
(1,426)
(664,192)
13,793
335,768
349,561
(1)
Effective January 1, 2020, Trustmark adopted FASB ASU 2016-13 using the modified retrospective approach. Therefore, prior period balances are
presented under legacy GAAP and may not be comparable to current period presentation.
See notes to consolidated financial statements.
79
Note 1 – Significant Accounting Policies
Business
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 183 offices in Alabama, Florida,
Mississippi, Tennessee and Texas.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Trustmark and all other entities in which Trustmark has a controlling financial interest. All
significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). The preparation of financial
statements in conformity with these accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and income and expense during the reporting periods and the related disclosures. Although Management’s
estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that in 2021 actual conditions could vary from
those anticipated, which could affect Trustmark’s financial condition and results of operations. Actual results could differ from those estimates.
Securities
Securities are classified as either held to maturity or available for sale. Securities are classified as held to maturity and carried at amortized cost when Management
has the positive intent and the ability to hold them until maturity. Securities to be held for indefinite periods of time are classified as available for sale and carried
at fair value, with the unrealized holding gains and losses reported as a component of other comprehensive income (loss), net of tax. Securities available for sale
are used as part of Trustmark’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment rates and
other factors. Management determines the appropriate classification of securities at the time of purchase.
The amortized cost of debt securities classified as securities held to maturity or securities available for sale is adjusted for amortization of premiums and accretion
of discounts to maturity of the security using the interest method. Such amortization or accretion is included in interest on securities. Realized gains and losses are
determined using the specific identification method and are included in noninterest income as securities gains (losses), net.
Securities transferred from the available for sale category to the held to maturity category are recorded at fair value at the date of transfer. Unrealized holding
gains or losses associated with the transfer of securities from available for sale to held to maturity are included in the balance of accumulated other comprehensive
income (loss), net of tax, in the consolidated balance sheets. These unrealized holding gains or losses are amortized over the remaining life of the security as a
yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security.
Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments,” was adopted by Trustmark on January 1, 2020. ASU 2016-13 introduced FASB ASC Topic 326, which requires a current
expected credit losses methodology for estimating allowances for credit losses and applies to all financial instruments carried at amortized cost, including securities
held to maturity, and makes targeted improvements to the accounting for credit losses on securities available for sale.
Under FASB ASC Topic 326, the allowance for credit losses is an estimate measured using relevant information about past events, including historical credit loss
experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the
remaining cash flows over the contractual term of the financial assets.
Trustmark has adopted a zero-credit loss assumption for certain classes of securities. This zero-credit loss assumption applies to debt issuances of the U.S.
Treasury and agencies and instrumentalities of the United States government. The reasons behind the adoption of the zero-credit loss assumption were as follows:
High credit rating
•
Long history with no credit losses
•
•
Guaranteed by a sovereign entity
• Widely recognized as “risk-free rate”
•
•
Can print its own currency
Currency is routinely held by central banks, used in international commerce, and commonly viewed as reserve currency
80
•
Currently under the U.S. Government conservatorship or receivership
Trustmark continuously monitors any changes in economic conditions, credit downgrades, changes to explicit or implicit guarantees granted to certain debt issuers,
and any other relevant information that would indicate potential credit deterioration and prompt Trustmark to reconsider its zero-credit loss assumption.
Securities Available for Sale
FASB ASC Subtopic 326-30, “Financial Instruments-Credit Losses-Available-for-Sale Debt Securities,” replaced the concept of other-than-temporarily impaired
with the allowance for credit losses. Unlike securities held to maturity, securities available for sale are evaluated on an individual level and pooling of securities is
not allowed.
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 as outlined below:
•
•
•
Review the extent to which the fair value is less than the amortized cost and observe the security’s lowest credit rating as reported by third-party credit ratings
companies.
The securities that violate the credit loss triggers above would be subjected to additional analysis that may include, but is not limited to: changes in market
interest rates, changes in securities credit ratings, security type, service area economic factors, financial performance of the issuer/or obligor of the underlying
issue and third-party guarantee.
If Trustmark determines that a credit loss exists, the credit portion of the allowance will be measured using a discounted cash flow (DCF) analysis using the
effective interest rate as of the security’s purchase date. The amount of credit loss Trustmark records will be limited to the amount by which the amortized
cost exceeds the fair value.
The DCF analysis utilizes contractual maturities, as well as third-party credit ratings and cumulative default rates published annually by Moody’s Investor Service
(Moody’s).
Accrued interest receivable is excluded from the estimate of credit losses for securities available for sale.
Securities Held to Maturity
FASB ASC Subtopic 326-20, “Financial Instruments-Credit Losses-Measured at Amortized Cost,” requires institutions to measure expected credit losses on
financial assets carried at amortized cost on a collective or pool basis when similar risks exist. Trustmark uses several levels of segmentation in order to measure
expected credit losses for its held to maturity securities:
•
•
The portfolio is segmented into agency and non-agency securities.
The non-agency securities are separated into municipal, mortgage, and corporate securities.
Each individual segment is categorized by third-party credit ratings.
As discussed above, Trustmark has determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero, which
include debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. This assumption is reviewed and attested to
quarterly. Trustmark uses an internally built model to verify the accuracy of third-party provided calculations.
Accrued interest receivable is excluded from the estimate of credit losses for securities held to maturity.
Loans Held for Sale (LHFS)
Primarily, all mortgage loans purchased from wholesale customers or originated in Trustmark’s General Banking Segment are considered to be held for sale. In
certain circumstances, Trustmark will retain a mortgage loan in its portfolio based on banking relationships or certain investment strategies. Trustmark has elected
to account for its LHFS under the fair value option permitted by FASB ASC Topic 825, “Financial Instruments,” with interest income on the LHFS reported in
interest and fees on LHFS and LHFI. Trustmark reports unrealized gains and losses resulting from changes in the fair value of the LHFS accounted for under the
fair value option as noninterest income in mortgage banking, net. 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 the fair
81
value reported as noninterest income in mortgage banking, net. Changes in the fair value of the LHFS are largely offset by changes in the fair value of the
derivative instruments. Election of the fair value option allows Trustmark to reduce the accounting volatility that would otherwise result from the asymmetry
created by accounting for its LHFS at the lower of cost or fair value and the derivative instruments at fair value. Realized gains and losses upon ultimate sale of
the loans are reported as noninterest income in mortgage banking, net.
Government National Mortgage Association (GNMA) optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans
that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer’s option and without GNMA’s prior
authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. Under FASB
ASC Topic 860, “Transfers and Servicing,” 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 LHFS, regardless of whether Trustmark intends to exercise the buy-back
option. These loans are reported as LHFS with the offsetting liability being reported as short-term borrowings. The fair value option election does not apply to the
GNMA optional repurchase loans which do not meet the requirements under FASB ASC Topic 825 to be accounted for under the fair value option.
Trustmark defers the upfront loan fees and costs related to the LHFS. In general, the LHFS are only retained on Trustmark’s balance sheet for 30 to 45 days before
they are pooled and sold in the secondary market. The difference between deferring these loan fees and costs until the loans are sold and recognizing them in
earnings as incurred as required by FASB ASC Subtopic 825-10 is considered immaterial. Deferred loan fees and costs are reflected in the basis of the LHFS and,
as such, impact the resulting gain or loss when the loans are sold.
Loans Held for Investment (LHFI)
LHFI are loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off and are reported at amortized cost net of
the allowance for credit losses. Amortized cost is the amount of unpaid principal, adjusted for the net amount of direct costs and nonrefundable loan fees
associated with lending. The net amount of nonrefundable loan origination fees and direct costs associated with the lending process, including commitment fees, is
deferred and accreted to interest income over the lives of the loans using a method that approximates the interest method. Interest on LHFI is accrued and recorded
as interest income based on the outstanding principal balance.
Past due LHFI are loans contractually past due 30 days or more as to principal or interest payments. A LHFI is classified as nonaccrual, and the accrual of interest
on such loan is discontinued, when the contractual payment of principal or interest becomes 90 days past due on commercial credits and 120 days past due on non-
business purpose credits. In addition, a credit may be placed on nonaccrual at any other time Management has serious doubts about further collectibility of
principal or interest according to the contractual terms, even though the loan is currently performing. A LHFI may remain in accrual status if it is in the process of
collection and well secured. When a LHFI is placed in nonaccrual status, interest accrued but not received is reversed against interest income. Interest payments
received on nonaccrual LHFI are applied against principal under the cost-recovery method, until qualifying for return to accrual status. Under the cost-recovery
method, interest income is not recognized until the principal balance is reduced to zero. LHFI are restored to accrual status when the obligation is brought current
or has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
Troubled Debt Restructuring
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
collectibility 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.
A formal TDR may include, but is not necessarily limited to, one or a combination of the following situations:
•
•
Trustmark accepts a third-party receivable or other asset(s) of the borrower, in lieu of the receivable from the borrower.
Trustmark accepts an equity interest in the borrower in lieu of the receivable.
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•
Trustmark accepts modification of the terms of the debt including but not limited to:
o
o
o
o
Reduction (absolute or contingent) of the stated interest rate to below the current market rate.
Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.
Reduction (absolute or contingent) of the face amount or maturity amount of the debt as stated in the note or other agreement.
Reduction (absolute or contingent) of accrued interest.
Troubled debt restructurings are addressed in Trustmark’s loan policy, and in accordance with that policy, any modifications or concessions that may result in a
TDR are subject to a special approval process which allows for control, identification, and monitoring of these arrangements. Prior to granting a concession, a
revised borrowing arrangement is proposed which is structured so as to improve collectability of the loan in accordance with a reasonable repayment schedule with
any loss promptly identified. It is supported by a thorough evaluation of the borrower’s financial condition and prospects for repayment under those revised
terms. Other TDRs arising from renewals or extensions of existing debt are routinely identified through the processes utilized in the Problem Loan Committee and
in the Credit Quality Review Committee. TDRs are subsequently reported to the Directors’ Credit Policy Committee on a quarterly basis and are disclosed in
Trustmark’s consolidated financial statements in accordance with GAAP and regulatory reporting guidance.
A TDR in which Trustmark receives physical possession of the borrower’s assets, regardless of whether formal foreclosure or repossession proceedings take place,
is accounted for in accordance with FASB ASC Subtopic 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” Thus, the loan is treated as if assets
have been received in satisfaction of the loan and reported as a foreclosed asset.
A TDR may be returned to accrual status if Trustmark is reasonably assured of repayment of principal and interest under the modified terms and the borrower has
demonstrated sustained performance under those terms for a period of at least six months. Otherwise, the restructured loan must remain on nonaccrual.
Purchased Credit Deteriorated (PCD) Loans
Trustmark has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. An initial allowance for credit
losses for PCD loans is determined at acquisition using the same allowance for credit losses methodology as the LHFI. The initial allowance for credit losses
determined on a collective basis is allocated to individual loans. PCD loans are reported at the amortized cost, which equals the loan purchased price plus the
initial allowance for credit losses. The difference between the amortized cost basis of the PCD loan and the par value of the loan is the noncredit premium or
discount, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the PCL.
Upon adoption of FASB ASC Topic 326, Trustmark elected to maintain pools of loans that were previously accounted for under FASB ASC Subtopic 310-30,
“Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality,” and will continue to account for these pools as a unit of account. Loans are
only removed from the existing loan pools if they are written off, paid off or sold. Upon adoption of FASB ASC Topic 326, the allowance for credit losses was
determined for each pool and added to the pool’s carrying value to establish a new amortized cost basis. The difference between the unpaid principal balance of
the pool and the new amortized cost basis is the noncredit premium or discount which will be amortized into interest income over the remaining life of the
pool. Changes to the allowance for credit losses after adoption of FASB ASC Topic 326 are recorded through the PCL.
Allowance for Credit Losses, LHFI (ACL)
Trustmark’s ACL methodology for LHFI is based upon guidance within FASB ASC Subtopic 326-20 as well as 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 for LHFI is adjusted through the PCL and reduced by the charge off of loan
amounts, net of recoveries.
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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. 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.
Trustmark estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable
and supportable forecasts including the COVID-19 pandemic effects. Trustmark uses a third-party software application to calculate the quantitative portion of the
ACL using a methodology and assumptions specific to each loan pool. The qualitative portion of the allowance is based on general economic conditions and other
internal and external factors affecting Trustmark as a whole as well as specific LHFI. Factors considered include the following: lending policies and procedures,
economic conditions and concentrations of credit, nature and volume of the portfolio, performance trends, and external factors. The quantitative and qualitative
portions of the allowance are added together to determine the total allowance for credit losses, which reflects Management’s expectations of future conditions
based on reasonable and supportable forecasts.
The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a collective, or pooled, component for
estimated expected credit losses for pools of loans that share similar risk characteristics, and an asset-specific component involving individual loans that do not
share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. In estimating the allowance for credit losses for
the collective component, loans are segregated into loan pools based on loan product types and similar risk characteristics.
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 ACL for individual loans that do not share risk characteristics with other loans is measured as the difference between the discounted value of expected future
cash flows, based in the effective interest rate at origination, and the amortized cost basis of the loan, or the net realizable value. The ACL is the difference
between the loan’s net realizable value and its amortized cost basis (net of previous charge-offs and deferred loan fees and costs), except for collateral-dependent
loans. 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 the ‘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. If the calculated
expected credit loss is determined to be permanent or not recoverable, the amount of the expected credit loss is charged off.
Accrued interest receivable is not included in the amortized cost basis of Trustmark’s LHFI and, therefore, excluded from the estimate of credit losses for LHFI.
LHFI are charged off against the ACL, with any subsequent recoveries credited back to the ACL account. Expected recoveries may not exceed the aggregate of
amounts previously charged off and expected to be charged off. Trustmark’s loan policy dictates the guidelines to be followed in determining when a loan is
charged off. Commercial purpose LHFI are charged off when a determination is made that the loan is uncollectible and continuance as a bankable asset is not
warranted. Consumer LHFI secured by 1-4 family residential real estate are generally charged off or written down to the fair value of the collateral less cost to sell
at no later than 180 days of delinquency. Non-real estate consumer purpose LHFI, including both secured and unsecured loans, are generally charged off by 120
days of delinquency. Consumer revolving lines of credit and credit card debt are generally charged off on or prior to 180 days of delinquency.
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ACL on Off-Balance Sheet Credit Exposures
Under FASB ASC Subtopic 326-20, Trustmark is required to estimate expected credit losses for off-balance sheet credit exposures which are not unconditionally
cancellable. 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 views the loan pools as
either closed-ended or open-ended. Closed-ended loan pools are those that typically fund up to 100% such as other construction and nonowner-occupied. Open-
ended loan pools are those that behave similar to a revolver such as the commercial and industrial and home equity line of credit loan pools. In addition to the
unfunded balances, Trustmark uses a funding rate for loan pools that are considered open-ended. Trustmark calculates the funding rate of the open-ended loan
pools each period. In order to mitigate volatility and incorporate historical experience in the funding rate, Trustmark uses a twelve-quarter moving average. For
the closed-ended loan pools, Trustmark takes a conservative approach and uses a 100% funding rate. The expected funding rate is applied to each pool’s unfunded
commitment balances to ensure that reserves will be applied to each pool based on balances expected to be funded based upon historical levels. In addition to the
funding rate being applied to the unfunded commitment balance, a reserve rate is applied that 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. Adjustments to the
ACL on off-balance sheet credit exposures are recorded to credit loss expense related to off-balance sheet credit exposures in noninterest expense.
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.
Premises and Equipment, Net
Premises and equipment are reported at cost, less accumulated depreciation and amortization. Depreciation is charged to expense over the estimated useful lives of
the assets, which are up to thirty-nine years for buildings and three to ten years for furniture and equipment. Leasehold improvements are amortized over the terms
of the respective leases or the estimated useful lives of the improvements, whichever is shorter. In cases where Trustmark has the right to renew the lease for
additional periods, the lease term for the purpose of calculating amortization of the capitalized cost of the leasehold improvements is extended when Trustmark is
“reasonably assured” that it will renew the lease. Depreciation and amortization expenses are computed using the straight-line method. Trustmark continually
evaluates whether events and circumstances have occurred that indicate that such long-lived assets have become impaired. Measurement of any impairment of
such long-lived assets is based on the fair values of those assets.
Branch closures and purchased land held for future branch expansion for more than five years are evaluated to determine if the related land, buildings and building
improvements should be transferred to assets held for sale in accordance with FASB ASC Topic 360, “Property, Plant and Equipment.” The property is transferred
to assets held for sale at the lower of its carrying value or fair value less cost to sell. An impairment loss is recorded at the time of transfer if the carrying value of
the assets exceeds the fair value. Impairment losses are recorded as noninterest expense in other expense.
Mortgage Servicing Rights (MSR)
Trustmark recognizes as assets the rights to service mortgage loans based on the estimated fair value of the MSR when loans are sold and the associated servicing
rights are retained. Trustmark has elected to account for the MSR at fair value.
The fair value of the MSR is determined using discounted cash flow techniques benchmarked against third-party valuations. Estimates of fair value involve several
assumptions, including the key valuation assumptions about market expectations of future prepayment rates, interest rates and discount rates which are provided by
a third-party firm. Prepayment rates are projected using an industry standard prepayment model. The model considers other key factors, such as a wide range of
standard industry assumptions tied to specific portfolio characteristics such as remittance cycles, escrow payment requirements, geographic factors, foreclosure
loss exposure, VA no-bid exposure, delinquency rates and cost of servicing, including base cost and cost to service delinquent mortgages. Prevailing market
conditions at the time of analysis are factored into the accumulation of assumptions and determination of servicing value.
Trustmark economically hedges changes in the fair value of the MSR attributable to interest rates. See Note 1 – Significant Accounting Policies, “Derivative
Financial Instruments – Derivatives Not Designated as Hedging Instruments” for information regarding these derivative instruments.
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Trustmark receives annual servicing fee income for loans serviced, which is recorded as noninterest income in mortgage banking, net. The fees are based on a
contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Late fees and ancillary fees related to loan
servicing are not considered material.
Goodwill and Identifiable Intangible Assets
Trustmark accounts for goodwill and other intangible assets in accordance with FASB ASC Topic 350, “Intangibles – Goodwill and Other.” Goodwill, which
represents the excess of cost over the fair value of the net assets of an acquired business, is not amortized but tested for impairment on an annual basis, which is
October 1 for Trustmark, or more often if events or circumstances indicate that there may be impairment.
Identifiable intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or legal rights or
because the assets are capable of being sold or exchanged either on their own or in combination with a related contract, asset or liability. Trustmark’s identifiable
intangible assets primarily relate to core deposits, insurance customer relationships and borrower relationships. These intangibles, which have definite useful lives,
are amortized on an accelerated basis over their estimated useful lives. In addition, these intangibles are evaluated for impairment whenever events and changes in
circumstances indicate that the carrying amount should be reevaluated. Trustmark also purchased banking charters in order to facilitate its entry into the states of
Florida and Texas. These identifiable intangible assets are being amortized on a straight-line method over 20 years.
Other Real Estate
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. When foreclosed real estate is received in full
satisfaction of a loan, the amount, if any, by which the recorded amount of the loan exceeds the estimated fair value of the property is a loss charged against the
ACL at the time of foreclosure. If the recorded amount of the loan is less than the estimated fair value of the property, a credit is recorded to write-downs of other
real estate at the time of foreclosure.
Other real estate is revalued on an annual basis or more often if market conditions necessitate. An other real estate specific reserve may be recorded through other
real estate expense for declines in fair value subsequent to foreclosure based on recent appraisals or changes in market conditions. Subsequent to foreclosure,
losses on the periodic revaluation of the property are charged against an existing other real estate specific reserve or as noninterest expense in other real estate
expense if a reserve does not exist. Costs of operating and maintaining the properties as well as gains or losses on their disposition are also included in other real
estate expense as incurred. Improvements made to properties are capitalized if the expenditures are expected to be recovered upon the sale of the properties.
Leases
ASU 2016-02, “Leases (Topic 842),” became effective for Trustmark on January 1, 2019. Trustmark adopted FASB ASC Topic 842 utilizing the modified-
retrospective transition approach prescribed by ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. Trustmark did not elect to adopt the package of
practical expedients, which includes reassessing whether any expired or existing contracts are or contain leases, reassessing the lease classification and reassessing
initial direct costs. Also, Trustmark did not elect to adopt the hindsight practical expedient therefore maintaining the lease terms previously determined under
FASB ASC Topic 840, “Leases”. Trustmark made an accounting policy election to not recognize short-term leases (12 months or less) on the balance
sheet. Trustmark accounts for the lease and nonlease components separately as such amounts are readily determinable.
Once Trustmark identifies and determines certain contracts are leases according to FASB ASC Topic 842, Trustmark classifies it as an operating or a finance lease
and recognizes a right-of-use asset and a lease liability at the lease commencement date. The lease liability represents the present value of the lease payments that
remain unpaid as of the commencement date and the right-of-use asset is the initial lease liability recognized for the lease plus any lease payments made to the
lessor at or before the commencement date as well as any initial direct costs less any lease incentives received.
Trustmark’s finance leases consist of building and equipment leases. Trustmark recognizes interest expense based on the discount rate of the lease as interest
expense in other interest expense and recognizes depreciation expense on a straight-line basis over the lease term as noninterest expense in net occupancy –
premises for building leases and in equipment expense for equipment leases. Trustmark amortizes the right-of-use asset over the life of the lease term on a
straight-line basis. Trustmark’s lease liabilities are measured as the present value of the remaining lease payments throughout the lease term. Trustmark records
its finance lease right-of-use assets in premises and equipment, net and its finance lease liabilities in other borrowings.
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Trustmark’s operating leases primarily consist of building and land leases. Trustmark recognizes lease rent expense on a straight-line basis over the term of the
lease contract and records it as noninterest expense in net occupancy – premises for building and land leases and in equipment expense for equipment
leases. Trustmark’s amortization of the right-of-use asset is the difference between the straight-line lease expense and the interest expense recognized on the lease
liability during the period. Trustmark’s lease liabilities are measured as the present value of the remaining lease payments throughout the lease term.
Trustmark’s leases typically have one or more renewal options included in the lease contract. Due to the nature of Trustmark’s leases, for leases with renewal
options available, Trustmark considers the first renewal option as reasonably certain to renew and is therefore included in the measurement of the right-of-use
assets and lease liabilities.
In order to calculate its right-of-use assets and lease liabilities, FASB ASC Topic 842 requires Trustmark to use the rate of interest implicit in the lease when
readily determinable. If the rate implicit in the lease is not readily determinable, Trustmark is required to use its incremental borrowing rate, which is the rate of
interest Trustmark would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. Trustmark was able to determine
the implicit interest rate for its equipment leases and used that rate as its discount rate. Since the implicit interest rate for most of its building and land leases were
not readily determinable, Trustmark used its incremental borrowing rate.
Trustmark’s short-term leases primarily include automated teller machines. For short-term leases, Trustmark recognizes lease expense on a straight-line basis over
the lease term. As previously stated, Trustmark has elected not to include short-term leases on its balance sheet.
Federal Home Loan Bank (FHLB) and Federal Reserve Bank of Atlanta Stock
Trustmark accounts for its investments in FHLB and Federal Reserve Bank of Atlanta stock in accordance with FASB ASC Subtopic 942-325, “Financial
Services-Depository and Lending-Investments-Other.” FHLB and Federal Reserve Bank stock are equity securities that do not have a readily determinable fair
value because its ownership is restricted and it lacks a market. FHLB and Federal Reserve Bank stock are carried at cost and evaluated for
impairment. Trustmark’s investment in member bank stock is included in other assets in the accompanying consolidated balance sheets. At December 31, 2020
and 2019, Trustmark’s investment in member bank stock totaled $31.7 million and $31.9 million, respectively. The carrying value of Trustmark’s member bank
stock gave rise to no other-than-temporary impairment for the years ended December 31, 2020, 2019 and 2018.
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.
General Banking Segment
Service Charges on Deposit Accounts
In general, deposit accounts represent contracts with customers with no fixed duration and can be terminated or modified by either party at any time without
compensation to the other party. According to FASB ASC Topic 606, a contract that can be terminated by either party without compensation does not exist for
periods beyond the then-current period. Therefore, deposit contracts are considered to renew day-to-day if not minute-to-minute.
Deposit contracts have a single continuous or stand-ready service obligation whereby Trustmark makes customer funds available for use by the customer as and
when the customer chooses as well as other services such as statement rendering and online banking. The specific services provided vary based on the type of
deposit account. These services are not individually distinct, but are distinct as a group, and therefore, constitute a single performance obligation which is satisfied
over time and qualifies as a series of distinct service periods.
Trustmark receives a fixed service charge amount as consideration monthly for services rendered. The service charge amount varies based on the type of deposit
account. Some of the service charge revenue is subject to refund provisions, which is variable consideration under the guidelines of FASB ASC Topic
606. Trustmark has elected the ‘as-invoiced’ practical expedient permitted
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under FASB ASC Topic 606 for recognition of service charge revenue. Therefore, revenue is recognized at the time and in the amount the customer is
charged. The service charge revenue is presented net of refunded amounts on Trustmark’s consolidated statements of income.
Services related to non-sufficient funds, overdrafts, excess account activity, stop payments, dormant accounts, etc. are considered optional purchases for a deposit
contract because there is no performance obligation for Trustmark until the service is requested by the customer or the occurrence of a triggering event. Fees for
these services are fixed amounts and are charged to the customer when the service is performed. Revenue is recognized at the time the customer is charged.
Bank Card and Other Fees
Revenue from contracts with customers in bank card and other fees includes income related to interchange fees and various other contracts which primarily
consists of contracts with a single performance obligation that is satisfied at a point in time. Trustmark receives a fixed consideration amount once the
performance obligation is completed for these contracts. Trustmark reports revenue from these contracts net of amounts refunded or due to a third party.
As both a debit and credit card issuer, Trustmark receives an interchange fee for every card transaction completed by its customers with a merchant. Trustmark
receives two types of interchange fees: point-of-sale transactions in which the customer must enter the PIN associated with the card to complete the transaction (a
debit card transaction), and signature transactions in which the signature of the customer is required to complete the transaction (a credit card transaction).
Trustmark, as the card issuing or settlement bank, has a contract (implied based on customary business practices) with the payment network in which Trustmark
has a single continuous service obligation to make funds available for settlement of the card transaction. Trustmark’s service obligation is satisfied over time and
qualifies as a series of distinct service periods. Trustmark receives interchange fees as consideration for services rendered in the amount established by the
respective payment network. The interchange fees are established by the payment network based on the type of transaction and is posted on their
website. Trustmark receives and records interchange fee revenue from the payment networks daily net of all fees and amounts due to the payment network.
Other Income
Revenue from contracts with customers in other income includes income related to cash management services and other contracts with a single performance
obligation that is satisfied at a point in time. Trustmark receives a fixed consideration amount once the performance obligation is completed for these
contracts. Trustmark reports revenue from these contracts net of amounts refunded or due to a third party.
Trustmark provides cash management services through the delivery of various products and services offered to its business and municipal customers including
various departments of state, city and local governments, universities and other non-profit entities. Similar to the deposit account contracts, the cash management
contracts primarily represent contracts with customers with no fixed duration and can be terminated or modified by either party at any time without compensation
to the other party. Therefore, cash management contracts are generally considered to renew day-to-day if not minute-to-minute.
Cash management contracts have a single continuous or stand-ready service obligation whereby Trustmark makes a specific service or group of services available
for use by the customer as and when the customer chooses. The specific services provided vary based on the type of account or product. These services are not
individually distinct, but are distinct as a group, and therefore, constitute a single performance obligation which is satisfied over time and qualifies as a series of
distinct service periods.
Trustmark receives a set service charge or maintenance fee amount as consideration monthly for services rendered. However, some of the fees are based on the
number of transactions that occur (i.e. flat fee for a set number of transactions per month then an additional charge for each transaction after that) or the average
daily account balance maintained by the customer during the month and a small amount of the cash management fee revenue is subject to refund provisions. These
fees represent variable consideration under the guidelines of FASB ASC Topic 606. Trustmark has elected the ‘as-invoiced’ practical expedient permitted under
FASB ASC Topic 606 for recognition of cash management fee revenue. The cash management revenue is presented net of any refunded amounts on Trustmark’s
consolidated statements of income.
Trustmark’s merchant services provider contracts directly with Trustmark business customers and provides Trustmark’s merchant customers card processing
equipment and transaction processing services. Trustmark’s contract with the merchant services provider has a single-continuous service obligation to provide
customer referrals for potential new accounts which is satisfied over time and qualifies as a series of distinct service periods. Trustmark receives a flat fee for each
new account established and a percentage of the residual income related to transactions processed for Trustmark’s merchant customers each month as provided in
the contract. Under the guidelines of FASB ASC Topic 606, the fee received for each new account and the profit sharing represent variable consideration.
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Revenue from merchant card services contracts is recognized monthly using a time-elapsed measure of progress. Trustmark has elected the ‘as-invoiced’ practical
expedient permitted under FASB ASC Topic 606 for recognition of the merchant card services revenue.
Other Real Estate
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. Other real estate sales for the year ended December 31, 2020 resulted in a net gain of
$897 thousand compared to a net loss of $291 thousand for the year ended December 31, 2019 and a net gain of $700 thousand for the year ended December 31,
2018.
In general, purchases of Trustmark’s other real estate property are not financed by Trustmark. Financing the purchase of other real estate is evaluated based upon
the same lending policies and procedures as all other types of loans. Under FASB ASC Subtopic 610-20, “Other Income – Gains and Losses from the
Derecognition of Nonfinancial Assets,” when Trustmark finances the sale of its other real estate to a buyer, Trustmark is required to assess whether the buyer is
committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these two criteria are met,
Trustmark derecognizes the other real estate asset and records a gain or loss on the sale once control of the property is transferred to the buyer.
Wealth Management Segment
Trust Management
There are five categories of revenue included in trust management: personal trust and investments, retirement plan services, institutional custody, corporate trust
and other. Each of these categories includes multiple types of contracts, service obligations and fee income. However, the majority of these contracts include a
single service obligation that is satisfied over time, the customer is charged in arrears for services rendered and revenue is recognized when payment is
received. In general, the time period between when the service obligation is completed and when payment from the customer is received is less than 30
days. Revenue from trust management contracts is primarily related to monthly service periods and based on the prior month-end’s market value. Some trust
management revenue is mandated by a court order, while other revenue consists of flat fees. Trust management revenue based on an account’s market value
represents variable consideration under the guidelines of FASB ASC Topic 606. Trustmark has elected the ‘as-invoiced’ practical expedient allowed under FASB
ASC Topic 606 to account for the trust management revenue.
Assets under administration held by Trustmark in a fiduciary or agency capacity for customers are not included in Trustmark’s consolidated balance sheets.
Investment Services
Investment services includes both brokerage and annuity income. Trustmark has a contract with a third-party investment services company which contains a single
continuous service obligation, to provide broker-dealer and advisory services to customers on behalf of the third-party, which is satisfied over time and qualifies as
a series of distinct service periods. Trustmark serves as the agent between the third-party investment services company, the principle, and the customer. In
accordance with the contract, Trustmark receives a monthly payment from the investment services company for commissions and advisory fees (asset management
fees) earned on transactions completed in the prior month net of all charges and fees due to the investment services company. Trustmark recognizes revenue from
the investment services company, net of the revenue sharing expense due to the investment services company, when the payments are received. Commissions vary
from month-to-month based on the specific products and transactions completed. The advisory fees vary based on the average daily balance of the managed assets
for the period. The commissions and advisory fees represent variable consideration under FASB ASC Topic 606. Trustmark has elected the ‘as-invoiced’
practical expedient allowed under FASB ASC Topic 606 to recognize revenue from the investment services company.
Insurance Segment
Fisher Brown Bottrell Insurance, Inc. (FBBI), a wholly-owned subsidiary of Trustmark National Bank (TNB), operates as an insurance broker representing the
policyholder and has no allegiance with any one insurance provider. FBBI serves as the agent between the insurance provider (either insurance carrier or broker),
the principal, and the policy holder, the customer. FBBI has four general categories of insurance contracts: commercial, commercial installments, personal and
employee benefits. FBBI’s insurance contracts contain a single performance obligation, policy placement, which is satisfied at a point in time. FBBI’s
performance obligation is satisfied as of the policy effective date.
In addition to policy placement, FBBI provides various other periodic services to the policyholders for which no additional fee is charged. These additional
services are not considered material to the overall contract. Trustmark has elected the immaterial promises
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practical expedient allowed under FASB ASC Topic 606, which allows Trustmark to not assess whether promised services are performance obligations if the
promised services are immaterial in the context of the contract. Therefore, the immaterial additional services offered to policyholders are not considered a
performance obligation and no amount of the contract transaction price is allocated to these services.
In general, the transaction price for the insurance contracts is an established commission amount agreed upon by FBBI and the insurance provider. The
commission amount varies based on the insurance provider and the type of policy. There are a small number of insurance contracts which FBBI does not receive a
commission, but charges a fee directly to the policyholder.
Most of the commissions from insurance contracts are subject to clawback provisions which require FBBI to refund a prorated amount of the commissions
received as a result of policy cancellations or lapses. Commissions subject to clawback provisions are considered variable consideration under FASB ASC Topic
606. Trustmark believes the expected value method of estimating the commissions subject to clawback provisions would best predict the amount of commissions
FBBI will be entitled to because of the large number of insurance contracts with similar characteristics and the number of possible outcomes. FBBI calculates a
separate weighted-average percentage (returned commissions percentage) based on actual cancellations over the previous three years for commercial lines, bonds,
and personal lines. FBBI applies the respective returned commissions percentage to the commission revenue earned related to insurance contracts within these
three lines each month to calculate the estimated returned commissions amount, which represents the variable consideration subject to variable
constraint. Revenue from insurance contracts is reported net of the variable consideration subject to variable constraint. FBBI performs an analysis of the returned
commissions reserve quarterly and adjusts the reserve balance based on all available information including actual cancellations and the remaining term of the
contract. The returned commission percentage is updated annually.
Insurance Producers at FBBI earn commission as compensation for each policy they are responsible for placing. Commissions are not paid to Producers
immediately at the policy effective date, can be subject to clawback provisions and can vary by Producer. Effective April 1, 2018, FBBI implemented a ‘pay when
paid’ system. Under the ‘pay when paid’ system, Producers receive the commissions for which they are entitled at the end of the month following the month in
which FBBI receives payment from the insurance provider or customer. Under FASB ASC Subtopic 340-40, “Other Assets and Deferred Costs: Contracts with
Customers,” the commission paid to the Producers is an incremental cost of obtaining a contract, which should be capitalized and amortized in a manner consistent
with the pattern of transfer of the service related to the contract acquisition asset. Insurance contracts have a term of one year or less; therefore, Trustmark has
elected the cost of obtaining a contract practical expedient allowed under FASB ASC Subtopic 340-40, which allows FBBI to recognize the incremental costs of
obtaining a contract as an expense when incurred if the amortization period of the contract asset that FBBI otherwise would have recognized is one year or
less. Commission expense is recorded as noninterest expense in salaries and employee benefits when paid to the Producers.
Commercial Insurance
Revenue from FBBI’s commercial insurance contracts (both agency billed and direct billed) consists of a set commission amount, which is subject to clawback
provisions. Revenue from commercial installment insurance contracts consists of a set commission amount, which is not subject to clawback provisions. An
estimated commission amount is entered in the agency management system when a commercial insurance contract is placed. FBBI records a top line receivable
based on the estimated commission amount entered in the system each month, along with a corresponding amount recognized as revenue, and then adjusts the
estimated receivable when the commissions are received from the insurance provider or customer.
Personal Insurance
Revenue from FBBI’s personal insurance contracts consists of a set commission amount, which is subject to clawback provisions, and is recognized when payment
is received (generally 30-60 days after the policy effective date). Personal insurance contracts have a term of one year; therefore, recognizing the revenue from
these contracts when payment is received is not materially different than recognizing the revenue at the policy effective date for any given period.
Employee Benefits Insurance
Revenue from FBBI’s employee benefits insurance contracts consists of a variable commission amount, which is not subject to clawback provisions, and is
recognized when payment is received, typically on a monthly basis. Employee benefits insurance contracts have a set commission rate, but can vary from period to
period based on changes in the number of employees covered by the policy (i.e. new hires and terminations). FBBI generally receives twelve monthly commission
payments for these contracts with the initial payment being received approximately 60-90 days after the policy effective date. Under the guidelines of FASB ASC
Topic 606, commissions from employee benefits insurance contracts represent fixed consideration because at contract inception (policy effective date) there is a set
commission rate times a known number of covered employees. Changes in the number of covered employees are not known, nor can they be predicted, at contract
inception. An increase or decrease in the number of covered
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employees after the policy effective date is considered a contract modification resulting from a change in scope and transaction price under FASB ASC Topic
606. This modification is treated as part of the existing contract because it does not add a distinct service. Employee benefits insurance contracts have a term of
one year; therefore, recognizing the revenue from these contracts when payment is received is not materially different than recognizing the revenue at the policy
effective date or the contract modification date for any given period.
Contingency Commission Insurance
In addition to the insurance contracts discussed above, FBBI has contracts with various insurance providers for which it receives contingency income based on
volume of business and claims experience. FBBI is the principal and the insurance provider is the customer for these contingency commission insurance
contracts. The contingency commission contracts have a single continuous or stand-ready service obligation whereby FBBI places policies with policyholders
when acceptable to the insurance provider, which is satisfied over time. The contract term for these contingency commission contracts is one year. Revenue is
recognized from the contingency commission contracts monthly using a time-elapsed measure of progress. FBBI accrues throughout the current year the amount
of contingency commission income it expects to receive in the following year adjusted for a degree of uncertainty. FBBI updates a detail by insurance provider
with the contingency commission income received, which is then compared to the total amount that was expected to be received. If actual receipts are higher or
lower than the amount accrued in the prior year, the monthly accrual for the current year is adjusted accordingly.
Under the guidelines of FASB ASC Topic 606, revenue from contingency commission insurance contracts represents variable consideration and should be
estimated using one of the two allowable methods subject to the variable consideration constraint. FBBI believes the most likely amount method to be the most
appropriate method for estimating the variable consideration as there are only a few possible outcomes for each contract.
Derivative Financial Instruments
Trustmark maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned
fluctuations in earnings and cash flows caused by interest rate volatility. Trustmark’s interest rate risk management strategy involves modifying the repricing
characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Under the guidelines
of FASB ASC Topic 815, “Derivatives and Hedging,” all derivative instruments are required to be recognized as either assets or liabilities and carried at fair value
on the balance sheet. The fair value of derivative positions outstanding is included in other assets and/or other liabilities in the accompanying consolidated balance
sheets and in the net change in these financial statement line items in the accompanying consolidated statements of cash flows as well as included in noninterest
income in the accompanying consolidated statements of income and other comprehensive income (loss), net of tax in the accompanying consolidated statements of
comprehensive income. 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.
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 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. See Note 1 – Significant Accounting Policies, “Loans Held for Sale (LHFS)” for information regarding the fair value option election.
Trustmark also utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area. Rate lock commitments are residential
mortgage loan commitments with customers, which guarantee a specified interest rate for a specified time period. Changes in the fair value of these derivative
instruments are recorded as noninterest income in mortgage banking, net and are offset by the changes in the fair value of forward sales contracts.
Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return
that economically hedges changes in the fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not
otherwise qualify for hedge accounting. 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 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 the fair value of the 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.
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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. Derivative 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.
Income Taxes
Trustmark accounts for uncertain tax positions in accordance with FASB ASC Topic 740, “Income Taxes,” which clarifies the accounting and disclosure for
uncertainty in tax positions. Under the guidance of FASB ASC Topic 740, Trustmark accounts for deferred income taxes using the liability method. Deferred tax
assets and liabilities are based on temporary differences between the financial statement carrying amounts and the tax basis of Trustmark’s assets and
liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled and are presented net in the accompanying consolidated balance sheets in other assets.
Stock-Based Compensation
Trustmark accounts for the stock and incentive compensation under the provisions of FASB ASC Topic 718, “Compensation – Stock Compensation.” Under this
accounting guidance, fair value is established as the measurement objective in accounting for stock awards and requires the application of a fair value based
measurement method in accounting for compensation cost, which is recognized over the requisite service period. Trustmark has elected to account for forfeitures
of stock awards as they occur.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. The following table reflects specific
transaction amounts for the periods presented ($ in thousands):
Income taxes paid
Interest paid on deposits and borrowings
Noncash transfers from loans to other real estate
Investment in tax credit partnership not funded
Finance right-of-use assets resulting from lease liabilities
Operating right-of-use assets resulting from lease liabilities
Transfer of long-term FHLB advances to short-term
Per Share Data
2020
$
Years Ended December 31,
2019
$
46,648
42,968
635
5,893
—
3,774
651
24,809
83,997
8,598
5,000
9,326
31,182
—
2018
$
12,435
66,358
12,115
—
—
—
—
Trustmark accounts for per share data in accordance with FASB ASC Topic 260, “Earnings Per Share,” which provides that unvested share-based payment awards
that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the
computation of earnings per share (EPS) pursuant to the two-class method. Trustmark has determined that its outstanding unvested stock awards are not
participating securities. Based on this determination, no change has been made to Trustmark’s current computation for basic and diluted EPS.
Basic EPS is computed by dividing net income by the weighted-average shares of common stock outstanding. Diluted EPS is computed by dividing net income by
the weighted-average shares of common stock outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period.
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The following table reflects weighted-average shares used to calculate basic and diluted EPS for the periods presented (in thousands):
Basic shares
Dilutive shares
Diluted shares
2020
Years Ended December 31,
2019
2018
63,505
141
63,646
64,630
142
64,772
67,505
154
67,659
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):
Weighted-average antidilutive stock awards
Fair Value Measurements
2020
57
Years Ended December 31,
2019
—
2018
1
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and requires certain disclosures about fair value measurements. The fair value of an asset or liability is the price that would be received to
sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal
market) for such asset or liability. Depending on the nature of the asset or liability, Trustmark uses various valuation techniques and assumptions when estimating
fair value. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820
establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that Trustmark has the ability to
access at the measurement date.
Level 2 Inputs – Valuation is based upon quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability such as interest rates, yield curves,
volatilities and default rates and inputs that are derived principally from or corroborated by observable market data.
Level 3 Inputs – Unobservable inputs reflecting the reporting entity’s own determination about the assumptions that market participants would use in
pricing the asset or liability based on the best information available.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value measurement in
its entirety. Trustmark’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors
specific to the asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the
transfer.
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
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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. Management is currently evaluating the impact to Trustmark as a result
of the potential discontinuance of LIBOR, and a determination cannot be made at this time as to the impact the amendments of ASU 2020-04 and ASU 2021-01 or
the reference rate reform will have on its consolidated financial statements.
ASU 2018-15, “Intangibles-Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” Issued in August 2018, ASU 2018-15 aims to
reduce complexity in the accounting for costs of implementing a cloud computing service arrangement. ASU 2018-15 aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments of ASU 2018-15 require an entity to follow
the guidance in FASB ASC Subtopic 350-40, “Intangibles-Goodwill and Other-Internal-Use Software,” in order to determine which implementation costs to
capitalize as an asset related to the service contract and which costs to expense. The amendments of ASU 2018-15 also require an entity to expense the capitalized
implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (i.e. the noncancellable period of the arrangement
plus periods covered by (1) an option to extend the arrangement if the entity is reasonably certain to exercise that option, (2) an option to terminate the arrangement
if the entity is reasonably certain not to exercise the option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in
the control of the vendor). ASU 2018-15 also requires an entity to present the expense related to the capitalized implementation costs in the same line item in the
statement of income as the fees associated with the hosting element (service) of the arrangement, and to classify payments for capitalized implementation costs in
the statement of cash flows in the same manner as payments made for fees associated with the hosting element. ASU 2018-15 became effective for Trustmark on
January 1, 2020. Trustmark does not currently have any material amount of implementation costs related to hosting arrangements that are service contracts within
the scope of this ASU; therefore, adoption of ASU 2018-15 did not impact Trustmark’s consolidated financial statements.
ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” Issued in
August 2018, the amendments in this ASU remove disclosure requirements in FASB ASC Topic 820 related to (1) the amount of, and reasons for, transfers
between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation processes for Level 3 fair value
measurements; and (4) for non-public entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value
measurements held at the end of the reporting period. The ASU also modifies disclosure requirements such that (1) in place of a rollforward for Level 3 fair value
measurements, a non-public entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and
liabilities; (2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and
the date that restrictions from redemption might lapse, only if the investee has communicated the timing to the entity or announced the timing publicly; and (3) it is
clear that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Additionally, this
ASU adds disclosure requirements for public entities about (1) the changes in unrealized gains and losses for the period included in other comprehensive income
for recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements. The amendments of ASU 2018-13 became effective for Trustmark on January 1, 2020. Adoption of ASU 2018-
13 did not have a material impact on Trustmark’s consolidated financial statements. Disclosures required by FASB ASC Topic 820 are presented in Note 19 – Fair
Value, of this report.
ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Issued in January 2017, ASU 2017-04 simplifies the
manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill
impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. In computing the implied fair value
of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date
of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of
assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an
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entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, with the understanding that the loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or
negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04
became effective for Trustmark on January 1, 2020. Based on Trustmark’s annual goodwill impairment test performed as of October 1, 2020, the fair value of its
reporting units exceeded the carrying value and, therefore, the related goodwill was not impaired.
ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13
will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit
Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit
losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that
reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The
amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit
losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its
expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented
as an allowance rather than as a write-down. The amendments of ASU 2016-13, and all subsequent ASUs issued by FASB to provide additional guidance and
clarification related to this Topic, became effective for Trustmark on January 1, 2020.
As previously disclosed, Trustmark established a cross-functional Current Expected Credit Loss (CECL) Steering Committee, a CECL Solution Development
Working Group and a CECL Working Group which included the appropriate members of Management to evaluate the impact this ASU, and all subsequent ASUs
issued by FASB, will have on Trustmark’s financial position, results of operations and financial statement disclosures and determine the most appropriate method
of implementing the amendments in these ASUs as well as any resources needed to implement the amendments. Trustmark selected a third-party vendor to
provide allowance for loan loss software as well as advisory services in developing a new methodology that would be compliant with amendments of ASU 2016-
13.
In accordance with the amendments of ASU 2016-13, Trustmark elected to maintain pools of loans that were previously accounted for under FASB ASC Subtopic
310-30 and will continue to account for these pools as a unit of account. Loans are only removed from the existing loan pools if they are written off, paid off or
sold. Upon adoption of ASU 2016-13, the allowance for credit losses was determined for each pool and added to the pool’s carrying value to establish a new
amortized cost basis. The difference between the unpaid principle balance of the pool and the new amortized cost basis is the noncredit premium or discount
which will be amortized into interest income over the remaining life of the pool.
As a result of adopting the amendments of ASU 2016-13, Trustmark recorded a decrease to its ACL, LHFI of $3.0 million and an increase to its ACL on off-
balance sheet credit exposures of $29.6 million resulting in a one-time cumulative effect adjustment through retained earnings of $26.6 million ($19.9 million, net
of tax) at the date of adoption. This adjustment included a qualitative adjustment to the allowance for credit losses related to loans and an allowance on off-balance
sheet credit exposures. Trustmark estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to
longer term historical loss experience over a one-year period.
Trustmark’s estimated allowance for credit losses on both held to maturity securities and available for sale securities under the CECL model was deemed
immaterial due to the composition of the portfolios being primarily government agency-backed securities for which the risk of loss is minimal. Therefore,
Trustmark did not recognize a cumulative effective adjustment through retained earnings at the date of adoption related to the held to maturity or available for sale
securities.
Disclosures required by the amendments ASU 2016-13 are presented in Note 3 – Securities Available for Sale and Held to Maturity, Note 4 – LHFI and Allowance
for Credit Losses, LHFI and Note 17 – Commitments and Contingencies-Lending Related of this report.
Pending Accounting Pronouncements
ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” Issued in December 2019, ASU 2019-12 seeks to simplify the
accounting for income taxes by removing certain exceptions to the general principles in FASB ASC Topic 740. In particular, the amendments of ASU 2019-12
remove the exceptions to (1) the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from
other items (e.g., discontinued operations or other comprehensive income); (2) the requirement to recognize a deferred tax liability for equity method investments
when a foreign subsidiary becomes an equity method investment; (3) the ability not to recognize a deferred tax liability for a foreign subsidiary when
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a foreign equity method investment becomes a subsidiary; and (4) the general methodology for calculating income taxes in an interim period when a year-to-date
loss exceeds the anticipated loss for the year. The amendments of ASU 2019-12 (1) require that an entity recognize a franchise tax (or similar tax), that is partially
based on income, in accordance with FASB ASC Topic 740 and account for any incremental amount incurred as a non-income-based tax; (2) require that an entity
evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized
and when it should instead be considered a separate transaction; (3) specify that an entity is not required to allocate the consolidated amount of current and deferred
tax expense to a legal entity that is not subject to tax in its separate financial statements, but rather may elect to do so for a legal entity that is both not subject to tax
and disregarded by the taxing authority; and (4) require that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate
computation in the interim period that includes the enactment date. Trustmark adopted the amendments of ASU 2019-12 effective January 1, 2021. Adoption of
ASU 2019-12 did not have a material impact to Trustmark’s consolidated financial statements.
ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure
Requirements for Defined Benefit Plans.” Issued in August 2018, ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit
pension or other postretirement plans. The amendments in ASU 2018-14 remove certain disclosure requirements that are no longer considered cost beneficial,
clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. Trustmark adopted the amendments of ASU 2018-14
effective January 1, 2021. Trustmark will include the revised disclosures in its Annual Report on Form 10-K for the year ending December 31, 2021. Changes to
the disclosures related to the defined benefit plans as a result of adopting ASU 2018-14 will not have a material impact to Trustmark’s consolidated financial
statements.
Note 2 – Cash and Due from Banks
Trustmark is required to maintain average reserve balances with the Federal Reserve Bank of Atlanta based on a percentage of deposits. Effective March 26, 2020,
the Federal Reserve reduced reserve requirement ratios to zero percent, eliminating the reserve requirements for all depository institutions, in order to provide
liquidity in the banking system to support lending to households and businesses due to the COVID-19 pandemic. The average amounts of those reserves for the
years ended December 31, 2020 and 2019 were $19.0 million and $122.4 million, respectively.
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Note 3 – Securities Available for Sale and Held to Maturity
The following tables are a summary of the amortized cost and estimated fair value of securities available for sale and held to maturity at December 31, 2020 and
2019 ($ in thousands):
December 31, 2020
U.S. Government agency obligations
Obligations of states and political
subdivisions
Mortgage-backed securities
Residential mortgage pass-through
securities
Guaranteed by GNMA
Issued by FNMA and FHLMC
Other residential mortgage-backed
securities
Issued or guaranteed by FNMA,
FHLMC or GNMA
Commercial mortgage-backed
securities
Issued or guaranteed by FNMA,
FHLMC or GNMA
Total
December 31, 2019
U.S. Government agency obligations
Obligations of states and political
subdivisions
Mortgage-backed securities
Residential mortgage pass-through
securities
Guaranteed by GNMA
Issued by FNMA and FHLMC
Other residential mortgage-backed
securities
Issued or guaranteed by FNMA,
FHLMC or GNMA
Commercial mortgage-backed
securities
Issued or guaranteed by FNMA,
FHLMC or GNMA
Total
Securities Available for Sale
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Securities Held to Maturity
Estimated
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
144 $
(481) $
18,041 $
— $
— $
— $
—
Amortized
Cost
18,378 $
$
5,198
637
—
5,835
26,584
258
(3)
26,839
55,193
1,421,861
1,672
20,768
(3)
56,862
(1,308) 1,441,321
7,598
67,944
382
2,397
—
—
7,980
70,341
409,883
9,600
(46)
419,437 360,361
19,678
(55) 379,984
49,260
1,068
$ 1,959,773 $ 33,889 $
(9)
2,386
(1,847) $ 1,991,815 $ 538,072 $ 25,101 $
50,319
75,585
77,971
—
(58) $ 563,115
$
22,965 $
69 $
(707) $
22,327 $
3,781 $
220 $
— $
4,001
24,952
513
—
25,465
31,781
434
(53)
32,162
69,196
714,350
425
2,171
(369)
(3,165)
69,252
713,356
10,820
96,631
266
286
(10)
(370)
11,076
96,547
656,162
3,777
(1,713)
658,226 485,324
7,026
(656) 491,694
113,359
$ 1,600,984 $
625
7,580 $
(206)
113,778 109,762
(6,160) $ 1,602,404 $ 738,099 $
1,042
9,274 $
(82) 110,722
(1,171) $ 746,202
During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale to securities held to maturity. The securities were transferred at
fair value, which became the cost basis for the securities held to maturity. At the date of transfer, the net unrealized holding loss on the available for sale securities
totaled approximately $46.6 million ($28.8 million, net of tax). The net unrealized holding loss is amortized over the remaining life of the securities as a yield
adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains
or losses recognized as a result of the transfer. At December 31, 2020 and 2019, the net unamortized, unrealized loss on the transferred securities included in
accumulated other comprehensive loss in the accompanying balance sheet totaled approximately $8.9 million ($6.7 million, net of tax) and $12.1 million ($9.1
million, net of tax), respectively.
97
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 DCF analysis using the effective interest rate as of the security’s purchase date. The amount of credit loss Trustmark
records will be limited to the amount by which the amortized cost exceeds the fair value. The DCF analysis utilizes contractual maturities, as well as third-party
credit ratings and cumulative default rates published annually by Moody’s.
At December 31, 2020, the results of the analysis did not identify any securities that violate the credit loss triggers; therefore, no DCF analysis was performed and
no credit loss was recognized on any of the securities available for sale.
Accrued interest receivable is excluded from the estimate of credit losses for securities available for sale. At December 31, 2020, accrued interest receivable
totaled $4.0 million for securities available for sale and was reported in other assets on the accompanying consolidated balance sheet.
Securities Held to Maturity
At December 31, 2020, the potential credit loss exposure for Trustmark’s securities held to maturity was $26.6 million and consisted of municipal securities. After
applying appropriate probability of default and loss given default assumptions, the total amount of current expected credit losses was deemed
immaterial. Therefore, no reserve was recorded at December 31, 2020.
Accrued interest receivable is excluded from the estimate of credit losses for securities held to maturity. At December 31, 2020, accrued interest receivable totaled
$1.2 million for securities held to maturity and was reported in other assets on the accompanying consolidated balance sheet.
At December 31, 2020, Trustmark had no securities held to maturity that were past due 30 days or more as to principal or interest payments. Trustmark had no
securities held to maturity classified as nonaccrual at December 31, 2020.
Trustmark monitors the credit quality of securities held to maturity on a monthly basis through credit ratings. The following table presents the amortized cost of
Trustmark’s securities held to maturity by credit rating, as determined by Moody’s, at December 31, 2020 ($ in thousands):
Aaa
Aa1 to Aa3
Not Rated (1)
Total
(1)
Not rated securities primarily consist of Mississippi municipal general obligations.
98
$
$
December 31, 2020
511,488
22,528
4,056
538,072
The table below includes securities with gross unrealized losses for which an allowance for credit losses has not been recorded and segregated by length of
impairment at December 31, 2020 and 2019 ($ in thousands):
December 31, 2020
U.S. Government agency obligations
Obligations of states and political
subdivisions
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA
Issued by FNMA and FHLMC
Other residential mortgage-backed securities
Issued or guaranteed by FNMA,
FHLMC or GNMA
Commercial mortgage-backed securities
Issued or guaranteed by FNMA,
FHLMC or GNMA
Total
December 31, 2019
U.S. Government agency obligations
Obligations of states and political
subdivisions
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA
Issued by FNMA and FHLMC
Other residential mortgage-backed securities
Issued or guaranteed by FNMA,
FHLMC or GNMA
Commercial mortgage-backed securities
Issued or guaranteed by FNMA,
FHLMC or GNMA
Total
Less than 12 Months
12 Months or More
Total
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
$
— $
— $
11,167 $
(481) $
11,167 $
(481)
—
—
667
(3)
667
(3)
1,636
324,905
(3)
(1,308)
—
—
—
—
1,636
324,905
(3)
(1,308)
29,398
(101)
—
—
29,398
(101)
—
355,939 $
$
—
(1,412) $
659
12,493 $
(9)
(493) $
659
368,432 $
(9)
(1,905)
$
6,585 $
(105) $
12,886 $
(602) $
19,471 $
—
—
6,216
(53)
6,216
(707)
(53)
23,544
112,879
(107)
(230)
18,529
278,120
(272)
(3,305)
42,073
390,999
(379)
(3,535)
158,341
(738)
151,271
(1,631)
309,612
(2,369)
51,312
352,661 $
$
(167)
(1,347) $
14,155
481,177 $
(121)
(5,984) $
65,467
833,838 $
(288)
(7,331)
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. Because Trustmark does not intend to sell these securities and it is more likely than not that Trustmark will not be required to sell the investments before
recovery of their amortized cost bases, which may be maturity. Prior to the adoption of FASB ASU 2016-13, Trustmark did not consider these investments to be
other-than-temporarily impaired at December 31, 2019. There were no other-than-temporary impairments for the years ended December 31, 2019 and 2018.
99
Security Gains and Losses
For the years ended December 31, 2020, 2019 and 2018, 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 $1.964 billion and $1.770 billion at December 31, 2020 and 2019, respectively, were pledged to collateralize public deposits and
securities sold under repurchase agreements and for other purposes as permitted by law. At both December 31, 2020 and 2019, none of these securities were
pledged under the Federal Reserve Discount Window program to provide additional contingency funding capacity.
Contractual Maturities
The amortized cost and estimated fair value of securities available for sale and held to maturity at December 31, 2020, by contractual maturity, are shown below ($
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.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total
Securities
Available for Sale
Securities
Held to Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
$
1,570 $
1,527
2,031
18,448
23,576
1,936,197
1,959,773 $
1,604 $
1,570
1,989
18,713
23,876
1,967,939
1,991,815 $
19,237 $
7,347
—
—
26,584
511,488
538,072 $
19,374
7,465
—
—
26,839
536,276
563,115
Note 4 – LHFI and Allowance for Credit Losses, LHFI
Trustmark adopted FASB ASC Topic 326 in accordance with the amendments of FASB ASU 2016-13 on January 1, 2020. In accordance with FASB ASC
Subtopic 326-20, Trustmark has developed an ACL methodology effective January 1, 2020, which replaces its previous allowance for loan losses
methodology. See the section captioned “ACL, LHFI” within this note for additional information regarding Trustmark’s ACL. Trustmark adopted FASB ASC
Topic 326 using the modified retrospective approach prescribed by the amendments of ASU 2016-13; therefore, prior period balances are presented under legacy
GAAP and may not be comparable to current period presentation.
At December 31, 2020 and 2019, LHFI consisted of the following ($ in thousands):
Loans secured by real estate:
Construction, land development and other land (1)
Other secured by 1-4 family residential properties (1)
Secured by nonfarm, nonresidential properties
Other real estate secured
Other loans secured by real estate: (1)
Other construction
Secured by 1-4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans (1)
LHFI
Less ACL
Net LHFI
December 31,
2020
2019
$
$
514,056 $
524,732
2,709,026
1,065,964
794,983
1,216,400
1,309,078
164,386
1,000,776
525,123
9,824,524
117,306
9,707,218 $
1,162,791
1,855,913
2,475,245
724,480
—
—
1,477,896
175,738
967,944
495,621
9,335,628
84,277
9,251,351
100
(1)
In accordance with the guidance in FASB ASC Topic 326, Trustmark redefined its LHFI portfolio segments and related loan classes based on the level at
which risk is monitored within the ACL methodology. The other loans secured by real estate portfolio segment and related loan classes were separated
from the loans secured by real estate portfolio segment. The other construction loans were segregated from the construction, land development and other
land loans. The other loans secured by 1-4 family residential properties were segregated from the loans secured by 1-4 family residential properties and
the loans secured by 1-4 family residential properties were redefined in the other loans secured by real estate portfolio segment. Other loans were
redefined as other commercial loans.
Accrued interest receivable is not included in the amortized cost basis of Trustmark’s LHFI. At December 31, 2020, accrued interest receivable for LHFI totaled
$33.0 million 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 December 31, 2020,
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.
Related Party Loans
At December 31, 2020 and 2019, loans to certain executive officers and directors, including their immediate families and companies in which they are principal
owners, totaled $37.7 million and $35.5 million, respectively. During 2020, $470.4 million of new loan advances were made, while repayments were $468.2
million. There were no increases in loans due to changes in executive officers and directors.
Nonaccrual and Past Due LHFI
No material interest income was recognized in the income statement on nonaccrual LHFI for each of the years in the three-year period ended December 31, 2020.
The following table provides the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more still accruing interest as of December 31,
2020 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Other secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Other loans secured by real estate:
Other construction
Secured by 1-4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
Total
December 31, 2020
Nonaccrual With
No ACL
Total Nonaccrual
Loans Past Due 90
Days or More Still
Accruing
$
$
5,756 $
1,895
12,037
60
—
—
12,665
—
—
—
32,413 $
5,985 $
4,487
15,197
185
—
11,807
15,618
86
3,970
5,793
63,128 $
—
79
—
—
—
1,257
—
240
—
—
1,576
101
The following table provides an aging analysis of the amortized cost basis of past due LHFI at December 31, 2020 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Other secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Other loans secured by real estate:
Other construction
Secured by 1-4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
Total
December 31, 2020
Past Due
30-59 Days
60-89 Days
90 Days
or More
Total Past
Due
Current
Loans
Total LHFI
$
$
339 $
1,505
920
103
—
3,291
271
926
117
2,143
9,615 $
34 $
523
—
101
—
1,289
196
190
—
2,971
5,304 $
161 $
896
972
107
—
5,110
1,543
240
177
346
9,552 $
514,056
513,522 $
534 $
2,924
524,732
521,808
1,892 2,707,134 2,709,026
311 1,065,653 1,065,964
—
794,983
794,983
9,690 1,206,710 1,216,400
2,010 1,307,068 1,309,078
164,386
163,030
1,356
294 1,000,482 1,000,776
525,123
519,663
5,460
24,471 $ 9,800,053 $ 9,824,524
The following table provides an aging analysis of past due and nonaccrual LHFI by loan class at December 31, 2019 ($ in thousands):
Past Due
December 31, 2019
30-59 Days
60-89 Days
90 Days
or More (1)
Total
Nonaccrual
Current
Loans
Total LHFI
$
380 $
5,254
256 $
940
— $
211
636 $
6,405
897 $ 1,161,258 $ 1,162,791
16,810 1,832,698 1,855,913
1,698
8
617
2,208
76
152
10,393 $
—
—
12
380
—
4
1,592 $
$
—
—
39
392
—
—
642 $
1,698
8
668
2,980
76
156
12,627 $
7,700 2,465,847 2,475,245
1,032
724,480
723,440
21,775 1,455,453 1,477,896
175,738
172,650
967,944
963,789
495,621
494,640
53,226 $ 9,269,775 $ 9,335,628
108
4,079
825
Loans secured by real estate:
Construction, land development and
other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential
properties
Other real estate secured
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other loans
Total
(1)
Past due 90 days or more but still accruing interest.
Impaired LHFI
Prior to the adoption of FASB ASC Topic 326, Trustmark’s individually evaluated impaired LHFI include all commercial nonaccrual relationships of $500
thousand or more, which were specifically reviewed for impairment and deemed impaired, and all LHFI classified as TDRs in accordance with FASB ASC
Subtopic 310-10-50-20, “Impaired Loans.” Once a LHFI was deemed to be impaired, the full difference between the book value and the most likely estimate of the
collateral’s net realizable value was charged off or a specific reserve was established.
No material interest income was recognized in the accompanying consolidated statements of income on impaired LHFI for each of the years ended December 31,
2019 and 2018.
At December 31, 2019, individually evaluated impaired LHFI consisted of the following ($ in thousands):
102
December 31, 2019
LHFI
Unpaid
Principal
Balance
With No Related
Allowance
Recorded
With an
Allowance
Recorded
Total
Carrying
Amount
Related
Allowance
Average
Recorded
Investment
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other loans
Total
Troubled Debt Restructurings
$
$
926 $
6,513
7,295
69
27,178
22
4,079
1,207
47,289 $
610 $
2,104
1,462
—
19,374
—
—
—
23,550 $
16 $
3,360
5,255
68
4,084
21
4,079
784
17,667 $
626 $
5,464
6,717
68
23,458
21
4,079
784
41,217 $
— $
35
2,355
—
707
—
1,809
553
5,459 $
1,089
4,713
8,096
158
27,088
11
6,337
1,033
48,525
At December 31, 2020, 2019 and 2018, LHFI classified as TDRs totaled $25.8 million, $31.5 million and $28.2 million, respectively, At December 31, 2020, LHFI
classified as TDRs were primarily comprised of credits with interest-only payments for an extended period of time, payment concessions and credits renewed at a
rate that was not commensurate with that of new debt with similar risk which totaled $17.7 million. At December 31, 2019 and 2018, LHFI classified as TDRs
were primarily comprised of credits with interest-only payments for an extended period of time and credits renewed at a rate that was not commensurate with that
of new debt with similar risk which totaled $20.8 million and $23.8 million, respectively. The remaining TDRs at December 31, 2020, 2019 and 2018 resulted
from bankruptcies or from payment or maturity extensions. Trustmark had $4.5 million of unused commitments on TDRs at December 31, 2020, compared to $7.0
million of unused commitments on TDRs at December 31, 2019 and $4.4 million of unused commitments on TDRs at December 31, 2018.
At December 31, 2020, TDRs had a related ACL of $2.4 million, compared to related loan loss allowance of $3.2 million at December 31, 2019 and $2.3 million at
December 31, 2018. Specific charge-offs related to TDRs totaled $2.3 million, $1.6 million and $18.4 million for the years ended December 31, 2020, 2019 and
2018, respectively.
The following tables illustrate the impact of modifications classified as TDRs for the periods presented ($ in thousands):
Modifications Classified as TDRs
Loans secured by real estate:
Other secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Total
Modifications Classified as TDRs
Loans secured by real estate:
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Commercial and industrial loans
Consumer loans
Total
Year Ended December 31, 2020
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
13 $
2
4
6
2
27 $
923 $
1,111
1,665
26
3,902
7,627 $
929
1,111
1,664
26
3,872
7,602
Year Ended December 31, 2019
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
$
19
1
8
2
30 $
$
1,742
5,055
9,167
30
15,994 $
1,738
5,055
9,054
30
15,877
103
Modifications Classified as TDRs
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Commercial and industrial loans
Consumer loans
Total
Year Ended December 31, 2018
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
1 $
23
2
23
3
52 $
22 $
2,102
1,780
26,970
4
30,878 $
22
1,660
1,780
25,862
4
29,328
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):
TDRs that Subsequently Defaulted
Loans secured by real estate:
Construction, land development and other
land
Other secured by 1-4 family residential
properties
Secured by nonfarm, nonresidential
properties
Commercial and industrial loans
Consumer loans
Total
2020
Number of
Contracts
Recorded
Investment
Years Ended December 31,
2019
Number of
Contracts
Recorded
Investment
2018
Number of
Contracts
Recorded
Investment
— $
2
1
1
—
4 $
—
78
139
82
—
299
— $
—
3
446
—
7
1
11 $
—
192
27
665
1 $
5
—
6
1
13 $
22
734
—
15,178
1
15,935
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 December 31, 2020, 2019 and 2018 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Other secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
Total TDRs
Accruing
December 31, 2020
Nonaccrual
Total
$
$
— $
—
—
1,500
6
—
—
1,506 $
12 $
3,699
3,903
12,749
17
3,793
81
24,254 $
12
3,699
3,903
14,249
23
3,793
81
25,760
104
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Commercial and industrial loans
Consumer loans
Other loans
Total TDRs
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Commercial and industrial loans
Consumer loans
Other loans
Total TDRs
$
$
$
Accruing
December 31, 2019
Nonaccrual
Total
— $
77
—
3,319
—
—
3,396 $
15 $
3,865
5,176
18,913
21
137
28,127 $
Accruing
December 31, 2018
Nonaccrual
Total
— $
743
1,734
9,007
—
—
24 $
3,125
395
12,620
2
540
$
11,484 $
16,706 $
15
3,942
5,176
22,232
21
137
31,523
24
3,868
2,129
21,627
2
540
28,190
On March 27, 2020, the CARES Act, a stimulus package intended to provide relief to businesses and consumers in the United States struggling as a result of the
pandemic, was signed into law. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related
modifications executed between March 1, 2020 and the earlier of (i) 60 days after the date of termination of the national emergency declared by the President and
(ii) January 1, 2022, on loans that were current as of December 31, 2019 are not TDRs. Additionally, under guidance from the federal banking agencies, other
short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs under ASC Subtopic
310-40. These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or
delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a
modification program is implemented. Trustmark modified 2,923 individual loans with aggregate principal balances totaling $1.271 billion through December 31,
2020. Of these modifications, $972 thousand were treated as TDRs. Commercial concessions were primarily either interest only for 90 days or full payment
deferrals for 90 days. Consumer concessions were 90-day full payment deferrals. At December 31, 2020, the balance of loans remaining under some type of
concession totaled $34.2 million.
105
Collateral-Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of December 31, 2020 ($ in thousands):
Loans secured by real estate:
Construction, land development and
other land
Other secured by 1-4 family
residential properties
Secured by nonfarm, nonresidential
properties
Other real estate secured
Other loans secured by real estate:
Other construction
Secured by 1-4 family residential
properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
Total
$
Real Estate
Equipment and
Machinery
Inventory and
Receivables
Vehicles
Miscellaneous
Total
December 31, 2020
$
5,756 $
—
$
— $
— $
— $
5,756
454
12,037
60
—
1,441
86
—
3,970
606
24,410 $
—
—
—
—
—
425
—
—
—
425
$
—
—
—
—
—
4,899
—
—
1,958
6,857 $
—
—
—
—
—
135
—
—
—
135 $
—
—
—
—
—
8,531
—
—
3,051
11,582 $
454
12,037
60
—
1,441
14,076
—
3,970
5,615
43,409
A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the
sale of the collateral. The following provides a qualitative description by class of loan of the collateral that secures Trustmark’s collateral-dependent LHFI:
•
•
•
•
•
Loans secured by real estate – Loans within these loan classes are secured by liens on real estate properties. One loan relationship experienced a decline
in fair value due to general deterioration during the fourth quarter of 2020 to the collateral that secures the relationship. There have been no other
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. There have been no significant
changes to the collateral that secures these financial assets during the period.
Other commercial loans - Loans within this loan class are secured by liens on real estate properties or priority status of a UCC agreement for 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 loan 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.
106
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 insure compliance with policy.
Underwriting – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within loan policy requirements.
A properly approved credit is approved by adequate authority in a timely manner with all conditions of approval fulfilled. Total policy exceptions
measure the level of underwriting and other policy exceptions within a portfolio segment.
Collateral Documentation – focuses on the adequacy of documentation to perfect Trustmark’s collateral position and substantiate collateral value.
Collateral exceptions measure the level of documentation exceptions within a portfolio segment. Collateral exceptions occur when certain collateral
documentation is either not present or not current.
Compliance with Law – focuses on underwriting, documentation, approval and reporting in compliance with banking laws and regulations. Primary
emphasis is directed to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Regulation O requirements and
regulations governing appraisals.
Commercial Credits
Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the
expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain
criteria to delineate the level of risk across the ten unique credit risk grades. Credit risk grade definitions are as follows:
•
•
•
•
•
Risk Rate (RR) 1 through RR 6 – Grades one through six represent groups of loans that are not subject to criticism as defined in regulatory
guidance. Loans in these groups exhibit characteristics that represent low to moderate risk measured by using a variety of credit risk criteria such as
cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic
conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are
supported by properly margined collateral and guarantees of principal parties.
Other Assets Especially Mentioned (Special Mention) (RR 7) – a loan that has a potential weakness that if not corrected will lead to a more severe
rating. This rating is for credits that are currently protected but potentially weak because of an adverse feature or condition that if not corrected will
lead to a further downgrade.
Substandard (RR 8) – a loan that has at least one identified weakness that is well defined. This rating is for credits where the primary sources of
repayment are not viable at the time of evaluation or where either the capital or collateral is not adequate to support the loan and the secondary
means of repayment do not provide a sufficient level of support to offset the identified weakness. Loss potential exists in the aggregate amount of
substandard loans but does not necessarily exist in individual loans.
Doubtful (RR 9) – a loan with an identified weakness that does not have a valid secondary source of repayment. Generally, these credits have an
impaired primary source of repayment and secondary sources are not sufficient to prevent a loss in the credit. The exact amount of the loss has not
been determined at this time.
Loss (RR 10) – a loan or a portion of a loan that is deemed to be uncollectible.
By definition, credit risk grades special mention (RR 7), substandard (RR 8), doubtful (RR 9) and loss (RR 10) are criticized loans while substandard (RR 8),
doubtful (RR 9) and loss (RR 10) are classified loans. These definitions are standardized by all bank regulatory agencies and are generally equally applied to each
individual lending institution. The remaining credit risk grades are considered pass credits and are solely defined by Trustmark.
To enhance this process, Trustmark has determined that loans will be individually assessed, and a formal analysis will be performed and based upon the analysis
the loan will be written down to net realizable value. Trustmark will individually assess and remove loans from the pool in the following circumstances:
•
Commercial nonaccrual loans with total exposure of $500 thousand (excluding those portions of the debt that are government guaranteed or are secured
by Trustmark deposits or marketable securities) or more.
107
•
•
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 thirty 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 $100 thousand or more.
In addition, periodic reviews of significant development, commercial construction, multi-family and nonowner-occupied projects are performed. These reviews
assess each particular project with respect to location, project valuations, progress of completion, leasing status, current financial information, rents, operating
expenses, cash flow, adherence to budget and projections and other information as applicable. Summary results are reviewed by Senior and Regional Credit
Officers in addition to the Chief Credit Officer with a determination made as to the appropriateness of existing risk ratings and accrual status.
Consumer Credits
Consumer LHFI that do not meet a minimum custom credit score are reviewed quarterly by Management. The Retail Credit Review Committee reviews the
volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer to ensure that Trustmark
continues to originate quality loans.
Trustmark monitors the levels and severity of past due consumer LHFI on a daily basis through its collection activities. A detailed assessment of consumer LHFI
delinquencies is performed monthly at both a product and market level by delivery channel, which incorporates the perceived level of risk at time of underwriting.
108
The tables below present the amortized cost basis of loans by credit quality indicator and class of loans based on the most recent analysis performed ($ in
thousands):
As of December 31, 2020
Loans secured by real estate:
Construction, land development
and other land:
Pass - RR 1 through RR 6
Special Mention - RR 7
Substandard - RR 8
Doubtful - RR 9
Total
Other secured by 1-4 family residential
properties:
Pass - RR 1 through RR 6
Special Mention - RR 7
Substandard - RR 8
Doubtful - RR 9
Total
Secured by nonfarm, nonresidential
properties:
Pass - RR 1 through RR 6
Special Mention - RR 7
Substandard - RR 8
Doubtful - RR 9
Total
Other real estate secured:
Pass - RR 1 through RR 6
Special Mention - RR 7
Substandard - RR 8
Doubtful - RR 9
Total
Term Loans by Origination Year
2020
2019
2018
2017
2016
Prior
Commercial LHFI
Revolving
Loans
Total
$ 287,218
—
5,419
—
$ 62,078
—
4,363
—
$ 26,401
—
1,226
—
$
292,637
66,441
27,627
$
$
4,487
—
12
—
4,499
3,274
—
494
—
3,768
3,564
—
22
42
3,628
$ 35,139
255
1,155
29
$ 19,596
—
8
—
$ 15,399
50
914
—
$
9,605
—
341
—
$ 10,273
—
302
—
$
36,578
19,604
16,363
9,946
10,575
4,786
—
337
—
5,123
$
$
28,548 $ 415,570
—
11,637
42
—
101
—
28,649
427,249
8,486 $ 103,284
305
7,007
29
—
3,950
—
12,436
110,625
$ 697,439
13,452
19,119
52
$ 496,476
6,139
20,572
163
$ 442,264
2,956
4,516
—
$ 293,072
4,466
12,956
—
$ 254,747
4,957
38,956
217
$ 251,219
20,545
25,438
306
$
730,062
523,350
449,736
310,494
298,877
297,508
96,098 $ 2,531,315
52,515
124,336
738
98,877 2,708,904
—
2,779
—
$ 146,803
—
18,649
—
$ 376,765
—
14
—
$ 347,472
—
18
—
$ 48,626
—
—
—
$ 89,824
—
556
—
$ 23,680
841
122
—
$
165,452
376,779
347,490
48,626
90,380
24,643
12,116 $ 1,045,286
841
19,359
—
12,116 1,065,486
—
—
—
109
As of December 31, 2020
Other loans secured by real estate:
Other construction
Pass - RR 1 through RR 6
Special Mention - RR 7
Substandard - RR 8
Doubtful - RR 9
Total
Commercial and industrial loans:
Pass - RR 1 through RR 6
Special Mention - RR 7
Substandard - RR 8
Doubtful - RR 9
Total
Term Loans by Origination Year
2020
2019
2018
2017
2016
Commercial LHFI
Prior
Revolving
Loans
Total
$
$ 262,544
—
754
—
$ 425,936
—
—
—
$
81,476
—
—
—
$ 14,074
—
—
—
263,298
425,936
81,476
14,074
$
2,464
—
—
—
2,464
$
—
—
—
—
—
7,735 $ 794,229
—
754
—
—
—
—
7,735
794,983
$
$ 444,304
677
12,090
151
$ 165,163
45
1,814
95
77,611
—
9,737
—
$ 77,985
—
3,735
—
$ 59,131
—
2,160
32
$ 43,214
—
5,024
4
457,222
167,117
87,348
81,720
61,323
48,242
$ 372,486 $ 1,239,894
962
67,940
282
406,106 1,309,078
240
33,380
—
State and other political subdivision loans:
Pass - RR 1 through RR 6
Special Mention - RR 7
Substandard - RR 8
Doubtful - RR 9
Total
Other commercial loans:
Pass - RR 1 through RR 6
Special Mention - RR 7
Substandard - RR 8
Doubtful - RR 9
Total
$
$
$ 250,363
—
—
—
250,363
$ 101,230
7,500
381
2
109,113
$
$
79,595
—
—
—
79,595
70,990
—
2,099
—
73,089
41,334
—
—
—
$ 113,817
—
247
—
$ 132,634
—
—
—
$ 372,831
4,018
4,491
—
$
41,334
114,064
132,634
381,340
1,446 $ 992,020
4,018
4,738
—
1,446 1,000,776
—
—
—
$
20,769
—
683
—
21,452
9,723
—
6
—
$ 33,481
—
707
—
$ 30,715
—
—
23
9,729
34,188
30,738
$ 225,533 $ 492,441
18,833
13,824
25
11,333
9,948
—
246,814
525,123
Total commercial LHFI
$ 2,304,725
$ 1,731,911
$ 1,072,826
$ 593,152
$ 634,209
$ 791,222
$ 814,179 $ 7,942,224
110
As of December 31, 2020
Loans secured by real estate:
Construction, land development and
other land:
Current
Past due 30-89 days
Past due 90 days or more
Nonaccrual
Total
Other secured by 1-4 family residential
properties:
Current
Past due 30-89 days
Past due 90 days or more
Nonaccrual
Total
Secured by nonfarm, nonresidential
properties:
Current
Past due 30-89 days
Past due 90 days or more
Nonaccrual
Total
Other real estate secured:
Current
Past due 30-89 days
Past due 90 days or more
Nonaccrual
Total
Term Loans by Origination Year
2020
2019
2018
2017
2016
Consumer LHFI
Prior
Revolving
Loans
Total
$ 47,336
—
—
—
$ 24,174
318
—
—
$ 8,496
20
—
—
$ 2,036
—
—
—
$ 1,447
1
—
—
$ 2,868
12
—
99
$
47,336
24,492
8,516
2,036
1,448
2,979
— $
—
—
—
—
86,357
351
—
99
86,807
$ 20,864
93
—
6
$ 10,253
12
—
44
$ 12,037
—
—
121
$ 4,177
13
—
428
$ 2,082
—
—
—
$ 11,124
133
30
382
$
20,963
10,309
12,158
4,618
2,082
11,669
348,830 $ 409,367
1,309
52
3,379
352,308 414,107
1,058
22
2,398
$
$
109
—
—
—
109
$
$ —
—
—
—
$ —
—
—
—
—
—
4
—
—
—
$ —
—
—
—
4
—
$
107
—
—
—
107
$ —
—
—
—
—
$
38
—
—
—
38
37
—
—
—
37
$
96
—
—
—
96
111
$
$
$
$
9
—
—
—
9
200
—
—
—
200
— $
—
—
—
—
— $
—
—
—
—
122
—
—
—
122
478
—
—
—
478
As of December 31, 2020
Other loans secured by real estate:
Secured by 1-4 family residential properties
Current
Past due 30-89 days
Past due 90 days or more
Nonaccrual
Total
Consumer loans:
Current
Past due 30-89 days
Past due 90 days or more
Nonaccrual
Total
Term Loans by Origination Year
2020
2019
2018
2017
2016
Consumer LHFI
Prior
Revolving
Loans
Total
$ 289,521
499
159
283
$ 214,056
93
214
711
$ 173,324
753
208
2,024
$ 92,564
366
127
682
$ 109,031
1,080
—
239
$ 321,250
799
549
7,868
$
290,462
215,074
176,309
93,739
110,350
330,466
— $ 1,199,746
—
3,590
—
1,257
—
11,807
— 1,216,400
$
$
65,370
524
77
12
65,983
$
25,303
158
—
4
25,465
$
$
13,140
67
4
55
13,266
3,893
19
—
13
3,925
$
1,257
7
—
2
1,266
$
345
3
—
—
348
53,669 $ 162,977
1,083
240
86
305
159
—
54,133
164,386
Total consumer LHFI
$ 424,960
$ 275,340
$ 210,287
$ 104,359
$ 115,242
$ 345,671
$ 406,441 $ 1,882,300
Total LHFI
$ 2,729,685
$ 2,007,251
$ 1,283,113
$ 697,511
$ 749,451
$ 1,136,893
$ 1,220,620 $ 9,824,524
The tables below present LHFI by loan class and credit quality indicator at December 31, 2019 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other loans
Total
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other loans
Total
Pass -
Special Mention -
Categories 1-6
Category 7
December 31, 2019
Commercial LHFI
Substandard -
Category 8
Doubtful -
Category 9
Subtotal
$
$
1,075,146 $
116,592
2,430,761
721,238
1,407,837
—
957,948
469,095
7,178,617 $
— $
45
—
—
909
—
4,650
3,445
9,049 $
15,726 $
6,355
44,001
2,547
68,262
—
5,346
16,926
159,163 $
42 $
41
328
—
888
—
—
30
1,329 $
1,090,914
123,033
2,475,090
723,785
1,477,896
—
967,944
489,496
7,348,158
Past Due
Current
30-89 Days
Consumer LHFI
Past Due
90 Days or More
Nonaccrual
Subtotal
Total LHFI
332 $
5,922
—
—
—
2,588
—
—
8,842 $
— $
211
—
—
—
393
—
—
604 $
132 $
15,817
—
—
—
108
—
—
71,877 $
1,732,880
155
695
—
175,738
—
6,125
16,057 $ 1,987,470 $
1,162,791
1,855,913
2,475,245
724,480
1,477,896
175,738
967,944
495,621
9,335,628
$
$
71,413 $
1,710,930
155
695
—
172,649
—
6,125
1,961,967 $
112
Past Due LHFS
LHFS past due 90 days or more totaled $119.4 million and $41.6 million at December 31, 2020 and 2019, respectively.
Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during 2020 or 2019.
ACL, LHFI
Trustmark’s ACL methodology for LHFI is based upon guidance within FASB ASC Subtopic 326-20 as well as 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 for LHFI is adjusted through the PCL and reduced by the charge off of loan
amounts, net of recoveries.
The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a collective, or pooled, component for
estimated expected credit losses for pools of loans that share similar risk characteristics, and an asset-specific component involving individual loans that do not
share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. In estimating the allowance for credit losses for
the collective component, loans are segregated into loan pools based on loan product types and similar risk characteristics.
The loans secured by real estate and other loans secured by real estate portfolio segments include loans for both commercial and residential properties. The
underwriting process for these loans includes analysis of the financial position and strength of both the borrower and guarantor, experience with similar projects in
the past, market demand and prospects for successful completion of the proposed project within the established budget and schedule, values of underlying
collateral, availability of permanent financing, maximum loan-to-value ratios, minimum equity requirements, acceptable amortization periods and minimum debt
service coverage requirements, based on property type. The borrower’s financial strength and capacity to repay their obligations remain the primary focus of
underwriting. Financial strength is evaluated based upon analytical tools that consider historical and projected cash flows and performance in addition to analysis
of the proposed project for income-producing properties. Additional support offered by guarantors is also considered. Ultimate repayment of these loans is
sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.
The commercial and industrial LHFI portfolio segment includes loans within Trustmark’s geographic markets made to many types of businesses for various
purposes, such as short term working capital loans that are usually secured by accounts receivable and inventory and term financing for equipment and fixed asset
purchases that are secured by those assets. Trustmark’s credit underwriting process for commercial and industrial loans includes analysis of historical and
projected cash flows and performance, evaluation of financial strength of both borrowers and guarantors as reflected in current and detailed financial information
and evaluation of underlying collateral to support the credit.
The consumer LHFI portfolio segment is comprised of loans which are underwritten after evaluating a borrower’s repayment capacity, credit and
collateral. Several factors are considered when assessing a borrower’s capacity to repay the obligation, including the borrower’s employment, income, current debt
and assets. Credit is assessed using a credit report that provides credit scores and the borrower’s current and past information about their credit history. Property
appraisals are obtained to assist in evaluating collateral. Loan-to-value and debt-to-income ratios, loan amount and lien position are also considered in assessing
whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices
and demand and levels of unemployment.
The state and other political subdivision LHFI and the other commercial LHFI portfolio segments primarily consist of loans to non-depository financial
institutions, such as mortgage companies, finance companies and other financial intermediaries, loans to state and political subdivisions, and loans to non-profit
and charitable organizations. These loans are underwritten based on the specific nature or purpose of the loan and underlying collateral with special consideration
given to the specific source of repayment for the loan.
113
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
Loans secured by real estate
Construction, land
1-4 family residential
Methodology
DCF
Loss Drivers
Prime Rate, National GDP
development and other land
construction
Other secured by 1-4
family residential
properties
Secured by nonfarm,
nonresidential properties
Other real estate secured
Other loans secured by
real estate
Commercial and
industrial loans
Other construction
Secured by 1-4 family
residential properties
Commercial and
industrial loans
Consumer loans
Consumer loans
Lots and development
Unimproved land
All other consumer
Consumer 1-4 family - 1st liens
All other consumer
Nonresidential owner-occupied
Nonowner-occupied -
hotel/motel
Nonowner-occupied - office
Nonowner-occupied- Retail
Nonowner-occupied - senior
living/nursing homes
Nonowner-occupied -
all other
Nonresidential owner-occupied
Nonresidential nonowner
-occupied - apartments
Nonresidential owner-occupied
Nonowner-occupied -
all other
Other construction
DCF
DCF
DCF
DCF
DCF
DCF
DCF
DCF
DCF
DCF
DCF
DCF
DCF
DCF
DCF
Prime Rate, Southern
Unemployment
Prime Rate, Southern
Unemployment
Prime Rate, Southern
Unemployment
Prime Rate, Southern
Unemployment
Prime Rate, Southern
Unemployment
Southern Unemployment,
National GDP
Southern Vacancy Rate,
Southern Unemployment
Southern Vacancy Rate,
Southern Unemployment
Southern Vacancy Rate,
Southern Unemployment
Southern Vacancy Rate,
Southern Unemployment
Southern Vacancy Rate,
Southern Unemployment
Southern Unemployment,
National GDP
Southern Vacancy Rate,
Southern Unemployment
Southern Unemployment,
National GDP
Southern Vacancy Rate,
Southern Unemployment
WARM
Prime Rate, National
Unemployment
Trustmark mortgage
WARM
Southern Unemployment
Commercial and industrial -
non-working capital
Commercial and industrial -
working capital
Credit cards
Credit cards
Overdrafts
All other consumer
DCF
DCF
WARM
WARM
Loss Rate
DCF
DCF
DCF
DCF
DCF
Trustmark historical data
Trustmark historical data
Trustmark call report data
Trustmark call report data
Trustmark historical data
Prime Rate, Southern
Unemployment
Moody's Bond Default Study
Prime Rate, Southern
Unemployment
Trustmark historical data
Trustmark historical data
State and other political
subdivision loans
Other commercial loans
State and other political
subdivision loans
Other commercial loans
Obligations of state and
political subdivisions
Other loans
Commercial and industrial -
non-working capital
Commercial and industrial -
working capital
In general, Trustmark utilizes a DCF method to estimate the quantitative portion of the allowance for credit losses for loan pools. The DCF model consists of two
key components, a loss driver analysis (LDA) and a cash flow analysis. For loan pools utilizing the DCF methodology, multiple assumptions are in place,
depending on the loan pool. A reasonable and supportable forecast is utilized for each loan pool by developing a LDA for each loan class. The LDA uses charge
off data from Federal Financial Institutions Examination Council (FFIEC) reports to construct a periodic default rate (PDR). The PDR is decomposed into a
probability of default
114
(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 loss given default (LGD) is
derived using a method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time
and projects the LGD based on the levels of PD forecasts. This model approach is applicable to all pools within the construction, land development and other land,
other secured by 1-4 family residential properties, secured by nonfarm, nonresidential properties and other real estate secured loan classes as well as the all other
consumer and other loans pools.
For the commercial and industrial loans related pools, Trustmark uses its own PD and LGD data, instead of the macroeconomic variables and the Frye Jacobs
method described above, to calculate the PD and LGD as there were no defensible macroeconomic variables that correlated to Trustmark’s losses. Trustmark
utilizes a third-party Bond Default Study to derive the PD and LGD for the obligations of state and political subdivisions pool. Due to the lack of losses within this
pool, no defensible macroeconomic factors were identified to correlate.
The PD and LGD measures are used in conjunction with prepayment data as inputs into the DCF model to calculate the cash flows at the individual loan
level. Contractual cash flows based on loan terms are adjusted for PD, LGD and prepayments to derive loss cash flows. These loss cash flows are discounted by
the loan’s coupon rate to arrive at the discounted cash flow based quantitative loss. The prepayment studies are updated quarterly by a third-party for each
applicable pool.
An alternate method of estimating the ACL is used for certain loan pools due to specific characteristics of these loans. For the non-DCF pools, specifically, those
using the weighted average remaining maturity (WARM) method, the remaining life is incorporated into the ACL quantitative calculation.
Trustmark determined that reasonable and supportable forecasts could be made for a twelve-month period for all of its loan pools. To the extent the lives of the
loans in the LHFI portfolio extend beyond this forecast period, Trustmark uses a reversion period of four quarters and reverts to the historical mean on a straight-
line basis over the remaining life of the loans. The econometric models in production today 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 2017. 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, 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 related to the COVID-19 pandemic, causing an overall decrease in
quantitative reserve levels.
Qualitative factors used in the ACL methodology include the following:
•
•
•
•
•
Lending policies and procedures
Economic conditions and concentrations of credit
Nature and volume of the portfolio
Performance trends
External factors
While all these factors are incorporated into the overall methodology, only three are currently considered active: economic conditions and concentrations of credit,
performance trends and 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.
115
For the performance trends factor, Trustmark uses migration analyses to allocate additional ACL to non-pass/delinquent loans within each pool. In this way,
Management believes the ACL will directly reflect changes in risk, based on the performance of the loans within a pool, whether declining or improving.
The external factors qualitative factor is Management’s best judgement on the loan or pool level impact of all factors that affect the portfolio that are not accounted
for using any other part of the ACL methodology, e.g., natural disasters, changes in legislation, impacts due to technology and pandemics. During the third quarter
of 2020, Trustmark activated the External Factor – Pandemic to ensure reserve adequacy for collectively evaluated loans most likely to be impacted by the unique
economic and behavioral conditions created by the COVID-19 pandemic. Additional qualitative reserves are derived based on two principles. The first is the
disconnect of economic factors to Trustmark’s modeled probability of default (the econometric models underpinning the quantitative pooled reserves). During the
pandemic, extraordinary measures by the federal government were made available to consumers and businesses, including COVID-19 loan payment concessions,
direct transfer payments to households, tax deferrals, and reduced interest rates, among others. These government interventions may have extended the lag between
economic conditions and default, relative to what was captured in the model development data. Because Trustmark’s econometric PD models rely on the observed
relationship from the economic downturn from 2007 to 2009 in both timing and severity, Management does not expect the models to reflect these current
conditions. For example, while the models would predict contemporaneous unemployment peaks and loan defaults, this may not occur when borrowers can request
payment deferrals. Thus, for the affected population, economic conditions are not fully considered as a part of Trustmark’s quantitative reserve. The second
principle is the change in risk that is identified by rating changes. As a part of Trustmark’s credit review process, loans in the affected population have been given
more frequent screening to ensure accurate ratings are maintained through this dynamic period. Trustmark’s quantitative reserve does not directly address changes
in ratings, thus a migration qualitative factor was designed to work in concert with the quantitative reserve. In a downturn, the qualitative factor is inactive for most
pools because changes in ratings are congruent with changes in macroeconomic conditions, which directly influence the PD models in the quantitative reserve.
As discussed above, the disconnect of economic factors means that changes in rating caused by deteriorating and weak economic conditions as a result of the
pandemic are not being captured in the quantitative reserve. During the fourth quarter due to unforeseen pandemic conditions that varied from Management’s
expectations during the third quarter, additional reserves were further dimensioned in order to appropriately reflect the risk within the portfolio related to the
COVID-19 pandemic. In an effort to ensure the External Factor-Pandemic qualitative factor is reasonable and supportable, historical Trustmark loss data was
leveraged to construct a framework that is quantitative in nature. To dimension the additional reserve, Management uses the sensitivity of the quantitative
commercial loan reserve to changes in macroeconomic conditions to apply to loans rated acceptable or better (RR 1-4). In addition, to account for the known
changes in risk, a weighted average of the commercial loan portfolio loss rate, derived from the performance trends qualitative factor, is used to dimension
additional reserves for downgraded credits. Loans rated acceptable with risk (RR 5) or watch (RR 6) received the additional reserves based on the average of the
macroeconomic conditions and weighted- average of the commercial loan portfolio loss rate while the loans rated special mention and substandard received
additional reserves based on the weighted-average described above.
The following table disaggregates the ACL and the amortized cost basis of the loans by the measurement methodology used at December 31, 2020 ($ in
thousands):
Loans secured by real estate:
Construction, land development and other land
Other secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Other loans secured by real estate:
Other construction
Secured by 1-4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
Total
Year Ended December 31, 2020
Individually
Evaluated for
Credit Loss
ACL
Collectively
Evaluated for
Credit Loss
Total ACL
Individually
Evaluated for
Credit Loss
LHFI
Collectively
Evaluated for
Credit Loss Total LHFI
$
$
— $
—
—
—
$
6,854
9,928
48,523
7,382
6,854 $
9,928
48,523
7,382
5,756
454
514,056
508,300 $
524,732
524,278
12,037 2,696,989 2,709,026
60 1,065,904 1,065,964
—
—
579
—
1,700
2,100
4,379 $
8,158
5,143
14,272
5,838
1,490
5,339
112,927
$
8,158
5,143
14,851
5,838
3,190
7,439
117,306 $
—
794,983
794,983
1,441 1,214,959 1,216,400
14,076 1,295,002 1,309,078
164,386
164,386
—
996,806 1,000,776
3,970
5,615
525,123
519,508
43,409 $ 9,781,115 $ 9,824,524
116
The following table disaggregates the allowance for loan losses and LHFI balances by the impairment evaluation methodology used at December 31, 2019 ($ in
thousands):
Individually
Evaluated
Allowance for Loan Losses
Collectively
Evaluated
Total
Individually
Evaluated
LHFI
Collectively
Evaluated
Total
December 31, 2019
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other loans
Total
$
$
— $
35
2,355
—
707
—
1,809
553
5,459 $
8,260
8,897
23,803
4,024
25,285
3,379
420
4,750
78,818
$
$
8,260
8,932
26,158
4,024
25,992
3,379
2,229
5,303
84,277
$
$
626
5,464
6,717
68
23,458
21
4,079
784
41,217
Changes in the ACL were as follows for the periods presented ($ in thousands):
724,412
$ 1,162,165 $ 1,162,791
1,850,449 1,855,913
2,468,528 2,475,245
724,480
1,454,438 1,477,896
175,738
967,944
495,621
$ 9,294,411 $ 9,335,628
175,717
963,865
494,837
Balance at beginning of period
FASB ASU 2016-13 adoption adjustments:
LHFI
Allowance for loan losses, acquired loans transfer
Acquired loans ACL adjustment
Transfers (1)
Loans charged-off
Recoveries
Net (charge-offs) recoveries
PCL
Balance at end of period
2020
Years Ended December 31,
2019
2018
$
84,277
$
79,290
$
76,733
(3,039)
815
1,007
—
(11,475)
9,608
(1,867)
36,113
117,306
$
—
—
—
—
(14,481)
8,671
(5,810)
10,797
84,277
$
—
—
—
1,554
(29,489)
12,499
(16,990)
17,993
79,290
$
(1)
The allowance for loan losses balance related to the remaining loans acquired in the Bay Bank, Heritage and Reliance acquisitions, which were
transferred from acquired impaired loans to LHFI during 2018.
The following table details changes in the ACL by loan class for the year ended December 31, 2020 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Other secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Other loans secured by real estate:
Other construction
Secured by 1-4 family residential properties
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other commercial loans
Total
Balance
January 1,
FASB ASU
2016-13
Adoption
Adjustment
Charge-offs
Recoveries
PCL
December 31,
Balance
2020
$
$
6,371 $
5,888
26,158
4,024
1,889
3,044
25,992
3,379
2,229
5,303
84,277 $
(188) $
4,188
(8,179)
(765)
3,202
2,891
(8,964)
2,059
2,455
2,084
(1,217) $
(12) $
(117)
(3,777)
(8)
—
(43)
(1,557)
(2,039)
—
(3,922)
(11,475) $
716 $
378
546
68
208
203
1,736
1,824
—
3,929
9,608 $
(33) $
(409)
33,775
4,063
2,859
(952)
(2,356)
615
(1,494)
45
36,113 $
6,854
9,928
48,523
7,382
8,158
5,143
14,851
5,838
3,190
7,439
117,306
The increases in the PCL for nonfarm, nonresidential properties, other real estate secured loans, other construction loans and consumer loans for the year ended
December 31, 2020 were primarily due to the negative impact of COVID-19.
117
The PCL for the commercial and industrial loan portfolio decreased $2.4 million during the year ended December 31, 2020 primarily due to loans that had been
specifically reserved for being charged down, upgrades on loans from substandard to pass, paydowns as well as a slight decrease in the calculated PD and LGD,
which uses Trustmark’s historical data. The decrease in the PCL for state and other political subdivision loans of $1.5 million was primarily due to a decrease in
reserves based on routine updates to the qualitative portion of the allowance calculation.
The following table details changes in the allowance for loan losses, LHFI by loan class for the year ended December 31, 2019 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
State and other political subdivision loans
Other loans
Total allowance for loan losses, LHFI
Balance
January 1,
Charge-offs
Recoveries
Provision for
Loan Losses
Balance
December 31,
2019
$
$
7,390 $
8,641
22,376
3,450
27,359
2,890
990
6,194
79,290 $
(40) $
(531)
(322)
—
(5,344)
(2,278)
—
(5,966)
(14,481) $
894 $
666
472
29
1,257
1,829
—
3,524
8,671 $
16 $
156
3,632
545
2,720
938
1,239
1,551
10,797 $
8,260
8,932
26,158
4,024
25,992
3,379
2,229
5,303
84,277
Note 5 – Acquired Loans
Trustmark’s loss share agreement with the FDIC covering the acquired covered loans secured by 1-4 family residential properties will expire in 2021.
Upon adoption of FASB ASC Topic 326, which was effective for Trustmark on January 1, 2020 in accordance with the amendments in FASB ASU 2016-13,
Trustmark elected to account for its existing acquired loans as purchased credit deteriorated (PCD) loans included within the LHFI portfolio. Trustmark elected to
maintain pools of loans that were previously accounted for under FASB ASC Subtopic 310-30, “Receivables – Loans and Debt Securities Acquired with
Deteriorated Credit Quality,” and will continue to account for these pools as a unit of account. Loans are only removed from the existing loan pools if they are
written off, paid off or sold. Upon adoption of FASB ASC Topic 326, the ACL was determined for each pool and added to the pool’s carrying value to establish a
new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the noncredit premium or discount
which will be amortized into interest income over the remaining life of the pool. Changes to the allowance for credit losses after adoption of FASB ASC Topic
326 are recorded through the PCL. Consequently, acquired loans of $72.6 million, as well as the allowance for loan losses, acquired loans of $815 thousand, were
transferred on January 1, 2020.
At December 31, 2019, acquired loans consisted of the following ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
Other loans
Acquired loans
Less allowance for loan losses, acquired loans
Net acquired loans
118
December 31, 2019
4,771
17,525
38,206
3,946
5,035
520
2,598
72,601
815
71,786
$
$
The following table presents changes in the net carrying value of the acquired loans for the periods presented ($ in thousands):
Carrying value, net at January 1, 2019
Transfers (2)
Accretion to interest income
Payments received, net
Other (3)
Change in allowance for loan losses, acquired loans
Carrying value, net at December 31, 2019
FASB ASU 2016-13 adoption adjustment
Carrying value, net at December 31, 2020
Acquired
Impaired
Acquired
Not ASC
310-30 (1)
$
$
102,890 $
—
5,532
(37,230)
178
416
71,786
(71,786)
— $
2,811
(2,926)
115
—
—
—
—
—
—
(1)
(2)
(3)
“Acquired Not ASC 310-30” loans consist of loans that are not in scope for FASB ASC Subtopic 310-30.
“Acquired Not ASC 310-30” loans transferred to LHFI due to the discount on these loans being fully amortized.
Includes miscellaneous timing adjustments as well as acquired loan terminations through foreclosure, charge-off and other terminations.
Under FASB ASC Subtopic 310-30, the accretable yield is the excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans
and is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is
reasonably estimable. The following table presents changes in the accretable yield for the periods presented ($ in thousands):
Accretable yield at beginning of period
FASB ASU 2016-13 adoption adjustment
Accretion to interest income
Disposals, net
Transfers (1)
Reclassification from nonaccretable difference (2)
Accretable yield at end of period
Years Ended December 31,
2020
2019
2018
$
$
(14,816) $
14,816
—
—
—
—
— $
(17,722) $
—
5,532
2,072
—
(4,698)
(14,816) $
(31,426)
—
9,514
3,926
5,874
(5,610)
(17,722)
(1)
(2)
During 2018, Trustmark transferred the remaining loans acquired in the Bay Bank, Heritage and Reliance acquisitions from acquired impaired loans to
LHFI.
Reclassifications from nonaccretable difference are due to lower loss expectations and improvements in expected cash flows.
The following table presents the components of the allowance for loan losses on acquired impaired loans for the periods presented ($ in thousands):
Balance at beginning of period
FASB ASU 2016-13 adoption adjustment
Transfers (1)
Net (charge-offs) recoveries
Provision for loan losses, acquired loans
Balance at end of period
(1)
2020
$
$
Years Ended December 31,
2019
2018
815 $
(815)
—
—
—
—
$
1,231 $
—
—
(458)
42
815 $
4,079
—
(1,554)
(289)
(1,005)
1,231
119
The allowance for loan losses balance related to the remaining loans acquired in the Bay Bank, Heritage and Reliance acquisition s, which were
transferred from acquired impaired loans to LHFI during 2018.
The table below presents the acquired loans by loan class and credit quality indicator at December 31, 2019 ($ in thousands):
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
Other loans
Total acquired loans
December 31, 2019
Pass -
Categories 1-6
Special Mention -
Category 7
Commercial Loans
Substandard -
Category 8
Doubtful -
Category 9
Subtotal
$
$
4,022 $
3,164
27,848
3,878
3,419
—
2,591
44,922 $
— $
42
—
—
—
—
—
42 $
192 $
580
9,972
68
—
—
7
10,819 $
— $
—
386
—
1,616
—
—
2,002 $
4,214
3,786
38,206
3,946
5,035
—
2,598
57,785
Past Due
Consumer Loans
Past Due
Total
Current
30-89 Days
90 Days or More
Nonaccrual (1)
Subtotal
Acquired Loans
Loans secured by real estate:
Construction, land development and other land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Other real estate secured
Commercial and industrial loans
Consumer loans
Other loans
Total acquired loans
$
$
463 $
12,843
—
—
—
489
—
13,795 $
(1)
Acquired loans not accounted for under FASB ASC Subtopic 310-30.
94 $
615
—
—
—
31
—
740 $
— $
281
—
—
—
—
—
281 $
— $
—
—
—
—
—
—
— $
557 $
13,739
—
—
—
520
—
14,816 $
4,771
17,525
38,206
3,946
5,035
520
2,598
72,601
The following table provides an aging analysis of contractually past due and nonaccrual acquired loans at December 31, 2019 ($ in thousands):
Loans secured by real estate:
Construction, land development and other
land
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential
properties
Other real estate secured
Commercial and industrial loans
Consumer loans
Other loans
Past Due
December 31, 2019
30-59 Days
60-89 Days
90 Days or
More (1)
Total
Nonaccrual (2)
Current
Loans
Total Acquired
Loans
$
94 $
696
— $
131
38 $
366
132 $
1,193
— $
—
4,639 $
16,332
4,771
17,525
36
1
—
16
—
—
—
—
15
—
851
52
—
—
—
887
53
—
31
—
—
—
—
—
—
37,319
3,893
5,035
489
2,598
38,206
3,946
5,035
520
2,598
Total acquired loans
$
843 $
146 $
1,307 $
2,296 $
— $
70,305 $
72,601
(1)
(2)
Past due 90 days or more but still accruing interest.
Acquired loans not accounted for under FASB ASC Subtopic 310-30.
120
Note 6 – Premises and Equipment, Net
At December 31, 2020 and 2019, premises and equipment, net consisted of the following ($ in thousands):
Land
Buildings and leasehold improvements
Furniture and equipment
Total cost of premises and equipment
Less accumulated depreciation and amortization
Premises and equipment, net
Finance lease right-of-use assets
Assets held for sale
Total premises and equipment, net
December 31,
2020
2019
$
$
52,189
216,650
180,976
449,815
263,147
186,668
7,471
139
$
194,278
$
52,454
210,362
174,257
437,073
256,608
180,465
9,326
—
189,791
Assets held for sale consisted of one property at December 31, 2020 compared to none at December 31, 2019. This property was transferred from premises and
equipment, net to assets held for sale due to Trustmark’s intent to sell this property over the next twelve months as a result of its strategic initiatives. Property
valuation adjustments of $1.7 million were recognized and included in other expense for 2020 compared to none for 2019 and $173 thousand for 2018,
respectively.
Depreciation and amortization of premises and equipment totaled $14.8 million in 2020, $15.7 million in 2019 and $14.3 million in 2018.
Note 7 – Mortgage Banking
Mortgage Servicing Rights
The activity in the MSR is detailed in the table below for the periods presented ($ in thousands):
Balance at beginning of period
Origination of servicing assets
Change in fair value:
Due to market changes
Due to runoff
Balance at end of period
Years Ended December 31,
2020
2019
$
$
79,394
29,805
$
(26,147)
(16,588)
66,464
$
95,596
16,711
(21,078)
(11,835)
79,394
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 December 31, 2020, the fair value of the MSR included an assumed average prepayment speed of 15 CPR and an average discount rate of 9.53%
compared to an assumed average prepayment speed of 11 CPR and an average discount rate of 10.03% at December 31, 2019. 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.
Mortgage Loans Sold/Serviced
During 2020, 2019 and 2018, Trustmark sold $2.532 billion, $1.404 billion and $1.092 billion, respectively, of residential mortgage loans. Gain on sales of loans,
net totaled $110.9 million in 2020, $30.3 million in 2019 and $21.8 million in 2018. Trustmark receives annual servicing fee income approximating 0.31% of the
outstanding balance of the underlying loans, which totaled $23.3 million in 2020, $22.6 million in 2019 and $21.9 million in 2018. The gains on the sale of
residential mortgage loans and the annual servicing fee are both recorded to noninterest income in mortgage banking, net in the accompanying consolidated
statements of income. The investors and the securitization trusts have no recourse to the assets of Trustmark for failure of debtors to pay when due.
121
The table below details the mortgage loans sold and serviced for others at December 31, 2020 and 2019 ($ in thousands):
Federal National Mortgage Association
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Other
Total mortgage loans sold and serviced for others
December 31,
2020
2019
$
$
4,629,670 $
2,960,760
50,459
16,201
7,657,090 $
4,411,914
2,652,782
73,134
19,404
7,157,234
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 Lending and Selling Representations and Warranties Framework updated in May 2014, 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 were
included in other expense. At both December 31, 2020 and 2019, Trustmark had a reserve for mortgage loan servicing putback expenses of $500 thousand.
There is inherent uncertainty in reasonably estimating the requirement for reserves against potential future mortgage loan servicing putback expenses. Future
putback expenses are dependent on many subjective factors, including the review procedures of the purchasers and the potential refinance activity on loans sold
with servicing released and the subsequent consequences under the representations and warranties. Trustmark believes that it has appropriately reserved for
potential mortgage loan servicing putback requests.
Note 8 – Goodwill and Identifiable Intangible Assets
Goodwill
The table below illustrates goodwill by segment for the years ended December 31, 2020 and 2019 ($ in thousands):
Balance as of January 1, 2019
Adjustment during 2019
Balance as of December 31, 2019
Adjustment during 2020
Balance as of December 31, 2020
General
Banking
$
334,603 $
—
334,603
—
$
334,603 $
Insurance
Total
45,024 $
—
45,024
5,643
50,667 $
379,627
—
379,627
5,643
385,270
Trustmark’s General Banking Segment delivers a full range of banking services to consumer, corporate, small and middle-market businesses through its extensive
branch network. The Insurance Segment includes TNB’s wholly-owned retail insurance subsidiary that offers a diverse mix of insurance products and
services. Trustmark performed goodwill impairment tests for the General Banking and Insurance Segments during 2020, 2019 and 2018. Based on these tests,
Trustmark concluded that the fair value of both the General Banking and Insurance Segments exceeded the book value and no impairment charge was required.
122
Identifiable Intangible Assets
At December 31, 2020 and 2019, identifiable intangible assets consisted of the following ($ in thousands):
Core deposit intangibles
Insurance intangibles
Banking charters
Total
December 31, 2020
Gross Carrying Accumulated
Amortization
Amount
Net Carrying
Amount
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
December 31, 2019
$
$
87,674 $
17,272
1,325
106,271 $
84,580 $
13,159
1,142
98,881 $
3,094 $
4,113
183
7,390 $
87,674 $
14,171
1,325
103,170 $
82,096 $
12,655
1,076
95,827 $
5,578
1,516
249
7,343
Trustmark recorded $3.1 million of amortization of identifiable intangible assets in 2020, $4.1 million in 2019 and $5.2 million in 2018. Trustmark estimates that
amortization expense for identifiable intangible assets will be $2.3 million in 2021, $1.4 million in 2022, $673 thousand in 2023, $471 thousand in 2024 and $403
thousand in 2025. Trustmark continually evaluates whether events and circumstances have occurred that indicate that identifiable intangible assets have become
impaired. Measurement of any impairment of such identifiable intangible assets is based on the fair values of those assets. There were no impairment losses on
identifiable intangible assets recorded during 2020, 2019 or 2018.
The following table illustrates the carrying amounts and remaining weighted-average amortization periods of identifiable intangible assets as of December 31,
2020 ($ in thousands):
Core deposit intangibles
Insurance intangibles
Banking charters
Total
Note 9 – Other Real Estate
Net Carrying
Amount
$
$
3,094
4,113
183
7,390
Remaining
Weighted-
Average
Amortization
Period in Years
3.1
17.0
2.7
10.8
At December 31, 2020, Trustmark’s geographic other real estate distribution was concentrated primarily in its five key market regions: Alabama, Florida,
Mississippi, Tennessee and Texas. The ultimate recovery of a substantial portion of the carrying amount of other real estate is susceptible to changes in market
conditions in these areas.
For the periods presented, changes and gains (losses), net on other real estate were as follows ($ in thousands):
Balance at beginning of period
Additions
Disposals
Write-downs
Balance at end of period
Gains (losses), net on the sale of other real estate
included in other real estate expense
2020
Years Ended December 31,
2019
2018
29,248
635
(16,446)
(1,786)
11,651
$
$
34,668
8,598
(11,474)
(2,544)
29,248
$
$
43,228
12,115
(19,802)
(873)
34,668
897 $
(291) $
700
$
$
$
123
At December 31, 2020 and 2019, other real estate by type of property consisted of the following ($ in thousands):
Construction, land development and other land properties
1-4 family residential properties
Nonfarm, nonresidential properties
Other real estate properties
Total other real estate
December 31,
2020
2019
$
$
3,857 $
1,349
6,445
—
11,651 $
At December 31, 2020 and 2019, other real estate by geographic location consisted of the following ($ in thousands):
Alabama
Florida
Mississippi (1)
Tennessee (2)
Texas
Total other real estate
December 31,
2020
2019
$
$
3,271 $
—
8,330
50
—
11,651 $
11,482
3,453
14,313
—
29,248
8,133
5,877
14,919
319
—
29,248
(1)
(2)
Mississippi includes Central and Southern Mississippi Regions.
Tennessee includes Memphis, Tennessee and Northern Mississippi Regions.
At December 31, 2020 and 2019, the balance of other real estate included $1.3 million and $3.5 million, respectively, of foreclosed residential real estate properties
recorded as a result of obtaining physical possession of the property. At December 31, 2020 and 2019, the recorded investment of consumer mortgage loans
secured by residential real estate properties for which formal foreclosure proceedings are in process was $424 thousand and $953 thousand, respectively.
Note 10 – Leases
The table below details the components of net lease cost for the periods presented ($ in thousands):
Finance leases
Amortization of right-of-use assets
Interest on lease liabilities
Operating lease cost
Short-term lease cost
Variable lease cost
Sublease income
Net lease cost
Year Ended December 31,
2020
2019
$
$
1,856 $
254
5,188
423
1,286
(335)
8,672 $
The table below details the cash payments included in the measurement of lease liabilities during the periods presented ($ in thousands):
Year Ended December 31,
2020
2019
Finance leases
Operating cash flows included in operating activities
Financing cash flows included in payments under finance lease obligations
$
Operating leases
Operating cash flows (fixed payments) included in other operating activities, net
Operating cash flows (liability reduction) included in other operating activities, net
254 $
1,715
4,988
3,856
124
2,162
307
5,183
370
1,387
(331)
9,078
307
1,964
5,092
5,404
The table below details balance sheet information, as well as weighted-average lease terms and discount rates, for the periods presented ($ in thousands):
Finance lease right-of-use assets, net of accumulated depreciation
Finance lease liabilities
Operating lease right-of-use assets
Operating lease liabilities
$
Weighted-average lease term
Finance leases
Operating leases
Weighted-average discount rate
Finance leases
Operating leases
Year Ended December 31,
2020
2019
$
7,471
7,805
30,901
32,290
8.53 years
8.65 years
3.10%
3.41%
9,326
9,520
31,182
32,354
8.62 years
9.05 years
3.01%
3.51%
At December 31, 2020, future minimum rental commitments under finance and operating leases were as follows ($ in thousands):
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
Less imputed interest
Lease liabilities
Note 11 – Deposits
At December 31, 2020 and 2019, deposits consisted of the following ($ in thousands):
Noninterest-bearing demand
Interest-bearing demand
Savings
Time
Total
Finance Leases
Operating Leases
$
$
1,615 $
1,556
871
572
584
3,868
9,066
(1,261)
7,805 $
4,714
4,456
4,342
4,449
4,464
15,040
37,465
(5,175)
32,290
December 31,
2020
2019
$
$
4,349,010 $
3,646,246
4,647,610
1,405,898
14,048,764 $
2,891,215
3,125,914
3,590,509
1,637,919
11,245,557
Interest expense on deposits by type consisted of the following for the periods presented ($ in thousands):
Interest-bearing demand
Savings
Time
Total
2020
Years Ended December 31,
2019
2018
$
$
9,985 $
13,481
14,021
37,487 $
35,428 $
19,462
24,281
79,171 $
18,479
17,980
17,477
53,936
Time deposits that exceed the FDIC insurance limit of $250 thousand totaled $228.1 million and $285.7 million at December 31, 2020 and 2019, respectively.
125
The maturities of interest-bearing deposits at December 31, 2020, are as follows ($ in thousands):
2021
2022
2023
2024
2025
Thereafter
Total time deposits
Interest-bearing deposits with no stated maturity
Total interest-bearing deposits
Note 12 - Borrowings
Securities Sold Under Repurchase Agreements
$
$
1,152,489
176,421
46,750
14,330
12,738
3,170
1,405,898
8,293,856
9,699,754
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 are
secured by securities with a carrying amount of $156.1 million and $105.6 million at December 31, 2020 and 2019, respectively. As of December 31, 2020, all
repurchase agreements were short-term and consisted primarily of sweep repurchase arrangements, under which excess deposits are “swept” into overnight
repurchase agreements with Trustmark. The following table presents the securities sold under repurchase agreements by collateral pledged at December 31, 2020
and 2019 ($ in thousands):
Mortgage-backed securities
Residential mortgage pass-through securities
Issued by FNMA and FHLMC
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA
Total securities sold under repurchase agreements
Other Borrowings
At December 31, 2020 and 2019, other borrowings consisted of the following ($ in thousands):
FHLB advances
Serviced GNMA loans eligible for repurchase
Finance lease liabilities
Other
Total other borrowings
FHLB Advances
December 31,
2020
2019
$
115,357 $
12,696
—
128,053 $
December 31,
2020
2019
741
$
141,160
7,805
18,546
168,252
$
$
$
$
—
24,282
29,290
53,572
811
57,062
9,520
18,003
85,396
At December 31, 2020, Trustmark had one outstanding short-term FHLB advance totaling $625 thousand with the FHLB of Atlanta, compared to none at
December 31, 2019. This advance was assumed through the BancTrust merger and had a fixed interest rate of 0.75%. At December 31, 2020, this advance had a
remaining maturity of 181 days.
Trustmark incurred $9 thousand of interest expense on short-term FHLB advances in 2020, compared to no interest expense in 2019 and $4.4 million of interest
expense in 2018.
126
At December 31, 2020, Trustmark had one outstanding long-term FHLB advance totaling $116 thousand with the FHLB of Atlanta, compared to two outstanding
long-term FHLB advances totaling $811 thousand at December 31, 2019. This advance was assumed through the BancTrust merger and had a fixed interest rate of
0.08%. At December 31, 2020, this advance had a remaining maturity of 5.71 years. At December 31, 2019, the outstanding long-term advances had fixed interest
rates of 0.08% and 0.75% with outstanding balances of $135 thousand and $676 thousand, respectively. At December 31, 2019, the outstanding long-term
advances had a weighted-average remaining maturity of 2.37 years with a weighted-average cost of 0.64% during 2019. There was no fair market value
adjustment associated with the BancTrust merger included in the FHLB advances at December 31, 2020 and 2019. Trustmark’s FHLB advances are collateralized
by securities held in safekeeping with the FHLB of Atlanta.
Trustmark incurred $8 thousand of interest expense on long-term FHLB advances in 2020, compared to $5 thousand of interest expense in 2019 and $6 thousand of
interest expense in 2018.
At both December 31, 2020 and 2019, Trustmark had no outstanding FHLB advances with the FHLB of Dallas.
At December 31, 2020 and 2019, Trustmark had $2.725 billion and $3.178 billion, respectively, available in additional borrowing capacity from the FHLB of
Dallas.
Subordinated Notes
During the fourth quarter of 2020, Trustmark agreed to issue and sell $125.0 million aggregate principal amount of its 3.625% Fixed-to-Floating Rate Subordinated
Notes (the Notes) due December 1, 2030. The Notes were sold at an underwriting discount of 1.2%, resulting in net proceeds to Trustmark of $123.5 million before
deducting offering expenses of $600 thousand. At December 31, 2020, the carrying amount of the Notes was $122.9 million. The 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 Notes are obligations of
Trustmark only and are not obligations of, and are not guaranteed by, any of its subsidiaries, including TNB. From the date of issuance until November 30, 2025,
the Notes bear interest at a fixed rate of 3.625% per year, payable semi-annually in arrears on June 1 and December 1 of each year. Beginning December 1, 2025,
the Notes will bear interest at a floating rate per year equal to the Benchmark rate, which is the Three-Month Term Secured Overnight Financing Rate (SOFR),
plus 338.7 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year. The Notes qualify as Tier 2 capital for
Trustmark. The Notes may be redeemed at Trustmark’s option under certain circumstances. Trustmark intends to use the net proceeds for general corporate
purposes.
Junior Subordinated Debt Securities
On August 18, 2006, Trustmark completed a private placement of $60.0 million of trust preferred securities through a newly formed Delaware trust affiliate,
Trustmark Preferred Capital Trust I (the Trust). The trust preferred securities mature September 30, 2036, are redeemable at Trustmark’s option and bear interest
at a variable rate per annum equal to the three-month LIBOR plus 1.72%. Under applicable regulatory guidelines, these trust preferred securities qualify as Tier 1
capital. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase $61.9 million in aggregate principal amount of Trustmark’s
junior subordinated debentures.
The debentures were issued pursuant to a Junior Subordinated Indenture, dated August 18, 2006, between Trustmark, as issuer, and Wilmington Trust Company,
National Association, as trustee. Like the trust preferred securities, the debentures bear interest at a variable rate per annum equal to the three-month LIBOR plus
1.72% and mature on September 30, 2036. The debentures may be redeemed at Trustmark’s option at any time. The interest payments by Trustmark will be used
to pay the quarterly distributions payable by the Trust to the holder of the trust preferred securities. However, so long as no event of default has occurred under the
debentures, Trustmark may defer interest payments on the debentures (in which case the Trust will also defer distributions otherwise due on the trust preferred
securities) for up to 20 consecutive quarters.
The debentures are subordinated to the prior payment of any other indebtedness of Trustmark that, by its terms, is not similarly subordinated. The trust preferred
securities are recorded as a long-term liability on Trustmark’s balance sheet; however, for regulatory purposes the trust preferred securities are treated as Tier 1
capital under the rules of the Federal Reserve Board (FRB), Trustmark’s primary federal regulatory agency.
Trustmark also entered into a Guarantee Agreement, dated August 18, 2006, pursuant to which it has agreed to guarantee the payment by the Trust of distributions
on the trust preferred securities and the payment of principal of the trust preferred securities when due, either at maturity or on redemption, but only if and to the
extent that the Trust fails to pay distributions on or principal of the trust preferred securities after having received interest payments or principal payments on the
junior subordinated debentures from Trustmark for the purpose of paying those distributions or the principal amount of the trust preferred securities.
127
As defined in applicable accounting standards, the Trust, a wholly-owned subsidiary of Trustmark, is considered a variable interest entity for which Trustmark is
not the primary beneficiary. Accordingly, the accounts of the Trust are not included in Trustmark’s consolidated financial statements.
At December 31, 2020 and 2019, assets for the Trust totaled $61.9 million, resulting from the investment in junior subordinated debentures issued by
Trustmark. Liabilities and shareholders’ equity for the Trust also totaled $61.9 million at December 31, 2020 and 2019, resulting from the issuance of trust
preferred securities in the amount of $60.0 million as well as $1.9 million in common securities issued to Trustmark. During 2020, net income for the Trust
equaled $51 thousand resulting from interest income from the junior subordinated debt securities issued by Trustmark to the Trust, compared with net income of
$79 thousand during 2019 and $74 thousand during 2018. Dividends issued to Trustmark by the Trust during 2020 totaled $51 thousand, compared to $79
thousand during 2019 and $74 thousand during 2018.
Note 13 – Revenue from Contracts with Customers
The following table presents noninterest income disaggregated by reportable operating segment and revenue stream for the periods presented ($ in thousands):
Year Ended December 31, 2020
Not Topic
606 (2)
Total
Topic 606
Year Ended December 31, 2019 (1)
Not Topic
606 (2)
Total
Topic 606
Year Ended December 31, 2018 (1)
Not Topic
606 (2)
Total
Topic 606
General Banking Segment
Service charges on deposit
accounts
Bank card and other fees
Mortgage banking, net
Wealth management
Other, net
Total noninterest income
Wealth Management Segment
Service charges on deposit
accounts
Bank card and other fees
Wealth management
Other, net
Total noninterest income
Insurance Segment
Insurance commissions
Other, net
Total noninterest income
Consolidated
Service charges on deposit
accounts
Bank card and other fees
Mortgage banking, net
Insurance commissions
Wealth management
Other, net
Total noninterest income
$ 32,213
27,398
—
254
7,432
$ 67,297
$
3,594
30,992
125,822 125,822
254
8,410
— $ 32,213 $ 42,509 $
27,973
—
379
9,528
— $ 43,614
28,801
34,674
296
6,545
$ 130,394 $ 197,691 $ 80,389 $ 33,367 $ 113,756 $ 77,576 $ 36,354 $ 113,930
— $ 42,509 $ 43,614 $
26,904
—
296
6,762
1,897
34,674
—
(217)
31,679
29,822
379
9,367
3,706
29,822
—
(161)
—
978
$
76
30
31,371
107
$ 31,584
$
$
94 $
76 $
— $
57
30
—
30,300
31,371
—
50
306
157
50 $ 31,634 $ 30,757 $
88 $
94 $
— $
104
57
—
30,042
30,300
—
103
69
409
103 $ 30,860 $ 30,303 $
88
— $
104
—
30,042
—
117
186
117 $ 30,420
$ 45,176
92
$ 45,268
$
$
— $ 45,176 $ 42,396 $
33
92
—
— $ 45,268 $ 42,429 $
— $ 42,396 $ 40,481 $
5
33
—
— $ 42,429 $ 40,486 $
— $ 40,481
5
—
— $ 40,486
$ 32,289
27,428
—
45,176
31,625
7,631
$ 144,149
$
3,594
31,022
125,822 125,822
45,176
31,625
8,659
— $ 32,289 $ 42,603 $
28,030
—
42,396
30,679
9,867
— $ 43,702
28,905
3,706
34,674
29,822
40,481
—
30,338
—
6,736
(58)
$ 130,444 $ 274,593 $ 153,575 $ 33,470 $ 187,045 $ 148,365 $ 36,471 $ 184,836
— $ 42,603 $ 43,702 $
27,008
—
40,481
30,338
6,836
1,897
34,674
—
—
(100)
31,736
29,822
42,396
30,679
9,809
—
—
1,028
During the first quarter of 2020, Trustmark revised the composition of its operating segments by moving the Retail Private Banking Group from the
General Banking Segment to the Wealth Management Segment as a result of a change in supervision of this group for segment reporting purposes. The
prior period amounts presented include reclassifications to conform to the current period presentation.
(1)
(2)
128
Noninterest income not in scope for FASB ASC Topic 606 includes customer derivatives revenue and miscellaneous credit card 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 securities gains (losses), net.
Note 14 – Income Taxes
The income tax provision included in the consolidated statements of income was as follows for the periods presented ($ in thousands):
Current
Federal
State
Deferred
Federal
State
Income tax provision
Years Ended December 31,
2020
2019
2018
$
$
40,118
9,439
$
(15,840)
(3,960)
29,757
$
20,068
7,145
$
(3,104)
(776)
23,333
$
4,532
5,997
9,392
2,348
22,269
For the periods presented, the income tax provision differs from the amount computed by applying the statutory federal income tax rate in effect for each respective
period to income before income taxes as a result of the following ($ in thousands):
Income tax computed at statutory tax rate
Tax exempt interest
Nondeductible interest expense
State income taxes, net
Income tax credits, net
Death benefit gains
Other
Income tax provision
2020
Years Ended December 31,
2019
2018
39,854
(4,284)
247
7,457
(9,375)
(91)
(4,051)
29,757
$
$
36,497
(4,951)
564
5,645
(13,473)
(123)
(826)
$
23,333
$
36,089
(4,533)
416
4,738
(15,404)
(268)
1,231
22,269
$
$
129
Temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities gave rise to the following net deferred tax assets
at December 31, 2020 and 2019, which are included in other assets on the accompanying consolidated balance sheets ($ in thousands):
December 31,
2020
2019
Deferred tax assets:
Loan purchase accounting
Other real estate
Accumulated credit losses
Deferred compensation
Finance and operating lease liabilities
Realized built-in losses
Securities
Pension and other postretirement benefit plans
Interest on nonaccrual loans
Loans held for sale
Stock-based compensation
Loan fees
Other
Gross deferred tax asset
Deferred tax liabilities:
Goodwill and other identifiable intangibles
Premises and equipment
Finance and operating lease right-of-use assets
Mortgage servicing rights
Securities
Other
Gross deferred tax liability
Net deferred tax asset
$
$
$
293
2,049
39,073
17,465
10,024
10,681
2,233
6,128
1,034
2,754
2,749
3,401
10,294
108,178
15,136
11,479
9,593
7,108
9,712
4,537
57,565
50,613
$
845
5,845
21,774
16,498
10,469
11,431
3,028
5,194
942
481
2,527
—
8,309
87,343
15,336
11,913
10,127
11,002
2,115
5,192
55,685
31,658
The following table provides a summary of the changes during the 2020 calendar year in the amount of unrecognized tax benefits that are included in other
liabilities in the consolidated balance sheet ($ in thousands):
Balance at beginning of period
Change due to tax positions taken during the current year
Change due to tax positions taken during a prior year
Change due to the lapse of applicable statute of limitations during the
current year
Change due to settlements with taxing authorities during the current year
Balance at end of period
Accrued interest, net of federal benefit
Unrecognized tax benefits that would impact the effective
tax rate, if recognized
2020
$
$
$
$
December 31,
2019
2018
1,524
353
79
(175)
—
1,781
330
$
$
$
1,249
279
134
(138)
—
1,524
271
$
$
$
1,420
$
1,218
$
1,105
282
56
(194)
—
1,249
212
988
Interest and penalties related to unrecognized tax benefits, if any, are recorded in income tax expense. With limited exception, Trustmark is no longer subject to
U.S. federal, state and local audits by tax authorities for 2014 and earlier tax years. Trustmark does not anticipate a significant change to the total amount of
unrecognized tax benefits within the next twelve months.
130
Note 15 – 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 tables present information regarding the benefit obligation, plan assets, funded status, amounts recognized in accumulated other comprehensive loss,
net periodic benefit cost and other statistical disclosures for the Continuing Plan for the periods presented ($ in thousands):
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation, end of year
Change in plan assets:
Fair value of plan assets, beginning of year
Actual return on plan assets
Employer contributions
Benefit payments
Fair value of plan assets, end of year
Funded status at end of year - net liability
Amounts recognized in accumulated other comprehensive loss:
Net loss - amount recognized
Net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Recognized net loss due to lump sum settlements
Recognized net actuarial loss
Net periodic benefit cost
Other changes in plan assets and benefit obligation recognized in other
comprehensive income (loss), before taxes:
Net loss - Total recognized in other comprehensive income (loss)
Total recognized in net periodic benefit cost and other comprehensive
income (loss)
Weighted-average assumptions as of end of year:
Discount rate for benefit obligation
Discount rate for net periodic benefit cost
Expected long-term return on plan assets
Plan Assets
December 31,
2020
2019
9,060
$
254
241
876
(884)
9,547 $
3,443 $
(87)
401
(884)
2,873 $
(6,674) $
9,179
211
361
875
(1,566)
9,060
3,954
668
387
(1,566)
3,443
(5,617)
2,564 $
1,893
$
$
$
$
$
$
$
$
$
$
2020
Years Ended December 31,
2019
2018
254
241
(154)
119
326
786
$
$
211
361
(202)
312
373
1,055
$
$
277
332
(227)
161
571
1,114
671
$
(277) $
(1,017)
1,457
$
778
$
97
1.95%
2.84%
5.00%
2.84%
3.97%
5.00%
3.97%
3.32%
5.00%
The weighted-average asset allocations by asset category are presented below for the Continuing Plan at December 31, 2020 and 2019.
131
Money market fund
Exchange traded funds:
Equity securities
Fixed income
International
Total
2020
December 31,
5.0%
2019
43.0%
41.0%
11.0%
100.0%
2.0%
46.0%
41.0%
11.0%
100.0%
The strategic objective of the investments of the assets in the Continuing Plan aims to provide long-term capital growth with moderate income. The allocation is
managed on a total return basis with the average participant age in mind. It is constructed with an intermediate investment time frame with a moderate to high risk
tolerance or a long-term investment time frame with a low to moderate risk tolerance. The plan allocation is typically balanced between equity and fixed income.
The equity exposure has the potential to earn a return greater than inflation while the fixed income exposure may reduce the risk and volatility of the portfolio to
which the equity allocation contributes.
Fair Value Measurements
At this time, Trustmark presents no fair values that are derived through internal modeling. Should positions requiring fair valuation arise that are not relevant to
existing methodologies, Trustmark will make every reasonable effort to obtain market participant assumptions, or independent evaluation.
The following table sets forth by level, within the fair value hierarchy, the Continuing Plan’s assets measured at fair value at December 31, 2020 and 2019 ($ in
thousands):
Money market fund
Exchange traded funds:
Equity securities
Fixed income
International
Total assets at fair value
Money market fund
Exchange traded funds:
Equity securities
Fixed income
International
Total assets at fair value
Total
Level 1
Level 2
Level 3
December 31, 2020
$
131 $
131 $
1,242
1,182
318
2,873 $
1,242
1,182
318
2,873 $
$
— $
—
—
—
— $
Total
Level 1
Level 2
Level 3
December 31, 2019
$
51 $
51 $
1,592
1,417
383
3,443 $
1,592
1,417
383
3,443 $
$
— $
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
There have been no changes in the methodologies used in estimating the fair value of plan assets at December 31, 2020. The money market fund approximates fair
value due to its immediate maturity.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair
values. Furthermore, although Trustmark believes their valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Contributions
The range of potential contributions to the Continuing Plan is determined annually by the Continuing Plan’s actuary in accordance with applicable IRS rules and
regulations. Trustmark’s policy is to fund amounts that are sufficient to satisfy the annual minimum funding requirements and do not exceed the maximum that is
deductible for federal income tax purposes. The actual amount of the contribution is determined annually based on the Continuing Plan’s funded status and return
on plan assets as of the measurement date, which is December 31. For the plan year ending December 31, 2020, Trustmark’s minimum required contribution to the
Continuing Plan was $306 thousand; however, Trustmark contributed $563 thousand, $257 thousand in excess of the minimum required. For the plan year ending
December 31, 2021, Trustmark’s minimum required contribution to the Continuing Plan is
132
expected to be $327 thousand . Management and the Board of Directors of Trustmark will monitor the Continuing Plan throughout 2021 to determine any
additional funding requirements by the plan’s measurement date.
Estimated Future Benefit Payments and Other Disclosures
The following table presents the expected benefit payments, which reflect expected future service, for the Continuing Plan ($ in thousands):
Year
2021
2022
2023
2024
2025
2026 - 2030
Amount
$
1,437
997
1,466
1,162
569
2,511
Amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2021 include a net loss of $594
thousand.
Supplemental Retirement Plans
Trustmark maintains a nonqualified supplemental retirement plan covering key executive officers and senior officers as well as directors who have elected to defer
fees. The plan provides for retirement and/or death benefits based on a participant’s covered salary or deferred fees. Although plan benefits may be paid from
Trustmark’s general assets, Trustmark has purchased life insurance contracts on the participants covered under the plan, which may be used to fund future benefit
payments under the plan. The measurement date for the plan is December 31. As a result of mergers prior to 2014, Trustmark became the administrator of small
nonqualified supplemental retirement plans, for which the plan benefits were frozen prior to the merger date.
The following tables present information regarding the benefit obligation, plan assets, funded status, amounts recognized in accumulated other comprehensive loss,
net periodic benefit cost and other statistical disclosures for Trustmark’s nonqualified supplemental retirement plans for the periods presented ($ in thousands):
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation, end of year
Change in plan assets:
Fair value of plan assets, beginning of year
Employer contributions
Benefit payments
Fair value of plan assets, end of year
Funded status at end of year - net liability
Amounts recognized in accumulated other comprehensive loss:
Net loss
Prior service cost
Amounts recognized
133
December 31,
2020
2019
57,482
$
77
1,576
4,168
(3,657)
59,646 $
— $
3,657
(3,657)
— $
53,257
109
2,044
5,498
(3,426)
57,482
—
3,426
(3,426)
—
(59,646) $
(57,482)
21,486 $
459
21,945 $
18,275
609
18,884
$
$
$
$
$
$
$
Net periodic benefit cost:
Service cost
Interest cost
Amortization of prior service cost
Recognized net actuarial loss
Net periodic benefit cost
Other changes in plan assets and benefit obligation recognized in other
comprehensive income (loss), before taxes:
Net (gain) loss
Amortization of prior service cost
Total recognized in other comprehensive income (loss)
Total recognized in net periodic benefit cost and other comprehensive
income (loss)
Weighted-average assumptions as of end of year:
Discount rate for benefit obligation
Discount rate for net periodic benefit cost
$
$
$
$
$
2020
Years Ended December 31,
2019
2018
77
1,576
150
957
2,760
$
$
109
2,044
250
627
3,030
$
$
3,211
(150)
3,061
$
$
4,872
(250)
4,622
$
$
116
1,865
250
884
3,115
(4,111)
(250)
(4,361)
5,821
$
7,652
$
(1,246)
1.95%
2.84%
2.84%
3.97%
3.97%
3.32%
Estimated Supplemental Retirement Plan Payments and Other Disclosures
The following table presents the expected benefits payments for Trustmark’s supplemental retirement plans ($ in thousands):
Year
2021
2022
2023
2024
2025
2026 - 2030
Amount
$
3,893
4,168
4,033
4,106
3,774
17,296
Amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2021 include a loss of $1.2 million
and prior service cost of $112 thousand.
Other Benefit Plans
Defined Contribution Plan
Trustmark provides associates with a self-directed 401(k) retirement plan that allows associates to contribute a percentage of base pay, within limits provided by
the Internal Revenue Code and accompanying regulations, into the plan. Trustmark matches 100% of associate contributions to the plan based on the amount of
each participant’s contributions up to a maximum of 6% of eligible compensation. Associates may become eligible to make elective deferral contributions the first
of the month following 30 days of employment. Eligible associates must complete one year of service in order to vest in Trustmark’s matching
contributions. Trustmark’s contributions to this plan were $9.2 million in 2020, $8.2 million in 2019 and $7.9 million in 2018.
Note 16 – Stock and Incentive Compensation Plans
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 December 31, 2020, the maximum number of shares of Trustmark’s common stock available for issuance under the Stock Plan
was 771,055 shares.
134
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. Beginning in 2020, Trustmark began granting performance units instead of performance awards. The performance units have the same attributes as the
previously granted performance awards, except for the performance units do not provide voting rights.
The following table summarizes Trustmark’s performance award activity for the periods presented:
2020
Weighted-
Average
Grant-Date
Fair Value
Shares
$
149,914
53,450
(36,357)
(21,965)
$
145,042
32.88
31.98
33.31
32.97
32.43
Years Ended December 31,
2019
Weighted-
Average
Grant-Date
Fair Value
Shares
2018
Weighted-
Average
Grant-Date
Fair Value
Shares
$
177,695
50,862
(61,347)
(17,296)
$
149,914
27.10
33.44
20.18
20.18
32.88
$
213,516
51,174
(55,351)
(31,644)
$
177,695
25.37
31.88
25.32
26.26
27.10
Nonvested shares, beginning of year
Granted
Released from restriction
Forfeited
Nonvested shares, end of year
Time-based Awards
Trustmark’s time-based awards vest over three years and are granted to members of Trustmark’s Board of Directors as well as Trustmark’s executive and senior
management teams. Time-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 Trustmark’s time-based award activity for the periods presented:
Nonvested shares, beginning of year
Granted
Released from restriction
Forfeited
Nonvested shares, end of year
2020
Weighted-
Average
Grant-Date
Fair Value
Shares
$
300,006
123,810
(110,537)
(11,660)
$
301,619
33.04
31.52
33.58
32.47
32.24
Years Ended December 31,
2019
Weighted-
Average
Grant-Date
Fair Value
Shares
$
321,870
113,673
(124,598)
(10,939)
$
300,006
28.48
33.42
21.64
32.73
33.04
2018
Weighted-
Average
Grant-Date
Fair Value
Shares
$
320,357
118,325
(107,180)
(9,632)
$
321,870
The following table presents information regarding compensation expense for awards under the Stock Plan for the periods presented ($ in thousands):
Recognized Compensation Expense
2020
for Years Ended December 31,
2019
2018
At December 31, 2020
Unrecognized
Compensation
Expense
Weighted Average
Life of Unrecognized
Compensation Expense
Performance awards
Time-based awards
Total
$
$
$
815
4,382
5,197 $
$
1,524
3,263
4,787 $
861 $
3,009
3,870 $
1,836
2,868
4,704
135
25.40
31.96
23.02
29.30
28.48
1.57
1.54
Note 17 – Commitments and 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 December
31, 2020 and 2019, Trustmark had unused commitments to extend credit of $4.867 billion and $4.349 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 December 31, 2020
and 2019, Trustmark’s maximum exposure to credit loss in the event of nonperformance by the other party for letters of credit was $113.8 million and $105.2
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 December 31, 2020 and 2019, the fair value of collateral held
was $21.9 million and $26.3 million, respectively.
Trustmark adopted FASB ASC Topic 326, effective January 1, 2020, which requires Trustmark to estimate expected credit losses for off-balance sheet credit
exposures which are not unconditionally cancellable. Trustmark maintains a separate ACL on off-balance sheet credit exposures, including unfunded loan
commitments and letters of credit, which is included on the accompanying consolidated balance sheet as of December 31, 2020.
Changes in the ACL on off-balance sheet credit exposures were as follows for the period presented ($ in thousands):
Balance at beginning of period
FASB ASU 2016-13 adoption adjustment
Credit loss expense related to off-balance sheet credit exposures
Balance at end of period
Year Ended December 31, 2020
$
$
—
29,638
8,934
38,572
Adjustments to the ACL on off-balance sheet credit exposures are recorded to credit loss expense related to off-balance sheet credit exposures in noninterest
expense. The increase in the ACL on off-balance sheet credit exposures for the year ended December 31, 2020 was primarily due to the negative effects of the
COVID-19 pandemic.
Legal Proceedings
Trustmark’s wholly-owned subsidiary, TNB, has been named as a defendant in several lawsuits related to the collapse of the Stanford Financial Group.
On August 23, 2009, a purported class action complaint was filed in the District Court of Harris County, Texas, by Peggy Roif Rotstain, Guthrie Abbott, Catherine
Burnell, Steven Queyrouze, Jaime Alexis Arroyo Bornstein and Juan C. Olano (collectively, Class Plaintiffs), on behalf of themselves and all others similarly
situated, naming TNB and four other financial institutions and one individual, each of which are unaffiliated with Trustmark, as defendants. The complaint seeks
to recover (i) alleged fraudulent transfers from each of the defendants in the amount of fees and other monies received by each defendant from entities controlled
by R. Allen Stanford (collectively, the Stanford Financial Group) and (ii) damages allegedly attributable to alleged conspiracies by one or more of the defendants
with the Stanford Financial Group to commit fraud and/or aid and abet fraud on the asserted grounds that defendants knew or should have known the Stanford
Financial Group was conducting an illegal and fraudulent scheme. Class Plaintiffs have demanded a jury trial. Class Plaintiffs did not quantify damages.
136
In November 2009, the lawsuit was removed to federal court by certain defendants and then transferred by the United States Panel on Multidistrict Litigation to
federal court in the Northern District of Texas (Dallas) where multiple Stanford related matters are being consolidated for pre-trial proceedings. In May 2010, all
defendants (including TNB) filed motions to dismiss the lawsuit. In August 2010, the court authorized and approved the formation of an Official Stanford
Investors Committee (OSIC) to represent the interests of Stanford investors and, under certain circumstances, to file legal actions for the benefit of Stanford
investors. In December 2011, the OSIC filed a motion to intervene in this action. In September 2012, the district court referred the case to a magistrate judge for
hearing and determination of certain pretrial issues. In December 2012, the court granted the OSIC’s motion to intervene, and the OSIC filed an Intervenor
Complaint against one of the other defendant financial institutions. In February 2013, the OSIC filed a second Intervenor Complaint that asserts claims against
TNB and the remaining defendant financial institutions. The OSIC seeks to recover: (i) alleged fraudulent transfers in the amount of the fees each of the
defendants allegedly received from Stanford Financial Group, the profits each of the defendants allegedly made from Stanford Financial Group deposits, and other
monies each of the defendants allegedly received from Stanford Financial Group; (ii) damages attributable to alleged conspiracies by each of the defendants with
the Stanford Financial Group to commit fraud and/or aid and abet fraud and conversion on the asserted grounds that the defendants knew or should have known the
Stanford Financial Group was conducting an illegal and fraudulent scheme; and (iii) punitive damages. The OSIC did not quantify damages.
In July 2013, all defendants (including TNB) filed motions to dismiss the OSIC’s claims. In March 2015, the court entered an order authorizing the parties to
conduct discovery regarding class certification, staying all other discovery and setting a deadline for the parties to complete briefing on class certification
issues. In April 2015, the court granted in part and denied in part the defendants’ motions to dismiss the Class Plaintiffs’ claims and the OSIC’s claims. The court
dismissed all of the Class Plaintiffs’ fraudulent transfer claims and dismissed certain of the OSIC’s claims. The court denied the motions by TNB and the other
financial institution defendants to dismiss the OSIC’s constructive fraudulent transfer claims.
On June 23, 2015, the court allowed the Class Plaintiffs to file a Second Amended Class Action Complaint (SAC), which asserted new claims against TNB and
certain of the other defendants for (i) aiding, abetting and participating in a fraudulent scheme, (ii) aiding, abetting and participating in violations of the Texas
Securities Act, (iii) aiding, abetting and participating in breaches of fiduciary duty, (iv) aiding, abetting and participating in conversion and (v) conspiracy. On July
14, 2015, the defendants (including TNB) filed motions to dismiss the SAC and to reconsider the court’s prior denial to dismiss the OSIC’s constructive fraudulent
transfer claims against TNB and the other financial institutions that are defendants in the action. On July 27, 2016, the court denied the motion by TNB and the
other financial institution defendants to dismiss the SAC and also denied the motion by TNB and the other financial institution defendants to reconsider the court’s
prior denial to dismiss the OSIC’s constructive fraudulent transfer claims. On August 24, 2016, TNB filed its answer to the SAC. On October 20, 2017, the OSIC
filed a motion seeking an order lifting the discovery stay and establishing a trial schedule. On November 4, 2016, the OSIC filed a First Amended Intervenor
Complaint, which added claims for (i) aiding, abetting or participation in violations of the Texas Securities Act and (ii) aiding, abetting or participation in the
breach of fiduciary duty. On November 7, 2017, the court denied the Class Plaintiffs’ motion seeking class certification and designation of class representatives
and counsel, finding that common issues of fact did not predominate. The court granted the OSIC’s motion to lift the discovery stay that it had previously ordered.
On May 3, 2019, individual investors and entities filed motions to intervene in the action. On September 18, 2019, the court denied the motions to intervene. On
October 14, 2019, certain of the proposed intervenors filed a notice of appeal.
On December 14, 2009, a different Stanford-related lawsuit was filed in the District Court of Ascension Parish, Louisiana, individually by Harold Jackson, Paul
Blaine and Carolyn Bass Smith, Christine Nichols, and Ronald and Ramona Hebert naming TNB (misnamed as Trust National Bank) and other individuals and
entities not affiliated with Trustmark as defendants. The complaint seeks to recover the money lost by these individual plaintiffs as a result of the collapse of the
Stanford Financial Group (in addition to other damages) under various theories and causes of action, including negligence, breach of contract, breach of fiduciary
duty, negligent misrepresentation, detrimental reliance, conspiracy, and violation of Louisiana’s uniform fiduciary, securities, and racketeering laws. The
complaint does not quantify the amount of money the plaintiffs seek to recover. In January 2010, the lawsuit was removed to federal court by certain defendants
and then transferred by the United States Panel on Multidistrict Litigation to federal court in the Northern District of Texas (Dallas) where multiple Stanford
related matters are being consolidated for pre-trial proceedings. On March 29, 2010, the court stayed the case. TNB filed a motion to lift the stay, which was
denied on February 28, 2012. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues.
On April 11, 2016, Trustmark learned that a different Stanford-related lawsuit had been filed on that date in the Superior Court of Justice in Ontario, Canada, by
The Toronto-Dominion Bank (“TD Bank”), naming TNB and three other financial institutions not affiliated with Trustmark as defendants. The 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 a litigation commenced against TD Bank brought by the Joint Liquidators of Stanford International Bank Limited in the Superior Court of Justice,
Commercial List in
137
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. To date, TNB has not been served in connection with this 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 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 state court action. On February 26, 2020, the lawsuit was removed
to federal court in the Southern District of Texas by TNB. Trustmark and its counsel are carefully evaluating the Smith Complaint in the form that is publicly
available, and will update the foregoing description to the extent that additional material facts are ascertained.
TNB’s relationship with the Stanford Financial Group began as a result of Trustmark’s acquisition of a Houston-based bank in August 2006, and consisted of
correspondent banking and other traditional banking services in the ordinary course of business. All Stanford-related lawsuits are in pre-trial stages.
On December 30, 2019, a complaint was filed in the United States District Court for the Southern District of Mississippi, Northern Division (the Court) 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.
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. In accordance FASB ASC Subtopic 450-20, “Loss Contingencies,” Trustmark will
establish an accrued liability for litigation matters when those matters present loss contingencies that are both probable and reasonably estimable. At the present
time, Trustmark believes, based on its evaluation and the advice of legal counsel, that a loss in any such proceeding is not probable and a reasonable estimate
cannot reasonably be made.
Note 18 – 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 this 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 the phased in capital conservation buffer of 2.500% at both December 31, 2020 and 2019. Accumulated other
comprehensive loss, net of tax, is not included in computing regulatory capital. Trustmark has elected the five-year phase-in transition period 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 December 31, 2020, Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark
and TNB met applicable regulatory guidelines to be considered well-capitalized at December 31, 2020. To be categorized in this manner, Trustmark and TNB
maintained 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 December
31, 2020, which Management believes have affected Trustmark’s or TNB’s present classification.
138
The following table provides Trustmark’s and TNB’s actual regulatory capital amounts and ratios under regulatory capital standards in effect at December 31,
2020 and 2019 ($ in thousands):
Actual
Regulatory Capital
Amount
Ratio
Minimum
Requirement
To Be Well
Capitalized
At December 31, 2020:
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation
Trustmark National Bank
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation
Trustmark National Bank
Total Capital (to Risk Weighted Assets)
Trustmark Corporation
Trustmark National Bank
Tier 1 Leverage (to Average Assets)
Trustmark Corporation
Trustmark National Bank
At December 31, 2019:
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation
Trustmark National Bank
Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation
Trustmark National Bank
Total Capital (to Risk Weighted Assets)
Trustmark Corporation
Trustmark National Bank
Tier 1 Leverage (to Average Assets)
Trustmark Corporation
Trustmark National Bank
1,395,844
1,412,015
1,455,844
1,412,015
1,696,794
1,530,044
1,455,844
1,412,015
1,312,668
1,352,893
1,372,668
1,352,893
1,457,760
1,437,985
1,372,668
1,352,893
$
$
$
$
$
$
$
$
139
11.62%
11.75%
12.11%
11.75%
14.12%
12.73%
9.33%
9.07%
11.93%
12.30%
12.48%
12.30%
13.25%
13.07%
10.48%
10.35%
7.000%
7.000%
8.500%
8.500%
10.500%
10.500%
4.00%
4.00%
7.000%
7.000%
8.500%
8.500%
10.500%
10.500%
4.00%
4.00%
n/a
6.50%
n/a
8.00%
n/a
10.00%
n/a
5.00%
n/a
6.50%
n/a
8.00%
n/a
10.00%
n/a
5.00%
Dividends on Common Stock
Dividends paid by Trustmark are substantially funded from dividends received from TNB. Approval by TNB’s regulators is required if the total of all dividends
declared in any calendar year exceeds the total of its net income for that year combined with its retained net income of the preceding two years. In 2021, TNB will
have available approximately $86.7 million plus its net income for that year to pay as dividends.
Stock Repurchase Program
On March 11, 2016, the Board of Directors of Trustmark authorized a stock repurchase program under which $100.0 million of Trustmark’s outstanding common
stock could be acquired through March 31, 2019. Trustmark repurchased approximately 1.2 million shares of its common stock valued at $36.9 million during the
year ended December 31, 2019, compared to 2.0 million shares of its common stock valued at $62.4 million repurchased during the year ended December 31, 2018
and no common stock repurchased during the year ended December 31, 2017. Under the 2016 program, Trustmark repurchased approximately 3.2 million shares
valued at $100.0 million.
The Board of Directors of Trustmark authorized a stock repurchase program effective April 1, 2019 under which $100.0 million of Trustmark’s outstanding
common stock could be acquired through March 31, 2020. The adoption of this stock repurchase program followed the receipt of non-objection from the
FRB. Trustmark repurchased approximately 887 thousand shares of its common stock valued at $27.5 million during the year ended December 31, 2020,
compared to approximately 601 thousand shares of its common stock valued at $19.7 million during the year ended December 31, 2019. Under the 2019 program,
Trustmark repurchased approximately 1.5 million shares of its common stock valued at $47.2 million.
On January 28, 2020, the Board of Directors of Trustmark authorized a new stock repurchase program effective April 1, 2020 under which $100.0 million of
Trustmark’s outstanding common stock may be acquired through December 31, 2021. On March 9, 2020, Trustmark suspended its share repurchase programs to
preserve capital to support customers during the COVID-19 pandemic. Trustmark resumed the repurchase of its shares in January 2021. Under this authority,
Trustmark repurchased approximately 16 thousand shares of its outstanding common stock valued at $446 thousand during January 2021. The shares may be
purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. There is no
guarantee as to the number of shares that will be repurchased by Trustmark, and Trustmark may discontinue repurchases at any time at Management’s discretion.
Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
The following tables present the net change in the components of accumulated other comprehensive loss and the related tax effects allocated to each component for
the years ended December 31, 2020, 2019 and 2018 ($ 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 15 – 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. Reclassification adjustments related to the cash flow hedge derivative are included in other
interest expense in the accompanying consolidated statements of income.
140
Year Ended December 31, 2020
Securities available for sale and transferred securities:
Net unrealized holding gains (losses) arising during the period
Change in net unrealized holding loss on securities transferred to held to maturity
$
Total securities available for sale and transferred securities
Pension and other postretirement benefit plans:
Change in the actuarial loss of pension and other postretirement
benefit plans
Reclassification adjustments for changes realized in net income:
Net change in prior service costs
Recognized net loss due to lump sum settlements
Change in net actuarial loss
Total pension and other postretirement benefit plans
Total other comprehensive income (loss)
Year Ended December 31, 2019
Securities available for sale and transferred securities:
Net unrealized holding gains (losses) arising during the period
Change in net unrealized holding loss on securities transferred to held to maturity
Total securities available for sale and transferred securities
Pension and other postretirement benefit plans:
Change in the actuarial loss of pension and other postretirement
benefit plans
Reclassification adjustments for changes realized in net income:
Net change in prior service costs
Recognized net loss due to lump sum settlements
Change in net actuarial loss
Total pension and other postretirement benefit plans
Cash flow hedge derivatives:
Change in accumulated gain (loss) on effective cash flow hedge derivatives
Reclassification adjustment for (gain) loss realized in net income
Total cash flow hedge derivatives
Total other comprehensive income (loss)
Year Ended December 31, 2018
Securities available for sale and transferred securities:
Net unrealized holding gains (losses) arising during the period
Change in net unrealized holding loss on securities transferred to held to maturity
Total securities available for sale and transferred securities
Pension and other postretirement benefit plans:
Change in the actuarial loss of pension and other postretirement
benefit plans
Reclassification adjustments for changes realized in net income:
Net change in prior service costs
Recognized net loss due to lump sum settlements
Change in net actuarial loss
Total pension and other postretirement benefit plans
Cash flow hedge derivatives:
Change in accumulated gain (loss) on effective cash flow hedge derivatives
Reclassification adjustment for (gain) loss realized in net income
Total cash flow hedge derivatives
Total other comprehensive income (loss)
141
$
$
$
$
$
Before Tax
Amount
Tax (Expense)
Benefit
Net of Tax
Amount
30,622 $
3,177
33,799
(7,657) $
(794)
(8,451)
(5,128)
1,282
150
119
1,128
(3,731)
30,068 $
(38)
(30)
(282)
932
(7,519) $
44,136 $
3,605
47,741
(11,033) $
(901)
(11,934)
(5,703)
250
312
796
(4,345)
(145)
(479)
(624)
42,772 $
(19,221) $
3,761
(15,460)
3,742
250
161
1,225
5,378
497
(322)
175
(9,907) $
1,425
(63)
(77)
(199)
1,086
36
119
155
(10,693) $
4,805 $
(940)
3,865
(936)
(63)
(39)
(306)
(1,344)
(124)
80
(44)
2,477 $
22,965
2,383
25,348
(3,846)
112
89
846
(2,799)
22,549
33,103
2,704
35,807
(4,278)
187
235
597
(3,259)
(109)
(360)
(469)
32,079
(14,416)
2,821
(11,595)
2,806
187
122
919
4,034
373
(242)
131
(7,430)
The following table presents the changes in the balances of each component of accumulated other comprehensive loss for the periods presented ($ in
thousands). All amounts are presented net of tax.
Balance, January 1, 2018
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other
comprehensive loss
Net other comprehensive income (loss)
Reclassification of certain income tax effects related to the change in the federal
statutory income tax rate under the Tax Reform Act
Balance, December 31, 2018
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other
comprehensive loss
Net other comprehensive income (loss)
Balance, December 31, 2019
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other
comprehensive loss
Net other comprehensive income (loss)
Balance, December 31, 2020
Note 19 – Fair Value
Financial Instruments Measured at Fair Value
Securities
Available for Sale
and Transferred
Securities
Defined
Benefit
Pension Items
Cash Flow Hedge
Derivative
$
(26,535) $
(11,595)
(13,468) $
2,806
278 $
373
Total
(39,725)
(8,416)
—
(11,595)
(5,694)
(43,824)
35,807
—
35,807
(8,017)
25,348
1,228
4,034
(2,890)
(12,324)
(4,278)
1,019
(3,259)
(15,583)
(3,846)
(242)
131
60
469
(109)
(360)
(469)
—
—
—
25,348
17,331 $
1,047
(2,799)
(18,382) $
$
—
—
— $
986
(7,430)
(8,524)
(55,679)
31,420
659
32,079
(23,600)
21,502
1,047
22,549
(1,051)
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 market place.
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.
142
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 as of December 31, 2020 and 2019, 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 years ended December 31, 2020 and 2019.
U.S. Government agency obligations
Obligations of states and political subdivisions
Mortgage-backed securities
Securities available for sale
Loans held for sale
Mortgage servicing rights
Other assets - derivatives
Other liabilities - derivatives
U.S. Government agency obligations
Obligations of states and political subdivisions
Mortgage-backed securities
Securities available for sale
Loans held for sale
Mortgage servicing rights
Other assets - derivatives
Other liabilities - derivatives
Total
Level 1
Level 2
Level 3
December 31, 2020
18,041 $
5,835
1,967,939
1,991,815
446,951
66,464
47,768
5,324
— $
—
—
—
—
—
145
666
18,041 $
5,835
1,967,939
1,991,815
446,951
—
38,063
4,658
—
—
—
—
—
66,464
9,560
—
Total
Level 1
Level 2
Level 3
December 31, 2019
22,327 $
25,465
1,554,612
1,602,404
226,347
79,394
17,956
6,063
— $
—
—
—
—
—
244
4,414
22,327 $
25,465
1,554,612
1,602,404
226,347
—
16,273
1,649
—
—
—
—
—
79,394
1,439
—
$
$
143
The changes in Level 3 assets measured at fair value on a recurring basis for the years ended December 31, 2020 and 2019 are summarized as follows ($ in
thousands):
Balance, January 1, 2020
Total net (loss) gain included in Mortgage banking, net (1)
Additions
Sales
Balance, December 31, 2020
The amount of total gains (losses) for the period included in earnings that are
attributable to the change in unrealized gains or losses still held at
December 31, 2020
Balance, January 1, 2019
Total net (loss) gain included in Mortgage banking, net (1)
Additions
Sales
Balance, December 31, 2019
The amount of total gains (losses) for the period included in earnings that are
attributable to the change in unrealized gains or losses still held at
December 31, 2019
MSR
Other Assets -
Derivatives
79,394 $
(42,735)
29,805
—
66,464 $
1,439
40,669
—
(32,548)
9,560
(26,146) $
25,031
95,596 $
(32,913)
16,711
—
79,394 $
1,187
6,775
—
(6,523)
1,439
$
$
$
$
$
$
(21,078) $
1,284
(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 December 31,
2020, 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 December 31, 2020, Trustmark had outstanding balances of $43.4 million
with a related ACL of $4.4 million in collateral-dependent LHFI. At December 31, 2019, Trustmark had $41.2 million with a related allowance of $5.5 million in
impaired LHFI that were individually evaluated for impairment and written down to fair value of the underlying collateral less cost to sell based on the fair value of
the collateral or other unobservable input. Both the collateral-dependent LHFI and the individually evaluated impaired 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 $10.1 million were re-measured during 2020, requiring write-downs of $2.0 million to reach their current fair values compared to $15.0
million of foreclosed assets that were re-measured during 2019, requiring write-downs of $2.4 million.
144
Fair Value of Financial Instruments
FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that
are not measured and reported at fair value on a recurring basis or non-recurring basis.
The carrying amounts and estimated fair values of financial instruments at December 31, 2020 and 2019 were as follows ($ in thousands):
Financial Assets:
Level 2 Inputs:
Cash and short-term investments
Securities held to maturity
Level 3 Inputs:
Net LHFI and PPP loans
Net acquired loans (1)
Financial Liabilities:
Level 2 Inputs:
Deposits
Federal funds purchased and securities sold under
repurchase agreements
Other borrowings
Subordinated notes
Junior subordinated debt securities
December 31, 2020
December 31, 2019
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$
1,952,554 $
538,072
1,952,554 $
563,115
358,916 $
738,099
358,916
746,202
10,317,352
—
10,312,395
—
9,251,351
71,786
9,235,674
71,786
14,048,764
14,052,863
11,245,557
11,250,071
164,519
168,252
122,921
61,856
164,519
168,252
127,500
46,083
256,020
85,396
—
61,856
256,020
85,374
—
50,722
(1)
Upon adoption of FASB ASC Topic 326 at January 1, 2020, Trustmark elected to account for its existing acquired loans as purchased credit deteriorated
loans included within the LHFI portfolio. See Note 5 – Acquired Loans for additional details.
Fair Value Option
Trustmark has elected to account for its LHFS under the fair value option, with interest income on these LHFS reported in interest and fees on LHFS and
LHFI. The fair value of the LHFS is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan. The 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 the LHFS are largely offset by changes
in the fair value of the derivative instruments. For the years ended December 31, 2020, 2019 and 2018, a net gain of $10.5 million, $1.5 million and $1.4 million,
respectively, was recorded as noninterest income in mortgage banking, net for changes in the fair value of the LHFS accounted for under the fair value
option. Interest and fees on LHFS and LHFI for the years ended December 31, 2020 included $6.9 million of interest earned on the LHFS accounted for under the
fair value option compared to $5.9 million and $4.9 million for the years ended December 31, 2019 and 2018, 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 the 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 $141.2 million and $57.1
million at December 31, 2020 and 2019, respectively, and are included in LHFS on the accompanying consolidated balance sheets.
The following table provides information about the fair value and the contractual principal outstanding of the LHFS accounted for under the fair value option as of
December 31, 2020 and 2019 ($ in thousands):
Fair value of LHFS
LHFS contractual principal outstanding
Fair value less unpaid principal
December 31,
2020
2019
$
$
305,791 $
290,625
15,166 $
169,285
164,420
4,865
145
Note 20 – Derivative Financial Instruments
Derivatives Designated as Hedging Instruments
On April 4, 2013, Trustmark entered into a forward interest rate swap contract on junior subordinated debentures with a total notional amount of $60.0
million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under FASB ASC Topic 815 with the objective of
protecting the quarterly interest payments on Trustmark’s $60.0 million of junior subordinated debentures issued to the Trust throughout the five-year period which
began December 31, 2014 and ended December 31, 2019 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest
rate. Under the swap, which became effective on December 31, 2014, Trustmark paid a fixed interest rate of 1.66% and received a variable interest rate based on
three-month LIBOR on a total notional amount of $60.0 million, with quarterly net settlements.
No ineffectiveness related to the interest rate swap designated as a cash flow hedge was recognized in the consolidated statements of income for the years ended
December 31, 2020, 2019 and 2018. The interest rate swap matured on December 31, 2019; therefore, there was no accumulated net after-tax amount related to
the effective cash flow hedge included in accumulated other comprehensive income (loss) at December 31, 2020 and 2019. Amounts reported in accumulated
other comprehensive income (loss) related to this derivative were reclassified to other interest expense as interest payments were made on Trustmark’s variable
rate junior subordinated debentures.
Derivatives not Designated as Hedging Instruments
Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return
that economically hedges changes in the fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not
otherwise qualify for hedge accounting. The total notional amount of these derivative instruments was $326.5 million at December 31, 2020 compared to $564.0
million at December 31, 2019. Changes in the fair value of these exchange-traded derivative instruments are recorded as noninterest income in mortgage banking,
net and are offset by changes in the fair value of the MSR. The impact of this strategy resulted in a net positive ineffectiveness of $7.8 million for the year ended
December 31, 2020, compared to a net negative ineffectiveness of $11.5 million for the year ended December 31, 2019 and a net positive ineffectiveness of $2.4
million for the year ended December 31, 2018.
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 $377.5 million at December 31, 2020, with a negative
valuation adjustment of $3.1 million, compared to $209.0 million at December 31, 2019, with a negative valuation adjustment of $486 thousand.
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 $329.3 million at December 31, 2020, with a positive valuation adjustment of $9.6 million,
compared to $92.1 million at December 31, 2019, with a positive valuation adjustment of $1.4 million.
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. As of December 31, 2020, Trustmark had interest rate swaps with an aggregate notional amount of $1.125 billion
related to this program, compared to $893.1 million as of December 31, 2019.
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.
146
As of December 31, 2020 and 2019, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment
for nonperformance risk, related to these agreements was $1.3 million and $1.0 million, respectively. As of December 31, 2020, Trustmark had posted collateral of
$1.6 million against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of
these triggering provisions at December 31, 2020, 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 both
December 31, 2020 and 2019, Trustmark had entered into three risk participation agreements as a beneficiary with aggregate notional amounts of $41.1 million and
$37.6 million, respectively. At December 31, 2020, Trustmark had entered into twenty-four risk participation agreements as a guarantor with an aggregate notional
amount of $172.0 million compared to ten risk participation agreements as a guarantor with an aggregate notional amount of $79.3 million at December 31,
2019. The aggregate fair values of these risk participation agreements were immaterial at December 31, 2020 and 2019.
Tabular Disclosures
The following tables disclose the fair value of derivative instruments in Trustmark’s consolidated balance sheets as of December 31, 2020 and 2019 as well as the
effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):
Derivatives not designated as hedging instruments
Interest rate contracts:
Exchange traded purchased options included in other assets
OTC written options (rate locks) included in other assets
Interest rate swaps included in other assets (1)
Credit risk participation agreements included in other assets
Futures contracts included in other liabilities
Forward contracts included in other liabilities
Exchange traded written options included in other liabilities
Interest rate swaps included in other liabilities (1)
Credit risk participation agreements included in other liabilities
December 31,
2020
2019
$
145 $
9,560
37,974
89
34
3,145
632
1,313
200
244
1,439
16,209
64
2,654
486
1,760
1,122
41
(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.
Derivatives in hedging relationships
Amount of gain (loss) reclassified from accumulated other
comprehensive income (loss) and recognized in other
interest expense
Derivatives not designated as hedging instruments
Amount of gain (loss) recognized in mortgage banking, net
Amount of gain (loss) recognized in bank card and other fees
2020
Years Ended December 31,
2019
2018
$
$
— $
479 $
322
39,436 $
(1,022)
11,096 $
(776)
(6,191)
(357)
The following table discloses the amount included in other comprehensive income (loss), net of tax, for derivative instruments designated as cash flow hedges for
the periods presented ($ in thousands):
Derivatives in cash flow hedging relationship
Amount of gain (loss) recognized in other comprehensive
income (loss), net of tax
2020
Years Ended December 31,
2019
2018
$
— $
(109) $
373
147
Information about financial instruments that are eligible for offset in the consolidated balance sheets as of December 31, 2020 and 2019 is presented in the
following tables ($ in thousands):
Offsetting of Derivative Assets
As of December 31, 2020
Gross
Amounts of
Recognized
Assets
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Assets presented
in the Statement of
Financial Position
Financial
Instruments
Cash Collateral
Received
Net Amount
Gross Amounts Not Offset in the
Statement of Financial Position
Derivatives
$
37,974 $
— $
37,974 $
— $
— $
37,974
Offsetting of Derivative Liabilities
As of December 31, 2020
Derivatives
$
1,313 $
— $
1,313 $
— $
(1,313) $
—
Gross
Amounts of
Recognized
Liabilities
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Liabilities presented
in the Statement of
Financial Position
Financial
Instruments
Cash Collateral
Posted
Net Amount
Gross Amounts Not Offset in the
Statement of Financial Position
Offsetting of Derivative Assets
As of December 31, 2019
Derivatives
$
16,209 $
— $
16,209 $
— $
— $
16,209
Gross
Amounts of
Recognized
Assets
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Assets presented
in the Statement of
Financial Position
Financial
Instruments
Cash Collateral
Received
Net Amount
Gross Amounts Not Offset in the
Statement of Financial Position
Offsetting of Derivative Liabilities
As of December 31, 2019
Derivatives
$
1,122 $
— $
1,122 $
— $
(1,390) $
(268)
Gross
Amounts of
Recognized
Liabilities
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Liabilities presented
in the Statement of
Financial Position
Financial
Instruments
Cash Collateral
Posted
Net Amount
Gross Amounts Not Offset in the
Statement of Financial Position
Note 21 – Segment Information
Trustmark’s management reporting structure includes three segments: General Banking, Wealth Management and Insurance. The General Banking Segment is
responsible for all traditional banking products and services, including loans and deposits. The General Banking Segment also consists of internal operations such
as Human Resources, Executive Administration, Treasury (Funds Management), Public Affairs and Corporate Finance. The Wealth Management Segment
provides customized solutions for customers by integrating financial services with traditional banking products and services such as money management, full-
service brokerage, financial planning, personal and institutional trust and retirement services. Through FBBI, Trustmark’s Insurance Segment provides a full range
of retail insurance products including commercial risk management products, bonding, group benefits and personal lines coverage.
During the first quarter of 2020, Trustmark revised the composition of its operating segments by moving the Retail Private Banking Group from the General
Banking Segment to the Wealth Management Segment as a result of a change in supervision of this group for segment reporting purposes. The prior periods
presented include reclassifications to conform to the current period presentation.
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.
148
The following table discloses financial information by reportable segment for the periods presented ($ in thousands):
General Banking
Net interest income
Provision for loan losses, net
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
General banking net income
Selected Financial Information
Total assets
Depreciation and amortization
Wealth Management
Net interest income
Provision for loan losses, net
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Wealth Management net income
Selected Financial Information
Total assets
Depreciation and amortization
Insurance
Net interest income
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Insurance net income
Selected Financial Information
Total assets
Depreciation and amortization
Consolidated
Net interest income
Provision for loan losses, net
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Consolidated net income
Selected Financial Information
Total assets
Depreciation and amortization
2020
Years Ended December 31,
2019
2018
420,225 $
36,124
197,691
410,744
171,048
25,109
145,939 $
419,597 $
10,622
113,756
367,976
154,755
18,638
136,117 $
412,455
17,098
113,930
353,174
156,113
18,313
137,800
16,226,358 $
40,351 $
13,140,467 $
38,634 $
12,896,799
38,181
6,082 $
(11)
31,634
30,318
7,409
1,853
5,556 $
6,750 $
217
30,860
28,882
8,511
2,123
6,388 $
6,739
(110)
30,420
31,385
5,884
1,472
4,412
242,429 $
274 $
283,164 $
270 $
320,742
187
230 $
45,268
34,173
11,325
2,795
8,530 $
242 $
42,429
32,144
10,527
2,572
7,955 $
83,053 $
700 $
74,246 $
516 $
426,537 $
36,113
274,593
475,235
189,782
29,757
160,025 $
426,589 $
10,839
187,045
429,002
173,793
23,333
150,460 $
226
40,486
30,856
9,856
2,484
7,372
68,919
572
419,420
16,988
184,836
415,415
171,853
22,269
149,584
16,551,840 $
41,325 $
13,497,877 $
39,420 $
13,286,460
38,940
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
149
Note 22 – Parent Company Only Financial Information
($ in thousands)
Condensed Balance Sheets
Assets:
Investment in banks
Other assets
Total Assets
Liabilities and Shareholders' Equity:
Accrued expense
Subordinated notes
Junior subordinated debt securities
Shareholders' equity
Total Liabilities and Shareholders' Equity
Condensed Statements of Income
Revenue:
Dividends received from banks
Earnings of subsidiaries over distributions
Other income
Total Revenue
Expense:
Other expense
Total Expense
Net Income
Condensed Statements of Cash Flows
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Net change in investment in subsidiaries
Other
Net cash from operating activities
Financing Activities:
Proceeds from subordinated notes
Common stock dividends
Repurchase and retirement of common stock
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
December 31,
2020
2019
$
$
$
$
1,769,165 $
158,360
1,927,525 $
1,631 $
122,921
61,856
1,741,117
1,927,525 $
1,707,644
15,778
1,723,422
864
—
61,856
1,660,702
1,723,422
2020
Years Ended December 31,
2019
2018
$
$
109,243 $
53,724
66
163,033
3,008
3,008
160,025 $
120,297 $
32,971
90
153,358
2,898
2,898
150,460 $
128,592
23,791
86
152,469
2,885
2,885
149,584
2020
Years Ended December 31,
2019
2018
$
160,025 $
150,460 $
149,584
(53,724)
(326)
105,975
(32,971)
(1,800)
115,689
122,900
(58,769)
(27,538)
36,593
142,568
15,707
158,275 $
—
(59,804)
(56,615)
(116,419)
(730)
16,437
15,707 $
$
(23,791)
(1,395)
124,398
—
(62,425)
(62,421)
(124,846)
(448)
16,885
16,437
Trustmark (parent company only) paid income taxes of approximately $46.6 million in 2020, $24.8 million in 2019 and $12.4 million in 2018. Trustmark did not
pay or receive interest during 2020, compared to interest received of $482 thousand and $320 thousand during 2019 and 2018, respectively.
150
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change of accountants within the two-year period prior to December 31, 2020.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out by Trustmark’s management, with the participation of its
Chief Executive Officer and Treasurer and Principal Financial Officer (Principal Financial Officer), of the effectiveness of Trustmark’s disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Principal
Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. No changes were made to
Trustmark’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter that
materially affected, or are reasonably likely to materially affect, Trustmark’s internal control over financial reporting.
Management Report on Internal Control over Financial Reporting
The management of Trustmark is responsible for establishing and maintaining adequate internal control over financial reporting. Trustmark’s internal control over
financial reporting was designed under the supervision of the Chief Executive Officer and Treasurer (Principal Financial Officer) to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of published financial statements in accordance with GAAP.
Management assessed the effectiveness of internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on our
assessment, we believe that, as of December 31, 2020, Trustmark’s internal control over financial reporting was effective based on those criteria.
The effectiveness of Trustmark’s internal control over financial reporting as of December 31, 2020 was audited by Crowe LLP, an independent registered public
accounting firm, as stated in their report appearing in the section captioned “Report of Independent Registered Public Accounting Firm” included in Part II. Item 8.
– Financial Statements and Supplementary Data of this report.
ITEM 9B.
OTHER INFORMATION
None
151
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information regarding executive officers is included under the section captioned “Information about Executive Officers of Trustmark” in Part I. Item 1. -
Business, elsewhere in this Annual Report on Form 10-K. Other information required by this Item is incorporated herein by reference to Trustmark Corporation’s
(Trustmark’s) Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of Trustmark’s fiscal year-
end.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to Trustmark’s Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of
Shareholders to be filed with the SEC within 120 days of Trustmark’s fiscal year-end.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Equity Compensation Plans
The table below contains summary information as of December 31, 2020 with respect to the Amended and Restated Stock and Incentive Compensation Plan,
which is Trustmark’s only equity compensation plan under which shares of Trustmark common stock are authorized for issuance.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by
security holders
Total
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights (a) (1)
Weighted-average exercise
price of outstanding options,
warrants and rights (2)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a)) (3)
145,042 $
—
145,042 $
—
—
—
771,055
—
771,055
(1)
(2)
(3)
This number represents the maximum potential shares issuable in connection with the vesting in excess of 100% of unvested performance-based restricted
stock and restricted stock unit awards previously granted.
Potential achievement shares, to the extent issued, do not have an exercise price and, therefore, are excluded for purposes of computing the weighted-
average exercise price.
This number represents shares available for future awards under the Amended and Restated Stock and Incentive Compensation Plan as of December 31,
2020, in connection with stock options, stock appreciation rights, restricted stock, restricted stock units and performance units.
All other information required by this Item is incorporated herein by reference to Trustmark’s Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of
Shareholders to be filed with the SEC within 120 days of Trustmark’s fiscal year-end.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to Trustmark’s Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of
Shareholders to be filed with the SEC within 120 days of Trustmark’s fiscal year-end.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to Trustmark’s Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of
Shareholders to be filed with the SEC within 120 days of Trustmark’s fiscal year-end.
152
ITEM. 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
A-1. Financial Statements
PART IV
The report of Crowe LLP, independent registered public accounting firm, and the following consolidated financial statements of Trustmark Corporation
(Trustmark) and subsidiaries are included in the Registrant’s 2020 Annual Report on Form 10-K and are incorporated into Part II. Item 8. – Financial Statements
and Supplementary Data herein by reference:
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements (Notes 1 through 22)
A-2. Financial Statement Schedules
The schedules to the consolidated financial statements set forth by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable
and therefore have been omitted.
A-3. Exhibits
The exhibits to this Annual Report on Form 10-K listed below have been included only with the copy of this report filed with the Securities and Exchange
Commission. Copies of individual exhibits will be furnished to shareholders upon written request to Trustmark and payment of a reasonable fee.
ITEM. 16.
SUMMARY
None
153
EXHIBIT INDEX
2-a
2-b
3-a
3-b
4-a
4-b
4-c
4-d
Agreement and Plan of Reorganization by and between Trustmark Corporation and BancTrust Financial Group, Inc. Filed June 1, 2012, as Exhibit
2.1 to Trustmark’s Form 8-K Current Report, incorporated herein by reference.
First Amendment to Agreement and Plan of Reorganization by and between Trustmark Corporation and BancTrust Financial Group, Inc. Filed
October 9, 2012 as Exhibit 2.1 to Trustmark’s Form 8-K Current Report, incorporated herein by reference.
Articles of Incorporation of Trustmark, as restated April 28, 2016. Incorporated herein by reference to Exhibit 3.1 to Trustmark’s Form 8-K Current
Report filed on May 2, 2016.
Amended and Restated Bylaws of Trustmark Corporation, as of October 27, 2020. Filed on October 27, 2020, as Exhibit 3.1 to Trustmark’s Form 8-
K Current Report, incorporated herein by reference.
Amended and Restated Trust Agreement among Trustmark Corporation, Wilmington Trust Company and the Administrative Trustees regarding
Trustmark Preferred Capital Trust I. Filed August 21, 2006, as Exhibit 4.1 to Trustmark’s Form 8-K Current Report, incorporated herein by
reference.
Junior Subordinated Indenture between Trustmark Corporation and Wilmington Trust Company. Filed August 21, 2006, as Exhibit 4.2 to
Trustmark’s Form 8-K Current Report, incorporated herein by reference.
Guarantee Agreement between Trustmark Corporation and Wilmington Trust Company. Filed August 21, 2006, as Exhibit 4.3 to Trustmark’s Form
8-K Current Report, incorporated herein by reference.
Description of Trustmark’s Common Stock. Filed February 20, 2020, as exhibit 4-d to Trustmark’s Form 10-K Annual Report, incorporated herein
by reference.
10-a
Deferred Compensation Plan for Executive Officers (Executive Deferral Plan-Group 2) of Trustmark National Bank, as amended. Filed as Exhibit
10-a to Trustmark’s Form 10-K Annual Report for the year ended December 31, 2007, incorporated herein by reference. *
10-b
Deferred Compensation Plan for Directors of First National Financial Corporation acquired October 7, 1994. Filed as Exhibit 10-c to Trustmark’s
Form 10-K Annual Report for the year ended December 31, 1994, incorporated herein by reference. *
10-c
Deferred Compensation Plan for Directors (Directors’ Deferred Fee Plan) of Trustmark National Bank, as amended. Filed as Exhibit 10-e to
Trustmark’s Form 10-K Annual Report for the year ended December 31, 2007, incorporated herein by reference. *
10-d
Deferred Compensation Plan for Executives (Executive Deferral Plan-Group 1) of Trustmark National Bank, as amended. Filed as Exhibit 10-f to
Trustmark’s Form 10-K Annual Report for the year ended December 31, 2007, incorporated herein by reference. *
10-e
Trustmark Corporation Deferred Compensation Plan (Master Plan Document), as amended. Filed as Exhibit 10-g to Trustmark’s Form 10-K Annual
Report for the year ended December 31, 2007, incorporated herein by reference. *
10-f
Trustmark Corporation Amended and Restated Stock and Incentive Compensation Plan, as amended and restated April 28, 2015. Filed May 4, 2015,
as Exhibit 10-f to Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-g
Revised Form of Restricted Stock Agreement (under the 2005 Stock and Incentive Compensation Plan). Filed February 26, 2009, as Exhibit 10-p to
Trustmark’s Annual Report on Form 10-K, incorporated herein by reference. *
10-h
Revised Form of Time-Based Restricted Stock Agreement for Executive (under the 2005 Stock and Incentive Compensation Plan). Filed
February 26, 2009, as Exhibit 10-q to Trustmark’s Annual Report on Form 10-K, incorporated herein by reference. *
10-i
First Amendment to Trustmark Corporation Deferred Compensation Plan (Master Plan Document). Filed November 7, 2008, as Exhibit 10-r to
Trustmark’s Form 10-Q Quarterly Report for the quarter ended September 30, 2008, incorporated herein by reference. *
10-j
Form of Performance-Based TARP-Compliant Restricted Stock Agreement for Executive (under the 2005 Stock and Incentive Compensation
Plan.). Filed November 9, 2009, as Exhibit 10-y to Trustmark’s Form 10-Q Quarterly Report for the quarter ended September 30, 2009 and
incorporated herein by reference. *
10-k
Employment Agreement between Trustmark Corporation and Gerard R. Host dated September 14, 2010. Filed September 14, 2010, as Exhibit 10-z
to Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
154
10-l
Form of Time-Based Restricted Stock Agreement for Director (under the 2005 Stock and Incentive Compensation Plan.) Filed August 8, 2011 as
Exhibit 10-aa to Trustmark’s Form 10-Q Quarterly Report for the quarter ended June 30, 2011 and incorporated herein by reference. *
10-m
Summary of the Trustmark Corporation Management Incentive Plan. Filed November 7, 2012, as Exhibit 10-ab to Trustmark’s Form 10-Q
Quarterly Report for the quarter ended September 30, 2012 and incorporated herein by reference. *
10-n
Form of Performance-Based Restricted Stock Agreement for Executive (under the 2005 Stock and Incentive Compensation Plan.) Filed February 27,
2013, as Exhibit 10-ac to Trustmark’s Annual Report on Form 10-K, incorporated herein by reference. *
10-o
Form of Change in Control Agreement between Trustmark Corporation and certain executive officers. Filed February 7, 2014, as Exhibit 10-ad to
Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-p
Form of Performance-Based Restricted Stock Agreement for Associate (under the Amended and Restated Stock and Incentive Compensation
Plan.) Filed January 8, 2016, as Exhibit 10-p to Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-q
Form of Time-Based Restricted Stock Agreement for Associate (under the Amended and Restated Stock and Incentive Compensation Plan.) Filed
January 8, 2016, as Exhibit 10-q to Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-r
Form of Time-Based Restricted Stock Agreement for Director (under the Amended and Restated Stock and Incentive Compensation Plan.) Filed
January 8, 2016, as Exhibit 10-r to Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-s
Form of Performance-Based Restricted Stock Agreement for Associate (under the Amended and Restated Stock and Incentive Compensation
Plan.) Filed February 15, 2018, as Exhibit 10-s to Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-t
Form of Time-Based Restricted Stock Agreement for Associate (under the Amended and Restated Stock and Incentive Compensation Plan.) Filed
February 15, 2018, as Exhibit 10-t to Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-u
Form of Time-Based Restricted Stock Agreement for Director (under the Amended and Restated Stock and Incentive Compensation Plan.) Filed
February 15, 2018, as Exhibit 10-u to Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-v
Amendment to Employment Agreement between Trustmark Corporation and Gerard R. Host dated February 15, 2018. Filed February 20, 2018, as
Exhibit 10-v to Trustmark’s Form 10-K Annual Report, incorporated herein by reference. *
10-w
Second Amendment to Trustmark Corporation Deferred Compensation Plan (Master Plan Document). Filed May 7, 2018, as Exhibit 10-w to
Trustmark’s Form 10-Q Quarterly Report, incorporated herein by reference. *
10-x
First Amendment to Deferred Compensation Plan for Directors (Directors’ Deferred Fee Plan) of Trustmark National Bank. Filed May 7, 2018, as
Exhibit 10-x to Trustmark’s Form 10-Q Quarterly Report, incorporated herein by reference. *
10-y
First Amendment to Deferred Compensation Plan for Executives (Executive Deferral Plan-Group 1) of Trustmark National Bank. Filed May 7, 2018,
as Exhibit 10-y to Trustmark’s Form 10-Q Quarterly Report, incorporated herein by reference. *
10-z
Second Amendment to Employment Agreement between Trustmark Corporation and Gerard R. Host dated December 10, 2019. Filed December 10,
2019, as Exhibit 10.1 to Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-aa
Form of Performance Unit Agreement for Associate (under the Amended and Restated Stock and Incentive Compensation Plan.) Filed February 20,
2020, as exhibit 10-aa to Trustmark’s Form 10-K Annual Report, incorporated herein by reference. *
10-ab
Form of Time-Based Restricted Stock Unit Agreement for Associate (under the Amended and Restated Stock and Incentive Compensation Plan.)
Filed February 20, 2020, as exhibit 10-ab to Trustmark’s Form 10-K Annual Report, incorporated herein by reference. *
10-ac
Form of Time-Based Restricted Stock Unit Agreement for Director (under the Amended and Restated Stock and Incentive Compensation Plan.) Filed
February 20, 2020, as exhibit 10-ac to Trustmark’s Form 10-K Annual Report, incorporated herein by reference. *
155
10-ad
Employment Agreement between Trustmark Corporation and Gerard R. Host dated October 27, 2020. Filed October 27, 2020 as Exhibit 10.1 to
Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
10-ae
Employment Agreement between Trustmark Corporation and Duane A. Dewey dated October 27, 2020. Filed October 27, 2020 as Exhibit 10.2 to
Trustmark’s Form 8-K Current Report, incorporated herein by reference. *
21
23
31-a
31-b
32-a
32-b
List of Subsidiaries.
Consent of Crowe LLP.
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Executive Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification by Principal Financial Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document
101.SCH Inline XBRL Schema Document
101.CAL
Inline XBRL Calculation Linkbase Document
101.DEF
Inline XBRL Label Linkbase Document
101.LAB Inline XBRL Presentation Linkbase Document
101.PRE
Inline XBRL Definition Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
* - Denotes management contract.
All other exhibits are omitted, as they are inapplicable or not required by the related instructions.
156
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.
SIGNATURES
BY:
/s/ Duane A. Dewey
Duane A. Dewey
President and Chief Executive Officer
DATE:
February 18, 2021
TRUSTMARK CORPORATION
157
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
SIGNATURES
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
DATE: February 18, 2021
BY:
/s/ Adolphus B. Baker
Adolphus B. Baker, Director
BY:
/s/ William A. Brown
William A. Brown, Director
BY:
/s/ Augustus L. Collins
Augustus L. Collins, Director
BY:
/s/ Tracy T. Conerly
Tracy T. Conerly, Director
BY:
/s/ Toni D. Cooley
Toni D. Cooley, Director
BY:
/s/ Duane A. Dewey
Duane A. Dewey, President, Chief Executive Officer
and Director
BY: /s/ Marcelo Eduardo
Marcelo Eduardo, Director
BY:
/s/ Louis E. Greer
Louis E. Greer, Treasurer, Principal Financial Officer
and Principal Accounting Officer
BY:
/s/ J. Clay Hays, Jr., M.D.
J. Clay Hays, Jr., M.D., Director
BY:
/s/ Gerard R. Host
Gerard R. Host, Executive Chairman and Director
BY:
/s/ Harris V. Morrissette
Harris V. Morrissette, Director
BY:
/s/ Richard H. Puckett
Richard H. Puckett, Director
BY: /s/ Harry M. Walker
Harry M. Walker, Director
BY:
/s/ William G. Yates III
William G. Yates III, Director
158
The following is a list of all subsidiaries of Trustmark Corporation as of December 31, 2020, and the jurisdiction in which each was organized. Each subsidiary
does business under its own name.
LIST OF SUBSIDIARIES
Exhibit 21
Name
Trustmark National Bank
F. S. Corporation (inactive)
First Building Corporation (inactive)
Trustmark Preferred Capital Trust I
Trustmark Securities, Inc. (1) (inactive)
Fisher Brown Bottrell Insurance, Inc. (1)
Trustmark Investment Advisors, Inc. (1)
Southern Community Capital, LLC (1)
(1)
Subsidiary of Trustmark National Bank.
Jurisdiction Where Organized
United States
Mississippi
Mississippi
Delaware
Mississippi
Mississippi
Mississippi
Mississippi
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statements (Nos. 333-213637, 333-124772, 333-124178) on Forms S-8 and Registration Statement
(333-250158) on Form S-3 of Trustmark Corporation of our report dated February 18, 2021 relating to the consolidated balance sheets of Trustmark Corporation as
of December 31, 2019 and 2020 and the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows of the three-
year period ended December 31, 2020, and effectiveness of internal control over financial reporting, appearing in the Annual Report on Form 10-K of Trustmark
Corporation and subsidiaries for the year ended December 31, 2020.
Exhibit 23
/s/ Crowe LLP
Atlanta, Georgia
February 18, 2021
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:
Exhibit 31-a
1)
2)
3)
4)
I have reviewed this annual report on Form 10-K of Trustmark Corporation;
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;
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;
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.
b.
c.
d.
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;
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;
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; and
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 the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
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
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:
February 18, 2021
TRUSTMARK CORPORATION
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Louis E. Greer, certify that:
Exhibit 31-b
1)
2)
3)
4)
I have reviewed this annual report on Form 10-K of Trustmark Corporation;
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;
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;
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.
b.
c.
d.
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;
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;
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; and
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 the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
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
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/ Louis E. Greer
Louis E. Greer
Treasurer, Principal Financial Officer and Principal Accounting
Officer
DATE:
February 18, 2021
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
Exhibit 32-a
In connection with the Annual Report of Trustmark Corporation (Trustmark) on Form 10-K for the fiscal year ended December 31, 2020, 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)
2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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:
February 18, 2021
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
Exhibit 32-b
In connection with the Annual Report of Trustmark Corporation (Trustmark) on Form 10-K for the fiscal year ended December 31, 2020, as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Louis E. Greer, Treasurer, Principal Financial Officer and Principal Accounting 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)
2)
BY:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Trustmark.
/s/ Louis E. Greer
Louis E. Greer
Treasurer, Principal Financial Officer and Principal Accounting
Officer
DATE:
February 18, 2021