TRUSTMARK CORPORATION

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05/05TRUSTMARK CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
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TRUSTMARK CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/04/2021 | 04:09pm EDT

The following provides a narrative discussion and analysis of Trustmark Corporation's (Trustmark) financial condition and results of operations. This discussion should be read in conjunction with the unaudited consolidated financial statements and the supplemental financial data included in Part I. Item 1. - Financial Statements of this report.

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Description of Business

Trustmark, a Mississippi business corporation incorporated in 1968, is a bank holding company headquartered in Jackson, Mississippi. Trustmark's principal subsidiary is Trustmark National Bank (TNB), initially chartered by the State of Mississippi in 1889. At September 30, 2021, TNB had total assets of $17.363 billion, which represented approximately 99.99% of the consolidated assets of Trustmark.

Through TNB and its other subsidiaries, Trustmark operates as a financial services organization providing banking and other financial solutions through 180 offices and 2,680 full-time equivalent associates (measured at September 30, 2021) located in the states of Alabama, Florida (primarily in the northwest or "Panhandle" region of that state, which is referred to herein as Trustmark's Florida market), Mississippi, Tennessee (in the Memphis and Northern Mississippi regions, which are collectively referred to herein as Trustmark's Tennessee market), and Texas (primarily in Houston, which is referred to herein as Trustmark's Texas market). Trustmark's operations are managed along three operating segments: General Banking Segment, Wealth Management Segment and Insurance Segment. For a complete overview of Trustmark's business, see the section captioned "The Corporation" included in Part I. Item 1. - Business of Trustmark's Annual Report on Form 10-K for its fiscal year ended December 31, 2020 (2020 Annual Report).

Executive Overview

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

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

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

Recent Economic and Industry Developments

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

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

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

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


?
Positive growth in consumer spending; however, auto sales were widely reported
as declining due to low inventory levels and rising prices. Travel and tourism
varied by District, with some seeing continued or strengthening leisure travel
while other saw declines that coincided with rises in COVID-19 cases and the
start of the school year. Manufacturing grew moderately to robustly, as did
trucking and freight. Growth in nonmanufacturing activity ranged from slight to
moderate for most Districts. Agriculture conditions were mixed and energy
markets were little changed on balance.
?
Residential real estate activity was unchanged or slowed slightly, but the
market remained healthy overall, while nonresidential real estate activity
varied across Districts and market segments.
?
Prices were significantly elevated, fueled by rising demand for goods and raw
materials. Input cost increases were widespread across industry sectors, driven
by product scarcity resulting from supply chain bottlenecks. Price pressures
also arose from increased transportation and labor constraints as well as
commodity shortages. Prices of steel and electronic components as well as
freight costs rose markedly during the reporting period. Many firms raised
selling prices, indicating a greater ability to pass along cost increases to
customers amid strong demand.
?
Employment increased at a modest to moderate rate as demand for workers was
high, but labor growth was dampened by a low supply of workers. Transportation
and technology firms saw particularly low labor supply, while many retail,
hospitality and manufacturing firms cut hours or production because they did not
have enough workers. Firms reported high turnover as workers left for other jobs
or retired. Child-care issues and vaccine mandates were widely cited as
contributing to the problem, along with COVID-19-related absences. Wage growth
was robust. Firms reported increasing starting wages to attract talent and
increasing wages for existing workers to retain them.
?
Banking contacts in most Districts reported that loan demand was flat to modest
during the period.
?
Outlooks for near-term economic activity remain positive overall, but some
Districts noted increased uncertainty and more cautious optimism than previous
reports.

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

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

Exposure to COVID-19 Stressed Industries

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


?
Restaurants: Aggregate outstanding balance of $104.0 million, credit exposure of
$121.0 million, 299 total loans, represents 1.0% of Trustmark's outstanding LHFI
portfolio, 88% of the loans are real estate secured, 38% are full-service
restaurants, 59% are limited-service restaurants and 3% are other.
?
Hotels: Aggregate outstanding balance of $354.0 million, credit exposure of
$373.0 million, 84 total loans, represents 3.5% of Trustmark's outstanding LHFI
portfolio, 99% of the loans are real estate secured, consists of experienced
operators and carry secondary guarantor support, 95% operate under a major hotel
chain.
?
Retail (Commercial Real Estate): Aggregate outstanding balance of $422.0
million, credit exposure of $494.0 million, 288 total loans, represents 4.2% of
Trustmark's outstanding LHFI portfolio, 22% are stand-alone buildings with
strong essential services tenants, 2% are national grocery store-anchored, 19%
are investment grade anchored centers, mall exposure in only one borrower with
$5.0 million outstanding.

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?
Energy: Aggregate outstanding balance of $101.2 million, credit exposure of
$316.0 million, 111 total loans, represents 0.99% of Trustmark's outstanding
LHFI portfolio, no loans where repayment or underlying security ties to
realization of value from energy reserves.
?
Higher Risk Commercial and Industrial: Aggregate outstanding balance of $10.3
million, credit exposure of $13.6 million, one borrower.

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

COVID-19 Related Loan Concessions

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

Paycheck Protection Program

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

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

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

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

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

Financial Highlights

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

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

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

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

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

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

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

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

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

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

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

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

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

Management has continued its practice of maintaining excess funding capacity to provide Trustmark with adequate liquidity for its ongoing operations. In this regard, Trustmark benefits from its strong deposit base, its highly liquid investment portfolio and its access to funding from a variety of external funding sources such as upstream federal funds lines, FHLB advances and, on a limited basis, brokered deposits. See the section captioned "Liquidity" for further discussion of the components of Trustmark's excess funding capacity.

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

Recent Legislative and Regulatory Developments

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

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

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