TRUSTMARK CORPORATION 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 endedDecember 31, 2020 and 2019 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 endedDecember 31, 2020 . 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 inMarch 2020 to protect the health and safety of its employees and customers, and continues to take additional precautions as recommended by theCenters for Disease Control and Prevention (CDC ) 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. To date, Trustmark has not incurred any significant disruptions to its business activities.
Exposure to
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 atDecember 31, 2021 :
•
Restaurants: Aggregate outstanding balance of$100.0 million , credit exposure of$115.0 million , 296 total loans, represents 1.0% of Trustmark's outstanding LHFI portfolio, 88.0% of the loans are real estate secured, 38.0% are full-service restaurants, 59.0% are limited-service restaurants and 3.0% are other.
•
Hotels: Aggregate outstanding balance of$358.0 million , credit exposure of$369.0 million , 86 total loans, represents 3.5% of Trustmark's outstanding LHFI portfolio, 99.0% of the loans are real estate secured, consists of experienced operators and carry secondary guarantor support, 95.0% operate under a major hotel chain.
•
Retail (Commercial Real Estate ): Aggregate outstanding balance of$415.0 million , credit exposure of$508.0 million , 298 total loans, represents 4.1% of Trustmark's outstanding LHFI portfolio, 23.0% are stand-alone buildings with strong essential 32 -------------------------------------------------------------------------------- services tenants, 2.0% are national grocery store-anchored, 19.0% are investment grade anchored centers, mall exposure in only one borrower with$4.0 million outstanding.
•
Energy: Aggregate outstanding balance of$112.1 million , credit exposure of$321.9 million , 112 total loans, represents 1.1% 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
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 global, national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect Trustmark's loan portfolio.
Loan Concessions
OnMarch 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, 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. OnMarch 27, 2020 , the CARES Act, a stimulus package intended to provide relief to businesses and consumers inthe 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 atDecember 31, 2019 are not TDRs. OnApril 7, 2020 , the federal banking agencies revised its earlier guidance to clarify the interaction between theMarch 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 onDecember 27, 2020 , amended section 4013 of the CARES Act to provide an extension of the period in which TDR relief was available to financial institutions. AtDecember 31, 2021 , the balance of loans remaining under some type of COVID-19 related concession totaled$1.1 million compared to$34.2 million atDecember 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 theSBA and Treasury Department . The PPP was 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 were 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 onMarch 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 onMarch 30, 2021 , extended the PPP throughMay 31, 2021 . From April toAugust 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, amended by the Consolidated Appropriations Act, 2021, inJanuary 2021 . Trustmark originated 5,727 PPP loans totaling$376.2 million ($354.5 million net of$21.7 million of deferred fees and costs) during 2021, compared to 9,691 PPP loans originated in 2020 totaling$970.0 million ($944.3 million net of$25.7 million of deferred fees and costs). OnJune 30, 2021 , Trustmark announced the sale of approximately$354.2 million of its outstanding PPP loans, substantially all PPP loans originated in 2021, toThe Loan Source, Inc. (Loan Source), a firm with significant expertise in PPP loans. As a result of this transaction, Loan Source assumed responsibility for the servicing and forgiveness process for the loans it acquired from Trustmark. This transaction allowed 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 costs, of approximately$18.6 million in the second quarter of 2021 due to the sale. This revenue was substantially the same as Trustmark would expect to recognize upon maturity or forgiveness of the PPP loans sold in this transaction, and thus this transaction served to accelerate revenue anticipated in future periods and recognize it during the second quarter of 2021. 33 -------------------------------------------------------------------------------- AtDecember 31, 2021 , Trustmark had 109 PPP loans outstanding totaling$33.8 million ($33.3 million net of$500 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) atDecember 31, 2020 . In addition to the loans sold, PPP loans totaling$605.5 million were forgiven by the SBA during 2021, compared to$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 sheets. 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.
Executive Overview
Trustmark has been committed to meeting the banking and financial needs of its customers and communities for over 130 years and remains focuses on providing support, advice and solutions to its customers' unique needs. Trustmark's financial performance during 2021 reflected continued balance sheet growth, with growth in LHFI of$423.3 million , or 4.3%, and deposits of$1.038 billion , or 7.4%, 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 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, during the third quarter of 2021, Trustmark entered into a settlement with regulatory authorities to resolve fair lending allegations in theMemphis metropolitan statistical area (MSA). As previously disclosed, Trustmark incurred a one-time settlement expense of$5.0 million and made 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 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 payableMarch 15, 2022 , to shareholders of record onMarch 1, 2022 .
Financial Highlights
Trustmark reported net income of$26.2 million , or basic and diluted earnings per share (EPS) of$0.42 , for the fourth quarter of 2021, compared to$51.2 million , or basic and diluted EPS of$0.81 , in the fourth quarter of 2020. Trustmark's reported performance during the quarter endedDecember 31, 2021 , produced a return on average tangible equity of 7.72%, a return on average assets of 0.60%, an average equity to average assets ratio of 10.12% and a dividend payout ratio of 54.76%, compared to 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% during the quarter endedDecember 31, 2020 .
Revenue, which is defined as net interest income plus noninterest income,
totaled
Net interest income for the fourth quarter of 2021 totaled$98.3 million , a decrease of$13.1 million , or 11.7%, when compared to the fourth quarter of 2020, principally due to a decline in interest and fees on PPP loans of$14.5 million , or 97.3%, as a result of PPP loans that have been forgiven by the SBA. Noninterest income for the fourth quarter of 2021 totaled$50.8 million , a decrease of$15.4 million , or 23.2%, when compared to the fourth quarter of 2020, principally due to a decrease in mortgage banking, net of$16.5 million , or 58.8%. The decrease in mortgage banking, net for the fourth quarter of 2021 was principally due to a decrease in gain on sales of loans, net partially offset by an increase in the net hedge ineffectiveness. Noninterest expense for the fourth quarter of 2021 totaled$119.5 million , a decrease of$425 thousand , or 0.4%, when compared to the fourth quarter of 2020, principally due to declines in salaries and employee benefits of$1.4 million , or 2.0%, primarily as a result of declines in performance incentives and COVID-related salary expense, and other expense of$1.3 million , or 8.3%, primarily attributed to decreases in other miscellaneous expenses and loan expenses, which were largely offset by increases in other real estate expense, net of$1.1 million and services and fees of$577 thousand , or 2.6%. The increase in other real estate expense, net was principally due to a net loss on sale of other real estate during the fourth quarter of 2021 compared to a net gain on sale of other real estate during the fourth quarter of 2020, partially offset by a decrease in other real estate write-downs. The increase in services and fees when the fourth quarter of 2021 is compared to the fourth quarter of 2020 was 34 --------------------------------------------------------------------------------
principally due to increases in data processing charges related to software and advertising expenses partially offset by a decline in outside services and fees.
Trustmark's PCL, LHFI for the three months endedDecember 31, 2021 totaled a negative$4.5 million compared to a negative$4.4 million for the three months endedDecember 31, 2020 , a decrease of$102 thousand , or 2.3%. The PCL, off-balance sheet credit exposures totaled$2.9 million for the three months endedDecember 31, 2021 compared to a negative$1.1 million for the three months endedDecember 31, 2020 , an increase of$4.0 million . The increase in the PCL, off-balance sheet credit exposures for the fourth quarter of 2021 was primarily due to an increase in the balance of unfunded commitments to extend credit. Please see the section captioned "Provision for Credit Losses," for additional information regarding the PCL on LHFI and off-balance sheet credit exposures. For the year endedDecember 31, 2021 , Trustmark reported net income of$147.4 million , or basic and diluted EPS of$2.35 and$2.34 , respectively, compared to$160.0 million , or basic and diluted EPS of$2.52 and$2.51 , respectively, for the year endedDecember 31, 2020 and$150.5 million , or basic and diluted EPS of$2.33 and$2.32 , respectively, for the year endedDecember 31, 2019 . Trustmark's reported performance for the year endedDecember 31, 2021 , produced a return on average tangible equity of 10.81%, a return on average assets of 0.86% and a dividend payout ratio of 39.15%, compared to 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% for the year endedDecember 31, 2020 and 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 endedDecember 31, 2019 . Trustmark's average equity to average assets ratio was 10.38%, 11.05% and 12.02% for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Revenue totaled$640.3 million for the year endedDecember 31, 2021 , compared to$701.1 million and$613.6 million for the years endedDecember 31, 2020 and 2019, respectively, a decrease of$60.9 million , or 8.7%, and an increase of$87.5 million , or 14.3%, respectively. The decrease in total revenue for 2021 compared to 2020 was principally due to a decline in gain on sales of loans, net of$54.9 million , or 49.5%, included in mortgage banking, net. See the section captioned "Noninterest Income" for additional information on the change in mortgage banking, net. Net interest income for the year endedDecember 31, 2021 totaled$418.4 million , a decrease of$8.2 million , or 1.9%, when compared to the year endedDecember 31, 2020 , principally due to declines in interest and fees on LHFS and LHFI and interest on securities, partially offset by a decline in interest expense on deposits and an increase in interest and fees on PPP loans. Interest and fees on LHFS and LHFI declined$27.0 million , or 6.9%, and interest on securities declined$10.1 million , or 20.4%, when 2021 is compared to 2020 as a result of lower interest rates. Interest expense on deposits declined$20.5 million , or 54.8%, when 2021 is compared to 2020 principally due to declines in interest rates on interest checking and money market deposit accounts as well as declines in average balances and interest rates on certificates of deposits. Interest and fees on PPP loans increased$10.1 million , or 37.8%, when 2021 is compared to 2020 principally due to the accelerated recognition of the unamortized loan fees on the PPP loans sold during the second quarter of 2021 partially offset by PPP loans that were forgiven by the SBA. Noninterest income totaled$221.9 million for 2021, a decrease of$52.7 million , or 19.2%, when compared to 2020, principally due to a decrease in mortgage banking, net partially offset by increases in bank card and other fees, wealth management income and insurance commissions. Mortgage banking, net decreased$62.1 million , or 49.3%, when 2021 is compared to 2020, principally due to decreases in gain on sales of loans, net and the net hedge ineffectiveness as well as an increase in the MSR run-off. Bank card and other fees increased$3.6 million , or 11.7%, when 2021 is compared to 2020 principally due to an increase in interchange income. Wealth management income increased$3.6 million , or 11.3%, when 2021 is compared to 2020 principally due to increases in income from brokerage services and trust management services. Insurance commissions increased$3.3 million , or 7.4%, when 2021 is compared to 2020 principally due to increases in property and casualty commissions and other commission income. Noninterest expense totaled$489.3 million for 2021, an increase of$23.0 million , or 4.9%, when compared to 2020, principally due to increases in salaries and employee benefits, services and fees and other expense. Salaries and employee benefits expense increased$11.9 million , or 4.4%, when 2021 is compared to 2020 principally due to non-routine expenses related to the voluntary early retirement program completed during the third quarter of 2021 and increases in salaries expense primarily related to general merit increases, commissions expense primarily related to increased mortgage production and improvements in insurance and wealth management, and annual performance incentives, partially offset by non-routine expenses related to the voluntary early retirement program completed during the first quarter of 2020 and a decline in COVID-related salary expense. Trustmark completed voluntary early retirement programs during 2021 and 2020 and incurred$5.6 million and$4.3 million , respectively, of non-routine salaries and employee benefits expense related to these programs. Excluding these non-routine expenses, salaries and employee benefits increased$10.6 million , or 3.9%, when 2021 is compared to 2020. Services and fees increased$5.6 million , or 6.7%, when 2021 is compared to 2020, primarily due to increases in data processing charges related to software. Other expense increased$2.3 million , or 3.9%, when 2021 is compared to 2020 principally due to the$5.0 million regulatory settlement expense incurred during the third quarter of 2021 partially offset by declines in sponsorships and contributions expense and property valuation adjustments related to properties transferred to assets held for sale. Excluding the non-routine settlement expense, other expense declined$2.7 million , or 4.7%, when 2021 is compared to 2020. 35 -------------------------------------------------------------------------------- Trustmark's PCL, LHFI for 2021 totaled a negative$21.5 million compared to$36.1 million for 2020, a decrease of$57.6 million . The PCL, off-balance sheet credit exposures totaled a negative$2.9 million for 2021 compared to$8.9 million for 2020, a decrease of$11.9 million . The decreases in the PCL on LHFI and off-balance sheet credit exposures were principally due to improvements in macroeconomic forecasts and credit quality. Please see the section captioned "Provision for Credit Losses" for additional information regarding the PCL on LHFI and off-balance sheet credit exposures. AtDecember 31, 2021 , nonperforming assets totaled$67.3 million , a decrease of$7.5 million , or 10.1%, compared toDecember 31, 2020 principally due to a decline other real estate. Total nonaccrual LHFI were$62.7 million atDecember 31, 2021 , representing a slight decrease of$430 thousand , or 0.7%, relative toDecember 31, 2020 , as reductions, pay-offs and charge-offs of nonaccrual LHFI were largely offset by LHFI placed on nonaccrual status. The percentage of loans, excluding PPP loans, that are 30 days or more past due and nonaccrual LHFI decreased in 2021 to 1.51% compared to 2.08% in 2020. Other real estate totaled$4.6 million atDecember 31, 2021 , a decline of$7.1 million , or 60.9%, when compared toDecember 31, 2020 , principally due to properties sold in Trustmark'sMississippi ,Alabama , andTennessee market regions. LHFI totaled$10.248 billion atDecember 31, 2021 , an increase of$423.3 million , or 4.3%, compared toDecember 31, 2020 . The increase in LHFI during 2021 was primarily due to net growth in LHFI secured by nonfarm, nonresidential properties (NFRN LHFI), LHFI secured by 1-4 family residential properties, state and other political subdivision LHFI and commercial and industrial LHFI, partially offset by a net decline in other real estate secured LHFI. 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$15.087 billion atDecember 31, 2021 , an increase of$1.038 billion , or 7.4%, compared toDecember 31, 2020 , reflecting increases in both noninterest-bearing and interest-bearing deposit accounts. During 2021, noninterest-bearing deposits increased$422.1 million , or 9.7%, primarily due to growth in all categories of noninterest-bearing deposit accounts. Interest-bearing deposits increased$616.3 million , or 6.4%, during 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.
Critical Accounting Policies and Accounting Estimates
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 historical experience, current information and other factors deemed relevant 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. An accounting estimate is considered critical if the accounting estimate requires Management to make assumptions about matters with a significant level of uncertainty and if the accounting estimate, or changes to the accounting estimate that are reasonably likely to occur from period to period, have had or are reasonable likely to have a material impact to the consolidated financial statements. 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, calculated in accordance with FASB ASC
Topic 326, that is deducted from the loans' amortized cost basis to present the
net amount expected to be collected on the loans. The ACL for LHFI represents
Management's best estimate of current expected credit losses on Trustmark's
existing LHFI portfolio considering available information, from internal and
external sources, relevant to assessing exposure to credit loss over the
contractual term of the instrument. The ACL for LHFI is adjusted through the
PCL, LHFI and reduced by the charge off of loan amounts, net of recoveries.
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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. While Management utilizes its best judgment and
information available, the ultimate adequacy of Trustmark's ACL is dependent
upon a variety of factors beyond its controls, including the performance of the
portfolios, the economy, changes in interest rates and the view of regulatory
authorities toward classification of assets. 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 ACL and PCL, LHFI 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. The ACL on off-balance sheet credit exposures is a liability account calculated in accordance with FASB ASC Topic 326 and presented in the accompanying consolidated balance sheets. Adjustments to the ACL on off-balance sheet credit exposures are recorded to PCL, off-balance sheet credit exposures. 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. While Management utilizes its best judgment and information available, the ultimate adequacy of Trustmark's ACL is dependent upon a variety of factors beyond its control, including the performance of the portfolios, the economy, changes in interest rates and the view of regulatory authorities toward classification of assets. 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 ACL and PCL, off-balance sheet credit exposures 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
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--------------------------------------------------------------------------------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. AtDecember 31, 2021 , the MSR fair value was$87.7 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 atDecember 31, 2021 , would be a decline in fair value of approximately$4.4 million and$3.2 million , respectively. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts. See the section captioned "MSR" in Note 7 - Mortgage Banking included in Part II. Item 8. - Financial Statements and Supplementary Data of this report for additional information regarding the valuation of the MSR.
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's Common Equity Tier 1 capital includes common stock, capital surplus
and retained earnings, and is reduced by goodwill and other intangible assets,
net of associated net deferred tax liabilities as well as disallowed deferred
tax assets and threshold deductions as applicable.
Trustmark believes these measures are important because they reflect the level
of capital available to withstand unexpected market conditions. Additionally,
presentation of these measures allows readers to compare certain aspects of
Trustmark's capitalization to other organizations. These ratios differ from
capital measures defined by banking regulators principally in that the numerator
excludes shareholders' equity associated with preferred securities, the nature
and extent of which varies across organizations. In Management's experience,
many stock analysts use tangible common equity measures in conjunction with more
traditional bank capital ratios to compare capital adequacy of banking
organizations with significant amounts of goodwill or other intangible assets,
typically stemming from the use of the purchase accounting method in accounting
for mergers and acquisitions.
These calculations are intended to complement the capital ratios defined by GAAP
and banking regulators. Because GAAP does not include these capital ratio
measures, Trustmark believes there are no comparable GAAP financial measures to
these tangible common equity ratios. Despite the importance of these measures to
Trustmark, there are no standardized definitions for them and, as a result,
Trustmark's 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.
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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):
Years Ended December 31,
TANGIBLE EQUITY 2021 2020 2019
AVERAGE BALANCES
Total shareholders' equity $ 1,770,151 $ 1,681,587 $ 1,622,013
Less: Goodwill (384,463 ) (383,582 ) (379,627 )
Identifiable intangible assets (6,205 ) (8,060 ) (9,212 )
Total average tangible equity $ 1,379,483 $ 1,289,945 $ 1,233,174
PERIOD END BALANCES
Total shareholders' equity $ 1,741,311 $ 1,741,117 $ 1,660,702
Less: Goodwill (384,237 ) (385,270 ) (379,627 )
Identifiable intangible assets (5,074 ) (7,390 ) (7,343 )
Total tangible equity (a) $ 1,352,000 $ 1,348,457 $ 1,273,732
TANGIBLE ASSETS
Total assets $ 17,595,636 $ 16,551,840 $ 13,497,877
Less: Goodwill (384,237 ) (385,270 ) (379,627 )
Identifiable intangible assets (5,074 ) (7,390 ) (7,343 )
Total tangible assets (b) $ 17,206,325 $ 16,159,180 $ 13,110,907
Risk-weighted assets (c) $ 12,623,630 $ 12,017,378 $ 11,002,877
NET INCOME ADJUSTED FOR INTANGIBLE
AMORTIZATION
Net income $ 147,365 $ 160,025 $ 150,460
Plus: Intangible amortization net of
tax 1,738 2,289 3,088
Net income adjusted for intangible
amortization $ 149,103 $ 162,314 $ 153,548
Period end common shares outstanding (d) 61,648,679 63,424,526 64,200,111
TANGIBLE EQUITY MEASUREMENTS Return on average tangible equity (1) 10.81 % 12.58 % 12.45 % Tangible equity/tangible assets (a)/(b) 7.86 % 8.34 % 9.72 % Tangible equity/risk-weighted assets (a)/(c) 10.71 % 11.22 % 11.58 % Tangible book value (a)/(d)*1,000$ 21.93 $
21.26
COMMON EQUITY TIER 1 CAPITAL (CET1) -BASEL III Total shareholders' equity$ 1,741,311 $ 1,741,117 $ 1,660,702 CECL transition adjustment (2) 26,000 31,199 - AOCI-related adjustments 32,560 1,051 23,600 CET1 adjustments and deductions:Goodwill net of associated deferred tax liabilities (DTLs) (370,252 ) (371,333 ) (365,738 ) Other adjustments and deductions for CET1 (3) (4,392 ) (6,190 ) (5,896 ) CET1 capital (e) 1,425,227 1,395,844 1,312,668 Additional tier 1 capital instruments plus related surplus 60,000 60,000 60,000 Tier 1 capital$ 1,485,227 $ 1,455,844 $ 1,372,668 Common equity tier 1 risk-based capital ratio (e)/(c) 11.29 % 11.62 % 11.93 % (1) Calculated using net income adjusted for intangible amortization divided by total average tangible equity. (2) Trustmark elected the five-year phase-in transition period related to adopting FASB ASU 2016-13 for regulatory capital purposes. (3) Includes other intangible assets, net of DTLs, disallowed deferred tax assets and threshold deductions, 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.
39
--------------------------------------------------------------------------------
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):
Years Ended December 31,
2021 2020 2019
Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS
Net Income (GAAP) $ 147,365 $ 2.34 $ 160,025 $ 2.51 $ 150,460 $ 2.32
Significant non-routine transactions:
Voluntary early retirement program 4,275 0.07 3,281 0.05 - -
Regulatory settlement charge
(not tax deductible) 5,000 0.08 - - - -
Net Income adjusted for significant
non-routine transactions (Non-GAAP)$ 156,640 $ 2.49$ 163,306 $ 2.56$ 150,460 $ 2.32 Reported Adjusted Reported Adjusted Reported Adjusted (GAAP) (Non-GAAP) (GAAP) (Non-GAAP) (GAAP) (Non-GAAP) Return on average equity 8.32 % 8.83 % 9.52 % 9.69 % 9.28 % n/a Return on average tangible equity 10.81 % 11.45 % 12.58 % 12.81 % 12.45 % n/a Return on average assets 0.86 % 0.92 % 1.05 % 1.07 % 1.11 % n/a
Voluntary Early Retirement Program
During the third quarter of 2021, Trustmark completed a voluntary early
retirement program and incurred one-time charges of
During the first quarter of 2020, Trustmark completed a voluntary early
retirement program and incurred one-time charges of
Regulatory Settlement Charge
During the third quarter of 2021, Trustmark finalized a settlement with regulatory authorities to resolve fair lending allegations in theMemphis metropolitan statistical area (MSA). Trustmark incurred a one-time settlement expense of$5.0 million and made other commitments to enhance credit opportunities to residents in majority-Black and Hispanic neighborhoods in the Memphis MSA. 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 endedDecember 31, 2021 decreased$8.5 million , or 1.9%, when compared with the year endedDecember 31, 2020 . The decrease in net interest income-FTE when 2021 is compared to 2020 was principally due to declines in interest and fees on LHFS and LHFI-FTE and interest on securities-FTE, partially offset by a decline in interest on deposits and an increase in interest and fees on PPP loans. The net interest margin-FTE for 2021 decreased 43 basis points to 2.76% when compared to 2020. The net interest margin-FTE excluding PPP loans and the balance held at theFederal Reserve Bank of Atlanta (FRBA), which equals the reported net interest income-FTE excluding interest and fees on PPP loans and interest on the FRBA balance, as a percentage of average 40 -------------------------------------------------------------------------------- earning assets excluding average PPP loans and the average FRBA balance, was 2.91% for 2021, a decrease of 38 basis points when compared to 3.29% for 2020. The decrease in the net interest margin-FTE excluding PPP loans and the balance held at the FRBA for 2021 was principally due to declines in the yield on the LHFS and LHFI and securities portfolios, partially offset by lower costs of interest-bearing deposits. AtDecember 31, 2021 , Trustmark had PPP loans outstanding totaling$33.3 million , net of deferred fees and costs of$500 thousand , compared to$610.1 million , net of deferred fees and costs of$12.9 million , atDecember 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). During the second quarter of 2021, Trustmark sold$354.2 million of its outstanding PPP loans, resulting in accelerated recognition of$18.6 million of unamortized PPP loan origination fees, net of cost, which was included in net interest income-FTE for 2021. In addition, PPP loans totaling$605.5 million were forgiven by the SBA during 2021. Average PPP loans for 2021 totaled$350.7 million , a decrease of$296.0 million , or 45.8%, when compared to 2020. Interest and fees on PPP loans increased$10.1 million , or 37.8%, when 2021 is compared to 2020. The yield on PPP loans increased to 10.47% for 2021 compared to 4.12% for 2020. Trustmark cannot predict the amount of PPP loans that will be forgiven in whole or in part by the SBA, nor can it predict the magnitude and timing of the impact the PPP loans and related fees will have on Trustmark's net interest margin. The average FRBA balance, included in other earning assets, for 2021 totaled$1.777 billion , an increase of$1.161 billion when compared to 2020. Interest earned on the FRBA balance increased$1.2 million when 2021 is compared to 2020. The yield on the FRBA balance was 0.13% and 0.19% for 2021 and 2020, respectively, a decrease of 6 basis points reflecting the FRBA's reduction of the interest rate that it pays on excess reserves during the first quarter of 2020. Average interest-earning assets for 2021 were$15.569 billion compared to$13.740 billion for 2020, an increase of$1.829 billion , or 13.3%. The increase in average earning assets during 2021 was primarily due to increases in average other earning assets of$1.168 billion , average taxable available for sale securities of$797.0 million , or 44.9%, and average loans (LHFS and LHFI) of$381.7 million , or 3.8%, which were partially offset by decreases in average PPP loans of$296.0 million , or 45.8%, and average taxable held to maturity securities of$203.2 million , or 32.4%. The increase in average other earning assets when 2021 is compared to 2020 was primarily due to an increase in excess reserves held at the FRBA as a result of the increase in customer deposit account balances. The increase in average taxable available for sale securities when 2021 is compared to 2020 was principally due to purchases of available for sale securities partially offset by calls, maturities and pay-downs of the underlying loans of government-sponsored enterprise (GSE) guaranteed securities. The increase in average loans (LHFS and LHFI) was primarily attributable to the increase in the LHFI portfolio partially offset by a decrease in LHFS when balances atDecember 31, 2021 are compared to balances atDecember 31, 2020 . See the sections captioned "LHFS" and "LHFI" for additional information regarding changes in the LHFS and LHFI portfolios. The decrease in average PPP loans when 2021 is compared to 2020 was principally due to the loans forgiven by the SBA. The decrease in average taxable held to maturity securities when 2021 is compared to 2020 was primarily due to calls, maturities and pay-downs of the underlying loans of GSE guaranteed securities. Interest income-FTE totaled$454.2 million for 2021, a decrease of$26.1 million , or 5.4%, while the yield on total earning assets declined 58 basis points to 2.92% when compared to 2020. The decrease in interest income-FTE in 2021 primarily reflects declines in interest and fees on LHFS and LHFI-FTE and interest on securities-taxable partially offset by the increase in interest and fees on PPP loans. During 2021, interest and fees on LHFS and LHFI-FTE declined$27.2 million , or 6.8%, when compared to 2020, while the yield on loans (LHFS and LHFI) decreased 41 basis points to 3.62% as a result of lower interest rates. During 2021, interest on securities-taxable decreased$9.6 million , or 19.8%, while the yield on securities-taxable declined 72 basis points to 1.29% when compared to 2020, primarily due to the run off of maturing investment securities and lower interest rates on securities available for sale purchased during 2021. Average interest-bearing liabilities for 2021 totaled$10.490 billion compared to$9.627 billion for 2020, an increase of$862.9 million , or 9.0%. The increase in average interest-bearing liabilities was primarily the result of increases in average interest-bearing deposits and average subordinated notes. Average interest-bearing deposits for 2021 increased$737.8 million , or 8.0%, when compared to 2020, reflecting growth in average interest-bearing demand deposits and savings deposits, partially offset by a decline in average time deposits. Average subordinated notes increased$112.2 million when 2021 is compared to 2020 due to the addition of the subordinated notes during the fourth quarter of 2020. Interest expense for 2021 totaled$24.2 million , a decrease of$17.6 million , or 42.2%, when compared with 2020, while the rate on total interest-bearing liabilities decreased 20 basis points to 0.23%. The decrease in total interest expense for 2021 when compared to 2020 was primarily due to a decline in interest on deposits. Interest on deposits decreased$20.5 million , or 54.8%, while the rate on interest-bearing deposits decreased 23 basis points to 0.17% when 2021 is compared to 2020, primarily due to declines in interest on all categories of interest-bearing demand deposit accounts, reflecting declines in interest rates, and interest on time deposits, reflecting declines in both interest rates and average balances. 41 -------------------------------------------------------------------------------- The following table provides the tax equivalent basis yield or rate for each component of the tax equivalent net interest margin for the periods presented ($ in thousands): Years Ended December 31, 2021 2020 2019 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Federal funds sold and securities purchased under reverse repurchase agreements $ 79 $ - -$ 221 $ 1 0.45 %$ 9,529 $ 240 2.52 % Securities available for sale: Taxable 2,573,533 30,453 1.18 % 1,776,555 35,375 1.99 % 1,633,496 37,717 2.31 % Nontaxable 5,166 199 3.85 % 10,737 384 3.58 % 29,948 1,116 3.73 % Securities held to maturity: Taxable 423,763 8,245 1.95 % 626,983 12,875 2.05 % 799,726 16,932 2.12 % Nontaxable 12,765 495 3.88 % 25,366 982 3.87 % 26,874 1,050 3.91 % PPP loans 350,668 36,726 10.47 % 646,680 26,643 4.12 % - - - Loans (LHFS and LHFI) 10,377,941 375,330 3.62 % 9,996,192 402,539 4.03 % 9,302,037 452,578 4.87 % Acquired loans - - - - - - 88,903 8,373 9.42 % Other earning assets 1,825,134 2,767 0.15 % 657,096 1,559 0.24 % 240,622 5,363
2.23 % Total interest-earning assets 15,569,049 454,215 2.92 % 13,739,830 480,358 3.50 % 12,131,135 523,369
4.31 %
Other assets 1,599,114 1,592,393 1,452,012
Allowance for loan losses (110,170 ) (108,567 ) (83,559 )
Total Assets $ 17,057,993 $ 15,223,656 $ 13,499,588
Liabilities and Shareholders'
Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 4,096,746 4,906 0.12 % $ 3,584,249 9,985 0.28 % $ 3,051,170 35,428 1.16 %
Savings deposits 4,622,167 7,912 0.17 % 4,149,860 13,481 0.32 % 3,650,178 19,462 0.53 %
Time deposits 1,287,663 4,127 0.32 % 1,534,673 14,021 0.91 % 1,783,928 24,281 1.36 %
Federal funds purchased and
securities sold
under repurchase agreements 172,782 232 0.13 % 151,805 755 0.50 % 110,915 1,420 1.28 %
Other borrowings 125,554 1,037 0.83 % 133,602 1,389 1.04 % 82,476 697 0.85 %
Subordinated notes 122,933 4,752 3.87 % 10,766 474 4.40 % - - -
Junior subordinated debt
securities 61,856 1,194 1.93 % 61,856 1,693 2.74 % 61,856 2,615 4.23 %
Total interest-bearing
liabilities 10,489,701 24,160 0.23 % 9,626,811 41,798 0.43 % 8,740,523 83,903 0.96 %
Noninterest-bearing demand
deposits 4,531,642 3,646,860 2,918,836
Other liabilities 266,499 268,398 218,216
Shareholders' equity 1,770,151 1,681,587 1,622,013
Total Liabilities and
Shareholders' Equity $ 17,057,993 $ 15,223,656 $ 13,499,588
Net Interest Margin 430,055 2.76 % 438,560 3.19 % 439,466 3.62 %
Less tax equivalent adjustments:
Investments 146 287 455
Loans 11,558 11,736 12,422
Net Interest Margin per
Consolidated
Statements of Income $ 418,351 $ 426,537 $ 426,589
42
--------------------------------------------------------------------------------
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):
2021 Compared to 2020 2020 Compared to 2019
Increase (Decrease) Due To: Increase (Decrease) Due To:
Yield/ Yield/
Volume Rate Net Volume Rate Net
Interest earned on:
Federal funds sold and
securities purchased under
reverse repurchase agreements $ (1 ) $ - $ (1 ) $ (130 ) $ (109 ) $ (239 )
Securities available for sale:
Taxable 12,509 (17,431 ) (4,922 ) 3,142 (5,484 ) (2,342 )
Nontaxable (212 ) 27 (185 ) (689 ) (43 ) (732 )
Securities held to maturity:
Taxable (4,024 ) (606 ) (4,630 ) (3,519 ) (538 ) (4,057 )
Nontaxable (490 ) 3 (487 ) (57 ) (11 ) (68 )
PPP loans (16,498 ) 26,581 10,083 26,643 - 26,643
Loans, net of unearned income
(LHFS and LHFI) 14,945 (42,154 ) (27,209 ) 32,082 (82,121 ) (50,039 )
Acquired loans - - - (4,187 ) (4,186 ) (8,373 )
Other earning assets 1,974 (766 ) 1,208 3,808 (7,612 ) (3,804 )
Total interest-earning assets 8,203 (34,346 ) (26,143 ) 57,093 (100,104 ) (43,011 )
Interest paid on:
Interest-bearing demand
deposits 1,279 (6,358 ) (5,079 ) 5,290 (30,733 ) (25,443 )
Savings deposits 1,344 (6,913 ) (5,569 ) 2,400 (8,381 ) (5,981 )
Time deposits (1,968 ) (7,926 ) (9,894 ) (3,046 ) (7,214 ) (10,260 )
Federal funds purchased and
securities sold under
repurchase agreements 95 (618 ) (523 ) 401 (1,066 ) (665 )
Other borrowings (81 ) (271 ) (352 ) 508 184 692
Subordinated notes 4,342 (64 ) 4,278 474 - 474
Junior subordinated debt
securities - (499 ) (499 ) - (922 ) (922 )
Total interest-bearing
liabilities 5,011 (22,649 ) (17,638 ) 6,027 (48,132 ) (42,105 )
Change in net interest income
on a tax
equivalent basis $ 3,192 $ (11,697 ) $ (8,505 ) 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
The PCL, LHFI is the amount necessary to maintain the ACL for LHFI at the amount of expected credit losses inherent within the LHFI portfolio. The amount of PCL and the related ACL for LHFI are based on Trustmark's ACL methodology. The PCL, LHFI totaled a negative$21.5 million for 2021, compared to a PCL, LHFI of$36.1 million for 2020 and a provision for loan losses, LHFI of$10.8 million for 2019. The negative PCL, LHFI for 2021 primarily reflected improvements in the macroeconomic forecasts and credit quality, partially offset by an increase in specific reserves for individually analyzed credits within the commercial and industrial LHFI portfolio. FASB ASC Topic 326 requires Trustmark to estimate expected credit losses for off-balance sheet credit exposures which are not unconditionally cancellable by Trustmark. Trustmark maintains a separate ACL for off-balance sheet credit exposures, including unfunded commitments and letters of credit. Adjustments to the ACL on off-balance sheet credit exposures are recorded to the PCL, off-balance sheet credit exposures. The PCL, off-balance sheet credit exposures totaled a negative$2.9 million for 2021 compared to$8.9 million for 2020. The negative PCL, off-balance sheet credit exposures for 2021 primarily reflected the overall decrease in the total reserve rates applied to off-balance sheet credit exposures as a result of improvements in macroeconomic forecasts and credit quality.
See the section captioned "Allowance for Credit Losses" for information regarding Trustmark's ACL methodology as well as further analysis of the PCL.
43
--------------------------------------------------------------------------------Noninterest Income
Noninterest income represented 34.7%, 39.2% and 30.5% of total revenue, before
securities gains (losses), net in 2021, 2020 and 2019, respectively. The
following table provides the comparative components of noninterest income for
the periods presented ($ in thousands):
Years Ended December 31,
2021 2020 2019
Amount % Change Amount % Change Amount % Change
Service charges on deposit accounts $ 33,246 3.0 % $ 32,289 -24.2 % $ 42,603 -2.5 %
Bank card and other fees 34,662 11.7 % 31,022 -2.2 % 31,736 9.8 %
Mortgage banking, net 63,750 -49.3 % 125,822 n/m 29,822 -14.0 %
Insurance commissions 48,511 7.4 % 45,176 6.6 % 42,396 4.7 %
Wealth management 35,190 11.3 % 31,625 3.1 % 30,679 1.1 %
Other, net 6,551 -24.3 % 8,659 -11.7 % 9,809 45.6 %
Total Noninterest Income $ 221,910 -19.2 % $ 274,593 46.8 % $ 187,045 1.2 %
n/m - percentage changes greater than +/- 100% are not considered meaningful
Changes in various components of noninterest income for the year ended
The increase in bank card and other fees when 2021 is compared to 2020 was principally due to an increase in interchange income.
Mortgage Banking, Net
The following table illustrates the components of mortgage banking, net included in noninterest income for the periods presented ($ in thousands):
Years Ended December 31,
2021 2020 2019
Amount % Change Amount % Change Amount % Change
Mortgage servicing income, net $ 25,476 7.6 % $ 23,681 3.5 % $ 22,883 2.9 %
Change in fair value-MSR from
runoff (20,160 ) 21.5 % (16,588 ) 40.2 % (11,835 ) 0.5 %
Gain on sales of loans, net 55,976 -49.5 % 110,903 n/m 30,296 39.0 %
Mortgage banking income before
net hedge
ineffectiveness 61,292 -48.1 % 117,996 n/m 41,344 28.1 %
Change in fair value-MSR from
market changes 13,258 n/m (26,147 ) 24.0 % (21,078 ) n/m
Change in fair value of
derivatives (10,800 ) n/m 33,973 n/m 9,556 n/m
Net hedge ineffectiveness 2,458 -68.6 % 7,826 n/m (11,522 ) n/m
Mortgage banking, net $ 63,750 -49.3 % $ 125,822 n/m $ 29,822 -14.0 %
n/m - percentage changes greater than +/- 100% are not considered meaningful
The decrease in mortgage banking, net when 2021 is compared to 2020 was principally due to decreases in gain on sales of loans, net and the net hedge ineffectiveness as well as an increase in the MSR run-off. The decline in the positive net hedge ineffectiveness in 2021 was principally due to stabilization in spreads between mortgage and ten-yearTreasury rates. Mortgage loan production totaled$2.803 billion for 2021, a decrease of$181.7 million , or 6.1%, when compared to 2020. Mortgage loan production totaled$2.985 billion for 2020, an increase of$1.222 billion , or 69.4%, when compared to 2019. 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$7.953 billion atDecember 31, 2021 , compared with$7.657 billion atDecember 31, 2020 , and$7.157 billion atDecember 31, 2019 . Representing a significant component of mortgage banking income is gain on sales of loans, net. The decrease in the gain on sales of loans, net when 2021 is compared to 2020 was primarily the result of decreases in the mortgage valuation adjustment and the volume of loans sold as well as lower profit margins in secondary marketing activities. Loan sales decreased$246.0 million , or 9.7%, during 2021 to total$2.286 billion compared to an increase of$1.128 billion , or 80.4%, during 2020 to total$2.532 billion . The decrease in loan sales during 2021 was principally due to a decline in mortgage lending activity as refinance activity slowed following the record setting levels of 2020. The increase in loan sales during 2020 was principally due to increases in mortgage lending activity as a result of lower interest rates. 44 --------------------------------------------------------------------------------
Other Income, Net
The following table illustrates the components of other income, net included in noninterest income for the periods presented ($ in thousands):
Years Ended December 31,
2021 2020 2019
Amount % Change Amount % Change Amount % Change
Partnership amortization for
tax credit purposes $ (8,011 ) 40.5 % $ (5,700 ) -25.4 % $ (7,644 ) -12.2 %
Increase in life insurance cash
surrender value 6,630 -3.6 % 6,881 -4.5 % 7,202 1.1 %
Other miscellaneous income 7,932 6.1 % 7,478 -27.1 % 10,251 23.2 %
Total other, net $ 6,551 -24.3 % $ 8,659 -11.7 % $ 9,809 45.6 %
The decrease in other income, net when 2021 is compared to 2020 was primarily
due to an increase in the amortization of tax credit partnerships as a result of
new investments in tax credit partnerships during the year.
Noninterest Expense
The following table illustrates the comparative components of noninterest expense for the periods presented ($ in thousands):
Years Ended December 31,
2021 (1) 2020 2019
Amount % Change Amount % Change Amount % Change
Salaries and employee benefits $ 284,158 4.4 % $ 272,257 9.9 % $ 247,717 4.1 %
Services and fees 89,463 6.7 % 83,816 14.3 % 73,315 10.4 %
Net occupancy-premises 27,043 2.1 % 26,489 1.3 % 26,149 -2.1 %
Equipment expense 24,337 4.6 % 23,277 -1.9 % 23,733 -4.4 %
Other real estate expense:
Write-downs 932 -47.8 % 1,786 -29.8 % 2,544 n/m
Net (gain)/loss on sale 1,869 n/m (897 ) n/m 291 n/m
Carrying costs 727 -31.9 % 1,067 -0.4 % 1,071 -41.4 %
Total other real estate expense, net 3,528 80.4 % 1,956 -49.9 % 3,906 95.1 %
Other expense 60,767 3.9 % 58,506 8.0 % 54,182 -5.7 %
Total noninterest expense $ 489,296 4.9 % $ 466,301 8.7 % $ 429,002 3.3 %
n/m - percentage changes greater than +/- 100% are not considered meaningful
(1)
During 2021, Trustmark reclassified its credit loss expense related to off-balance sheet credit exposures from noninterest expense to PCL, off-balance sheet credit exposures. Prior periods have been reclassified accordingly.
Changes in the various component of noninterest expense for the year endedDecember 31, 2021 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
Trustmark completed voluntary early retirement programs during 2021 and 2020 and incurred$5.6 million and$4.3 million , respectively, of non-routine salaries and employee benefits expense related to these programs. Excluding these non-routine expenses, salaries and employee benefits increased$10.6 million , or 3.9%, when 2021 is compared to 2020. The increase in salaries and employee benefits expense, excluding the non-routine expenses, for the year endedDecember 31, 2021 was principally due to increases in salaries expense primarily related to general merit increases, commissions expense related to increased mortgage production and improvements in insurance and wealth management and annual performance incentives, partially offset by a decline in COVID-related salary expense.
Services and Fees
The increase in services and fees when 2021 is compared to 2020 was primarily
due to increases in data processing charges related to software due to continued
investments in technology to enhance growth and efficiency opportunities.
45
--------------------------------------------------------------------------------Other Real Estate Expense, Net
The increase in other real estate expense, net for 2021 compared to 2020 was principally due to an increase in net losses on sales of other real estate properties partially offset by a decline in write-downs of other real estate. For additional analysis of other real estate and foreclosure expenses, please see the section captioned "Nonperforming Assets, Excluding PPP and Acquired Loans."
Other Expense
The following table illustrates the comparative components of other noninterest expense for the periods presented ($ in thousands):
Years Ended December 31,
2021 2020 2019
Amount % Change Amount % Change Amount % Change
Loan expense (1) $ 15,148 -0.2 % $ 15,177 18.6 % $ 12,798 4.9 %
Amortization of intangibles 2,316 -24.1 % 3,052
-25.9 % 4,116 -21.6 %
FDIC assessment expense 5,515 -9.4 % 6,090 -5.5 % 6,444 -31.7 %
Regulatory settlement charge 5,000 n/m - - - -
Other miscellaneous expense (1) 32,788 -4.1 % 34,187 10.9 % 30,824 0.8 %
Total other expense $ 60,767 3.9 % $ 58,506 8.0 % $ 54,182 -5.7 %
n/m - percentage changes greater than +/- 100% are not considered meaningful
(1)
During 2021, Trustmark reclassified certain expenses related to mortgage loan appraisals from other miscellaneous expense to loan expense. Prior period amounts have been reclassified accordingly.
During the third quarter of 2021, Trustmark finalized a settlement with regulatory authorities to resolve fair lending allegations in the MSA. Trustmark incurred a one-time settlement expense of$5.0 million and made other commitments to enhance credit opportunities to residents in majority-Black and Hispanic neighborhoods in the Memphis MSA. Excluding the non-routine settlement expense, other expense decreased$2.7 million , or 4.7%, when 2021 is compared to 2020. The decrease in other miscellaneous expense when 2021 is compared to 2020 was principally due to declines in charitable contributions and sponsorships and property valuation adjustments related to properties transferred to assets held for sale.
Results of Segment Operations
Trustmark's operations are managed along three operating segments: General Banking, Wealth Management and Insurance. A description of each segment and the methodologies used to measure financial performance and financial information by reportable segment are included in Note 21 - Segment Information located in Part II. Item 8. - Financial Statements and Supplementary Data of this report. During the first quarter of 2020, Trustmark revised the composition of its operating segments by moving theRetail Private Banking Group from the General Banking Segment to the Wealth Management Segment as a result of a change in supervision of this group for segment reporting purposes. Prior periods include reclassifications to conform to current period presentation.
The following table provides the net income by reportable segment for the periods presented ($ in thousands):
Years Ended December 31,
2021 2020 2019
General Banking $ 131,247 $ 145,939 $ 136,117
Wealth Management 6,650 5,556 6,388
Insurance 9,468 8,530 7,955
Consolidated Net Income $ 147,365 $ 160,025 $ 150,460
General Banking
Net interest income for the General Banking Segment for 2021 decreased $7.0
million , or 1.7%, when compared with 2020, principally due to declines in
interest and fees on LHFS and LHFI and interest on securities, partially offset
by a decline in interest expense on deposits and an increase in interest and
fees on PPP loans. 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. During 2021, Trustmark reclassified its
credit loss expense related to off-balance sheet credit exposures from
noninterest expense to PCL, off-balance sheet credit exposures. Prior periods
have been reclassified accordingly. The PCL (LHFI and off-balance sheet credit
exposures) for the General Banking Segment for 2021 totaled a negative $24.4
million compared to a PCL of $45.1 million during 2020
46
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and a provision for loan losses, net of
Noninterest income for the General Banking Segment decreased$59.8 million , or 30.3%, during 2021 compared to an increase of$83.9 million , or 73.8%, during 2020. The decrease in noninterest income for the General Banking Segment during 2021 was primarily due to decrease in mortgage banking, net and other income, partially offset by an increase in bank card and other fees. 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. Noninterest income for the General Banking Segment represented 25.0% of total revenue for 2021, 32.0% for 2020 and 21.3% for 2019. Noninterest income for the General Banking Segment includes service charges on deposit accounts; bank card and other fees; mortgage banking, net and other income, net. For more information on these noninterest income items, please see the analysis included in the section captioned "Noninterest Income." Noninterest expense for the General Banking Segment increased$19.8 million , or 4.9%, during 2021 compared to an increase of$33.8 million , or 9.2%, during 2020. The increase in noninterest expense for the General Banking Segment for 2021 was principally due to increases in salaries and employee benefits, data processing charges related to software, other miscellaneous expenses and other real estate expense, net. During the third quarter of 2021, Trustmark completed a voluntary early retirement program which resulted in non-routine transaction expenses of$5.7 million ($5.6 million of salaries and employee benefits expense and$89 thousand of other expense). In addition, during the third quarter of 2021, Trustmark finalized a settlement with regulatory authorities to resolve fair lending allegations in the MSA. Trustmark incurred a one-time settlement expense of$5.0 million and made other commitments to enhance credit opportunities to residents in majority-Black and Hispanic neighborhoods in the Memphis MSA. The increase in noninterest expense for the General Banking Segment for 2020 was principally due to increases in salaries and employee benefits and services and fees. 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). For more information on these noninterest expense items, please see the analysis included in the section captioned "Noninterest Expense."
Wealth Management
During 2021, net income for the Wealth Management Segment increased$1.1 million , or 19.7%, compared to a decrease of$832 thousand , or 13.0%, during 2020. The increase in net income for the Wealth Management Segment during 2021 was principally due to an increase in noninterest income, partially offset by an increase in noninterest expense. 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$921 thousand , or 15.1%, during 2021 compared to a decrease of$668 thousand , or 9.9%, during 2020. The decrease in net interest income for the Wealth Management Segment during 2021 was principally due to a decline in interest and fees on loans partially offset by a decrease in interest on deposits generated by thePrivate Banking Group . The PCL for the Wealth Management Segment for 2021 totaled a negative$9 thousand compared to a negative PCL of$11 thousand during 2020 and a provision for loan losses, net of$217 thousand during 2019. Noninterest income for the Wealth Management Segment, which includes income related to investment management, trust and brokerage services, increased$3.8 million , or 12.0%, during 2021, principally due to an increase in income from brokerage services and trust management services. Noninterest income for the Wealth Management Segment increased$774 thousand , or 2.5%, during 2020, principally due to an increase in fees from brokerage services. Noninterest expense increased$1.4 million , or 4.6%, during 2021 compared to an increase of$1.4 million , or 5.0%, during 2020. The increase in noninterest expense for the Wealth Management Segment for 2021 was principally due to an increase in salary and employee benefit expense, primarily due to increases in commissions expense and annual performance incentives, partially offset by a decline in other miscellaneous expenses. 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.
At
Insurance
Net income for the Insurance Segment during 2021 increased$938 thousand , or 11.0%, compared to an increase of$575 thousand , or 7.2%, during 2020. Noninterest income for the Insurance Segment, which predominately consists of insurance commissions, increased$3.3 million , or 7.4%, during 2021, compared to an increase of$2.8 million , or 6.7%, during 2020. The increase in noninterest income for the Insurance Segment during 2021 was principally due to increases in property and casualty commissions and other commission income. 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. 47 -------------------------------------------------------------------------------- Noninterest expense for the Insurance Segment increased$1.8 million , or 5.4%, during 2021 and$2.0 million , or 6.3%, during 2020. The increase in noninterest expense for the Insurance Segment for 2021 was principally due to higher salaries expense resulting from modest general merit increases and higher commission expense due to improvements in business volumes, as well as increases in outside services and fees, partially offset by a decrease in other miscellaneous expense. 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. Trustmark performed an annual impairment test of the book value of goodwill held in the Insurance Segment as ofOctober 1, 2021 , 2020, and 2019. 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. Income Taxes For the year endedDecember 31, 2021 , Trustmark's combined effective tax rate was 16.0% compared to 15.7% in 2020 and 13.4% in 2019. 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$15.569 billion , or 91.3% of total average assets, atDecember 31, 2021 , compared with$13.740 billion , or 90.3% of total average assets, atDecember 31, 2020 , an increase of$1.829 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 atDecember 31, 2021 and 2020 was 4.3 and 2.9 years, respectively. The increase in the weighted-average life of the portfolio was principally due to the available for sale securities purchased during 2021. When compared withDecember 31, 2020 , total investment securities increased by$1.052 billion , or 41.6%, during 2021. 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 and a decline in the fair market value of securities available for sale. Trustmark sold no securities during 2021 or 2020. 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. AtDecember 31, 2021 , the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive income (loss), net of tax, (AOCI) in the accompanying consolidated balance sheets totaled$6.3 million ($4.7 million net of tax) compared to$8.9 million ($6.7 million net of tax) atDecember 31, 2020 . Available for sale securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in AOCI, a separate component of shareholders' equity. AtDecember 31, 2021 , available for sale securities totaled$3.239 billion , which represented 90.4% of the securities portfolio, compared to$1.992 billion , or 78.7%, atDecember 31, 2020 . AtDecember 31, 2021 , unrealized losses, net on available for sale securities totaled$17.4 million compared to unrealized gains, net of$32.0 million atDecember 31, 2020 . AtDecember 31, 2021 , available for sale securities consisted ofU.S. Treasury securities, obligations of states and political subdivisions, GSE guaranteed mortgage-related securities and direct obligations of government agencies and GSEs. Held to maturity securities are carried at amortized cost and represent those securities that Trustmark both intends and has the ability to hold to maturity. AtDecember 31, 2021 , held to maturity securities totaled$342.5 million and represented 9.6% of the total securities portfolio, compared with$538.1 million , or 21.3%, atDecember 31, 2020 . 48 --------------------------------------------------------------------------------
The following table details the the weighted-average yield for each range of
maturities of securities available for sale and held to maturity using the
amortized cost at
Maturing
After One, After Five,
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
Securities available for sale
U.S. Treasury securities - 0.77 % 1.05 % - 0.86 %
U.S. Government agency
obligations 3.92 % 1.97 % 2.85 % 2.29 % 2.46 %
Obligations of states and
political subdivisions 2.07 % 2.77 % 4.52 % - 4.04 %
Mortgage-backed securities
Residential mortgage
pass-through securities
Guaranteed by GNMA - 1.69 % 2.73 % 1.93 % 1.95 %
Issued by FNMA and FHLMC - 2.02 % 1.80 % 1.08 % 1.15 %
Other residential
mortgage-backed securities
Issued or guaranteed by FNMA ,
FHLMC, or GNMA - 2.35 % 1.58 % 2.16 % 2.15 %
Commercial mortgage-backed
securities
Issued or guaranteed by FNMA ,
FHLMC, or GNMA - 1.85 % 1.15 % 3.37 % 1.21 %
Total securities available for
sale 3.62 % 1.01 % 1.35 % 1.19 % 1.21 %
Securities held to maturity Obligations of states and political subdivisions 4.05 % 4.22 % - - 4.16 % Mortgage-backed securities Residential mortgage pass-through securities Guaranteed by GNMA - - - 2.32 % 2.32 % Issued by FNMA and FHLMC - - 1.70 % 2.09 % 1.91 % Other residential mortgage-backed securities Issued or guaranteed byFNMA , FHLMC, or GNMA - - 1.76 % 1.90 % 1.90 % Commercial mortgage-backed securities Issued or guaranteed byFNMA , FHLMC, or GNMA 2.28 % 2.22 % - 2.48 % 2.30 % Total securities held to maturity 2.57 % 2.59 % 1.71 % 1.95 % 2.01 % 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 99.7% of the portfolio in GSE-backed obligations and other Aaa-rated securities as determined by Moody's Investors Services (Moody's). None of the securities owned by Trustmark are collateralized by assets which are considered sub-prime. Furthermore, outside of stock ownership in the FHLB ofDallas , FHLB ofAtlanta andFederal Reserve Bank of Atlanta , Trustmark does not hold any other equity investment in a GSE. AtDecember 31, 2021 , 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. 49 --------------------------------------------------------------------------------
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
Amortized Cost Estimated Fair Value
Amount % Amount %
Securities Available for Sale
Aaa $ 3,251,155 99.8 % $ 3,233,163 99.8 %
A1 to A3 1,046 - 1,087 -
Not Rated (1) 4,088 0.2 % 4,627 0.2 %
Total securities available for sale $ 3,256,289 100.0 % $ 3,238,877 100.0 %
Securities Held to Maturity
Aaa $ 335,208 97.9 % $ 346,121 97.9 %
Aa1 to Aa3 5,007 1.4 % 5,009 1.4 %
Not Rated (1) 2,322 0.7 %
2,381 0.7 %
Total securities held to maturity
(1)
Not rated issues primarily consist of
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. AtDecember 31, 2021 , approximately 99.8% of the available for sale securities, measured at the estimated fair value, and 97.9% of the held to maturity securities, measured at amortized cost, were rated Aaa. LHFS AtDecember 31, 2021 , LHFS totaled$275.7 million , consisting of$191.2 million of residential real estate mortgage loans in the process of being sold to third parties and$84.5 million ofGovernment National Mortgage Association (GNMA) optional repurchase loans. AtDecember 31, 2020 , LHFS totaled$447.0 million , consisting of$305.8 million of residential real estate mortgage loans in the process of being sold to third parties and$141.2 million of GNMA optional repurchase loans. Please refer to the nonperforming assets table that follows for information on GNMA loans eligible for repurchase which are past due 90 days or more.
Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during 2021 or 2020.
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 domestic economies, markets
and employment. The pandemic has had and may continue to have a significant
adverse impact on certain industries Trustmark serves, including the restaurant
and food services, hotel, retail and energy industries. See the section
captioned "COVID-19 Update" for further information and discussion regarding the
current and anticipated impact of the COVID-19 pandemic.
50
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The table below provides the carrying value of the LHFI portfolio by loan class
for the years ended
December 31,
2021 2020
Amount % Amount %
Loans secured by real estate:
Construction, land development and
other land $ 596,968 5.8 % $ 514,056 5.2 %
Other secured by 1-4 family
residential properties 517,683 5.1 % 524,732 5.3 %
Secured by nonfarm, nonresidential
properties 2,977,084 29.1 % 2,709,026 27.6 %
Other real estate secured 726,043 7.1 % 1,065,964 10.9 %
Other loans secured by real estate:
Other construction 711,813 6.9 % 794,983 8.1 %
Secured by 1-4 family residential
properties 1,460,310 14.2 % 1,216,400 12.4 %
Commercial and industrial loans 1,414,279 13.8 % 1,309,078 13.3 %
Consumer loans 162,555 1.6 % 164,386 1.7 %
State and other political subdivision
loans 1,146,251 11.2 % 1,000,776 10.2 %
Other commercial loans 534,843 5.2 % 525,123 5.3 %
LHFI $ 10,247,829 100.0 % $ 9,824,524 100.0 %
LHFI at December 31, 2021 increased $423.3 million , or 4.3%, compared to
December 31, 2020 . The increase in LHFI during 2021 was primarily due to net
growth in NFRN LHFI, LHFI secured by 1-4 family residential properties, state
and other political subdivision LHFI and commercial and industrial LHFI,
partially offset by a net decline in other real estate secured LHFI.
LHFI secured by real estate (loans secured by real estate and other loans
secured by real estate) increased $164.7 million , or 2.4%, during 2021
representing net growth in Trustmark's Mississippi , Alabama and Tennessee market
regions partially offset by net declines in the Texas and Florida market
regions. The net growth in LHFI secured by real estate during 2021 was
principally due to growth in NFNR LHFI, LHFI secured by 1-4 family residential
properties and LHFI secured by construction, land development and other land,
partially offset by declines in LHFI secured by other real estate and other
construction loans. NFNR LHFI increased $268.1 million , or 9.9%, during 2021,
principally due to movement from the other construction loans category.
Excluding other construction loan reclassifications, the NFNR LHFI portfolio
decreased $132.4 million , or 4.9%, during 2021 primarily due to declines in
nonowner-occupied loans in the Texas and Florida market regions as well as
declines in owner-occupied loans in the Texas and Alabama market regions, which
were partially offset by growth in nonowner-occupied loans in the Mississippi
market region. LHFI secured by 1-4 family residential properties increased
$243.9 million , or 20.1%, during 2021, primarily in the Mississippi market
region as a result of Trustmark's decision to retain certain mortgage loans in
its portfolio. LHFI secured by construction, land development and other land
increased $82.9 million , or 16.1%, during 2021 principally due to growth in 1-4
family construction loans in Trustmark's Alabama and Tennessee market regions
and land development loans in the Alabama , Texas and Mississippi market regions.
LHFI secured by other real estate decreased $339.9 million , or 31.9%, during
2021, primarily due to pay-offs of LHFI secured by multi-family residential
properties partially offset by other construction loans that moved to LHFI
secured by multi-family residential properties in the Texas , Alabama and
Mississippi market regions. Other construction loans decreased $83.2 million , or
10.5%, during 2021 primarily due to other construction loans moved to other loan
categories upon the completion of the related construction project, partially
offset by new construction loans across all five market regions. During 2021,
$739.7 million loans were moved from other construction to other loan
categories, including $337.8 million to multi-family residential loans, $311.7
million to nonowner-occupied loans and $88.8 million to owner-occupied loans.
Excluding all reclassifications between loan categories, growth in other
construction loans across all five market regions totaled $648.4 million , or
81.6%, during 2021.
State and other political subdivision LHFI increased $145.5 million , or 14.5%,
during 2021 principally due to growth in the Mississippi , Texas , Florida and
Alabama market regions. Commercial and industrial LHFI increased $105.2 million ,
or 8.0%, during 2021, primarily due to growth in Trustmark's Alabama , Tennessee
and Texas market regions partially offset by a decline in the Mississippi market
region. Trustmark's exposure to the energy sector is primarily included in the
commercial and industrial loan portfolio in Trustmark's Mississippi and Texas
market regions. At December 31, 2021 and 2020, energy-related LHFI had
outstanding balances of $112.1 million and $102.3 million , respectively, which
represented 1.1% and 1.0% of Trustmark's total LHFI portfolio at December 31,
2021 and 2020, respectively. Trustmark has no loan exposure where the source of
repayment, or the underlying security of such exposure, is tied to the
realization of value from energy reserves. Should oil prices fall to levels that
comprise the financial condition of market participants generally, or
Trustmark's energy-related borrowers specifically, for a prolonged period of
time, there is potential for downgrades to occur. Management will continue to
monitor this exposure.
51
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The following table provides information regarding Trustmark's home equity loans
and home equity lines of credit which are included in the LHFI secured by 1-4
family residential properties at December 31, 2021 and 2020 ($ in thousands):
December 31,
2021 2020
Home equity loans $ 36,223 $ 40,730
Home equity lines of credit 351,128 352,309
Percentage of loans and lines for which Trustmark
holds first lien 58.2 % 59.5 %
Percentage of loans and lines for which Trustmark
does not hold first lien 41.8 % 40.5 %
Due to the increased risk associated with second liens, loan terms and
underwriting guidelines differ from those used for products secured by first
liens. Loan amounts and loan-to-value ratios are limited and are lower for
second liens than first liens. Also, interest rates and maximum amortization
periods are adjusted accordingly. In addition, regardless of lien position, the
passing credit score for approval of all home equity lines of credit is higher
than that of term loans. The ACL on LHFI is also reflective of the increased
risk related to second liens through application of a greater loss factor to
this portion of the portfolio.
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
The following table presents the LHFI composition by region at
December 31, 2021
Total Alabama Florida Mississippi Tennessee Texas
LHFI Composition by Region
Loans secured by real
estate:
Construction, land
development and
other land $ 596,968 $ 252,363 $ 41,866 $ 171,769 $ 47,171 $ 83,799
Other secured by 1-4 family
residential
properties 517,683 114,068 41,473 284,932 60,942 16,268
Secured by nonfarm,
nonresidential
properties 2,977,084 890,055 252,656 1,137,039 170,318 527,016
Other real estate secured 726,043 147,430 6,765 280,122 19,887 271,839
Other loans secured by real
estate:
Other construction 711,813 269,868 7,517 239,838 1,157 193,433
Secured by 1-4 family
residential
properties 1,460,310 - - 1,453,651 6,659 -
Commercial and industrial
loans 1,414,279 279,151 24,099 516,122 349,385 245,522
Consumer loans 162,555 23,855 8,176 104,794 18,115 7,615
State and other political
subdivision loans 1,146,251 98,215 72,146 728,509 34,542 212,839
Other commercial loans 534,843 76,607 11,697 352,770 43,018 50,751
LHFI $ 10,247,829 $ 2,151,612 $ 466,395 Construction,Land Development and Other Land Loans by Region Lots$ 62,841 $ 25,827 $ 8,399 $ 17,845 $ 3,210 $ 7,560 Development 139,708 59,615 584 44,593 11,862 23,054 Unimproved land 101,591 26,016 12,495 31,167 10,976 20,937 1-4 family construction 292,828 140,905 20,388 78,164 21,123 32,248 Construction, land development and other land loans$ 596,968 $ 252,363 $ 41,866 $ 171,769 $ 47,171 $ 83,799 Loans Secured by Nonfarm,Nonresidential (NFNR) Properties by Region Nonowner-occupied: Retail$ 351,822 $ 140,054 $ 29,586 $ 97,103 $ 18,777 $ 66,302 Office 208,835 68,067 22,626 66,799 12,786 38,557 Hotel/motel 348,090 176,327 78,408 46,886 32,204 14,265 Mini-storage 153,938 22,414 2,144 100,029 697 28,654 Industrial 346,096 134,279 20,581 86,613 135 104,488 Health care 63,746 32,230 1,101 27,766 364 2,285 Convenience stores 22,634 8,114 677 3,748 1,167 8,928 Nursing homes/senior living 197,677 86,868 - 84,540 6,269 20,000 Other 78,940 17,509 7,239 32,015 11,729 10,448 52
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Total nonowner-occupied loans 1,771,778 685,862 162,362 545,499 84,128 293,927 Owner-occupied: Office 170,438 37,572 42,913 48,923 13,091 27,939 Churches 83,375 18,657 5,937 47,019 9,172 2,590 Industrial warehouses 182,126 21,647 2,678 48,118 18,562 91,121 Health care 141,427 11,854 6,809 105,842 2,276 14,646 Convenience stores 130,948 15,255 13,244 68,673 466 33,310 Retail 65,269 12,420 10,992 20,476 8,818 12,563 Restaurants 54,978 2,877 4,484 30,894 12,735 3,988 Auto dealerships 53,710 6,090 256 27,489 19,875 - Nursing homes/senior living 197,232 71,639 - 125,593 - - Other 125,803 6,182 2,981 68,513 1,195 46,932 Total owner-occupied loans 1,205,306 204,193 90,294 591,540 86,190 233,089 Loans secured by NFNR properties$ 2,977,084 $ 890,055 $ 252,656 $ 1,137,039 $ 170,318 $ 527,016 Due to the short-term nature of most commercial real estate lending and the practice of annual renewal of commercial lines of credit, approximately 39.2% 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. Trustmark's variable rate LHFI are based primarily on various prime and LIBOR interest rate bases. Trustmark has transitioned to SOFR for new variable rate loans as ofJanuary 1, 2022 . The following table provides information regarding Trustmark's LHFI maturities by loan class and interest rate terms atDecember 31, 2021 ($ in thousands): Maturing One Year Five Years Within Through Through After One Year Five Fifteen Fifteen or Less Years Years Years Total Loans secured by real estate: Construction, land development and other land$ 434,903 $ 121,785 $ 25,733 $ 14,547 $ 596,968 Other secured by 1-4 family residential properties 51,452 217,108 237,698 11,425 517,683 Secured by nonfarm, nonresidential properties 1,455,615 1,164,780 356,311 378 2,977,084 Other real estate secured 462,409 220,158 42,719 757 726,043 Other loans secured by real estate: Other construction 475,518 206,387 29,614 294 711,813 Secured by 1-4 family residential properties 35,231 144,186 702,415 578,478 1,460,310 Commercial and industrial loans 604,413 688,627 121,239 - 1,414,279 Consumer loans 49,362 108,508 4,661 24 162,555 State and other political subdivision loans 206,486 423,129 473,946 42,690 1,146,251 Other loans 238,985 242,884 38,812 14,162 534,843 LHFI 4,014,374 3,537,552 2,033,148 662,755 10,247,829 Loans with fixed interest rates: Loans secured by real estate: Construction, land development and other land$ 75,263 $ 58,465 $ 19,410 $ 14,536 $ 167,674 Other secured by 1-4 family residential properties 30,200 99,797 47,984 116 178,097 Secured by nonfarm, nonresidential properties 215,388 988,186 340,125 - 1,543,699 Other real estate secured 89,318 157,659 14,096 163 261,236 Other loans secured by real estate: Other construction 4,465 115,256 19,842 294 139,857 Secured by 1-4 family residential properties 2,856 42,521 309,396 572,125 926,898 Commercial and industrial loans 135,549 466,410 86,260 - 688,219 Consumer loans 22,252 108,097 4,661 - 135,010 State and other political subdivision loans 178,238 406,158 460,946 42,690 1,088,032 53
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Other loans 88,992 162,226 38,163 13,787 303,168 LHFI 842,521 2,604,775 1,340,883 643,711 5,431,890 Loans with variable interest rates: Loans secured by real estate: Construction, land development and other land$ 359,640 $ 63,320 $ 6,323 $ 11 $ 429,294 Other secured by 1-4 family residential properties 21,252 117,311 189,714 11,309 339,586 Secured by nonfarm, nonresidential properties 1,240,227 176,594 16,186 378 1,433,385 Other real estate secured 373,091 62,499 28,623 594 464,807 Other loans secured by real estate: Other construction 471,053 91,131 9,772 - 571,956 Secured by 1-4 family residential properties 32,375 101,665
393,019 6,353 533,412 Commercial and industrial loans 468,864 222,217 34,979
- 726,060
Consumer loans 27,110 411 - 24 27,545
State and other political
subdivision loans 28,248 16,971 13,000 - 58,219
Other loans 149,993 80,658 649 375 231,675
LHFI 3,171,853 932,777 692,265 19,044 4,815,939
Allowance for Credit Losses
LHFI
Trustmark's ACL methodology for LHFI is based upon guidance within FASB ASC
Subtopic 326-20, "Financial Instruments - Credit Losses - Measured at Amortized
Cost," as well as regulatory guidance from its primary regulator. The ACL is a
valuation account that is deducted from the loans' amortized cost basis to
present the net amount expected to be collected on the loans. Credit quality
within the LHFI portfolio is continuously monitored by Management and is
reflected within the ACL for loans. The ACL is an estimate of expected losses
inherent within Trustmark's existing LHFI portfolio. The ACL on LHFI is adjusted
through the PCL, LHFI and reduced by the charge off of loan amounts, net of
recoveries.
The loan loss estimation process involves procedures to appropriately consider
the unique characteristics of Trustmark's LHFI portfolio segments. These
segments are further disaggregated into loan classes, the level at which credit
risk is estimated. When computing allowance levels, credit loss assumptions are
estimated using a model that categorizes loan pools based on loss history,
delinquency status and other credit trends and risk characteristics, including
current conditions and reasonable and supportable forecasts about the future.
Evaluations of the portfolio and individual credits are inherently subjective,
as they require estimates, assumptions and judgments as to the facts and
circumstances of particular situations.
The econometric models currently in production reflect segment or pool level
sensitivities of probability of default (PD) to changes in macroeconomic
variables. By measuring the relationship between defaults and changes in the
economy, the quantitative reserve incorporates reasonable and supportable
forecasts of future conditions that will affect the value of its assets, as
required by FASB ASC Topic 326. Under stable forecasts, these linear regressions
will reasonably predict a pool's PD. However, due to the COVID-19 pandemic, the
macroeconomic variables used for reasonable and supportable forecasting have
changed rapidly. At the current levels, it is not clear that the models
currently in production will produce reasonably representative results since the
models were originally estimated using data beginning in 2004 through 2019.
During this period, a traditional, albeit severe, economic recession occurred.
Thus, econometric models are sensitive to similar future levels of PD.
In order to prevent the econometric models from extrapolating beyond reasonable
boundaries of their input variables, Trustmark chose to establish an upper and
lower limit process when applying the periodic forecasts. In this way,
Management will not rely upon unobserved and untested relationships in the
setting of the quantitative reserve. This approach applies to all input
variables, including: Southern Unemployment, National Unemployment, National
GDP, Southern Vacancy Rate and the Prime Rate. The upper and lower limits are
based on the distribution of the macroeconomic variable by selecting extreme
percentiles at the upper and lower limits of the distribution, the 1st and 99th
percentiles, respectively. These upper and lower limits are then used to
calculate the PD for the forecast time period in which the forecasted values are
outside of the upper and lower limit range. For the current period, the forecast
related to the macroeconomic variables used in the quantitative modeling process
were positively impacted due to the updated forecast effects. However, due to
multiple periods in 2021 having a PD or LGD at or near zero as a result of the
improving macroeconomic forecasts, Management implemented PD and LGD floors to
account for the risk associated with each portfolio. The PD and LGD floors are
based on Trustmark's historical loss experience and applied at a portfolio
level.
54
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The external factors qualitative factor is Management's best judgement on the
loan or pool level impact of all factors that affect the portfolio that are not
accounted for using any other part of the ACL methodology (i.e., natural
disasters, changes in legislation, impacts due to technology and pandemics).
During 2020, Trustmark activated the External Factor - Pandemic to ensure
reserve adequacy for collectively evaluated loans most likely to be impacted by
the unique economic and behavioral conditions created by the COVID-19 pandemic.
Additional qualitative reserves are derived based on two principles. The first
is the disconnect of economic factors to Trustmark's modeled PD (derived from
the econometric models underpinning the quantitative pooled reserves). During
the pandemic, extraordinary measures by the federal government were made
available to consumers and businesses, including COVID-19 loan payment
concessions, direct transfer payments to households, tax deferrals and reduced
interest rates, among others. These government interventions may have extended
the lag between economic conditions and default, relative to what was captured
in the model development data. Because Trustmark's econometric PD models rely on
the observed relationship from the economic downturn from 2007 to 2009 in both
timing and severity, Management does not expect the models to reflect these
current conditions. For example, while the models would predict contemporaneous
unemployment peaks and loan defaults, this may not occur when borrowers can
request payment deferrals. Thus, for the affected population, economic
conditions are not fully considered as a part of Trustmark's quantitative
reserve. The second principle is the change in risk that is identified by rating
changes. As a part of Trustmark's credit review process, loans in the affected
population have been given more frequent screening to ensure accurate ratings
are maintained through this dynamic period. Trustmark's quantitative reserve
does not directly address changes in ratings; thus, a migration qualitative
factor was designed to work in concert with the quantitative reserve. In a
downturn, the qualitative factor is inactive for most pools because changes in
ratings are congruent with changes in macroeconomic conditions, which directly
influence the PD models in the quantitative reserve.
As discussed above, the disconnect of economic factors means that changes in
rating caused by deteriorating and weak economic conditions as a result of the
pandemic are not being captured in the quantitative reserve. During 2020, due to
unforeseen pandemic conditions that varied from Management's expectations,
additional reserves were further dimensioned in order to appropriately reflect
the risk within the portfolio related to the COVID-19 pandemic. In an effort to
ensure the External Factor - Pandemic qualitative factor is reasonable and
supportable, historical Trustmark loss data was leveraged to construct a
framework that is quantitative in nature. To dimension the additional reserve,
Management uses the sensitivity of the quantitative commercial loan reserve to
changes in macroeconomic conditions to apply to loans rated acceptable or better
(risk rates 1-4). In addition, to account for the known changes in risk, a
weighted average of the commercial loan portfolio loss rate, derived from the
performance trends qualitative factor, is used to dimension additional reserves
for downgraded credits. Loans rated acceptable with risk (risk rate 5) or watch
(risk rate 6) received the additional reserves based on the average of the
macroeconomic conditions and weighted average of the commercial loan portfolio
loss rate while the loans rated special mention (risk rate 7) and substandard
(risk rate 8) received additional reserves based on the weighted-average
described above.
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. AtDecember 31, 2021 , the ACL on LHFI was$99.5 million , a decrease of$17.8 million , or 15.2%, when compared withDecember 31, 2020 . The decrease in the ACL on LHFI during 2021 was principally due to improvements in macroeconomic forecasts and credit quality. Allocation of Trustmark's ACL on LHFI represented 1.00% of commercial LHFI and 0.87% of consumer and home mortgage LHFI, resulting in an ACL to total LHFI of 0.97% atDecember 31, 2021 . This compares with an ACL to total LHFI of 1.19% atDecember 31, 2020 , which was allocated to commercial LHFI at 1.20% and to consumer and home mortgage LHFI at 1.16%. 55 -------------------------------------------------------------------------------- The table below illustrates the changes in Trustmark's ACL on LHFI as well as Trustmark's loan loss experience for the periods presented ($ in thousands): Years Ended December 31, 2021 2020 2019 Balance at beginning of period$ 117,306 $ 84,277 $ 79,290 FASB ASU 2016-03 Adoption Adjustment: LHFI - (3,039 ) - Allowance for loan losses, acquired loans transfer - 815 - Acquired loans ACL adjustment - 1,007 - LHFI charged off (10,275 ) (11,475 ) (14,481 ) Recoveries 13,925 9,608 8,671 Net (charge-offs) recoveries 3,650 (1,867 ) (5,810 ) PCL, LHFI (21,499 ) 36,113 10,797 Balance at end of period$ 99,457 $ 117,306 $ 84,277 Recoveries exceeded charge-offs for 2021 resulting in net recoveries of$3.7 million , or -0.04% of average loans (LHFS and LHFI), compared to net charge-offs of$1.9 million , or 0.02% of average loans (LHFS and LHFI), in 2020, and net charge-offs of$5.8 million , or 0.06% of average loans (LHFS and LHFI), in 2019. The increase in net recoveries during 2021 was principally due to declines in charge-offs in theAlabama andTennessee market regions as well as an increase in recoveries in theMississippi ,Texas ,Tennessee andAlabama market regions, partially offset by an increase in charge-offs in theMississippi market region. The increase in charge-offs in theMississippi market region was principally due to the charge off of one substandard commercial credit that was previously reserved for in that market region.
The following table presents the net (charge-offs) recoveries by geographic market region for the periods presented ($ in thousands):
Years Ended December 31,
2021 2020 2019
Alabama $ 1,299 $ (1,448 ) $ (754 )
Florida 521 390 850
Mississippi (111 ) 814 (4,438 )
Tennessee 940 (1,775 ) (708 )
Texas 1,001 152 (760 )
Total net (charge-offs) recoveries
56
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The following table presents selected credit ratios for the periods presented ($
in thousands):
Years Ended December 31,
2021 2020 (1) 2019
ACL, LHFI to total LHFI 0.97 % 1.19 % 0.90 %
ACL, LHFI $ 99,457 $ 117,306 $ 84,277
LHFI 10,247,829 9,824,524 9,335,628
Nonaccrual LHFI to total LHFI 0.61 % 0.64 % 0.57 %
Nonaccrual LHFI $ 62,698 $ 63,128 $ 53,226
LHFI 10,247,829 9,824,524 9,335,628
ACL, LHFI to nonaccrual LHFI 158.63 % 185.82 % 158.34 %
ACL, LHFI $ 99,457 $ 117,306 $ 84,277
Nonaccrual LHFI 62,698 63,128 53,226
Net (charge-offs) recoveries to average
LHFI:
Construction, land development and other
land loans (2) 0.28 % 0.14 % 0.07 %
Net (charge-offs) recoveries $ 1,525 $ 704 $ 854
Average LHFI 551,266 490,036 1,145,453
Other loans secured by 1-4 family
residential properties (2) 0.08 % 0.05 % 0.01 %
Net (charge-offs) recoveries $ 396 $ 261 $ 135
Average LHFI 505,063 550,423 1,811,560
Loans secured by nonfarm, nonresidential
properties 0.04 % -0.12 % 0.01 %
Net (charge-offs) recoveries $ 1,076 $ (3,231 ) $ 150
Average LHFI 2,846,103 2,628,240 2,352,213
Other loans secured by real estate - 0.01 % -
Net (charge-offs) recoveries $ 20 $ 60 $ 29
Average LHFI 971,881 910,672 634,061
Other construction loans (2) 0.01 % 0.03 % -
Net (charge-offs) recoveries $ 47 $ 208 $ -
Average LHFI 757,716 776,546 -
Loans secured by 1-4 family residential
properties (2) - 0.01 % -
Net (charge-offs) recoveries $ (49 ) $ 160 $ -
Average LHFI 1,328,220 1,230,319 -
Commercial and industrial loans 0.03 % 0.01 % -0.27 %
Net (charge-offs) recoveries $ 336 $ 179 $ (4,087 )
Average LHFI 1,331,537 1,388,180 1,503,018
Consumer loans 0.02 % -0.13 % -0.26 %
Net (charge-offs) recoveries $ 25 $ (215 ) $ (449 )
Average LHFI 156,826 165,249 174,935
State and other political subdivision loans - - -
Net (charge-offs) recoveries $ - $ - $ -
Average LHFI 1,098,190 943,281 968,831
Other commercial loans (2) 0.06 % - -0.49 %
Net (charge-offs) recoveries $ 274 $ 7 $ (2,442 )
Average LHFI 474,291 560,360 498,822
Total LHFI 0.04 % -0.02 % -0.06 %
Net (charge-offs) recoveries $ 3,650 $ (1,867 ) $ (5,810 )
Average LHFI 10,021,093 9,643,306 9,088,893
(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.
(2)
In accordance with the guidance of 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 construction loans were
segregated from the loans secured by 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. Other
loans were redefined as other commercial loans.
57
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The PCL, LHFI for 2021 totaled -0.21% of average loans (LHFS and LHFI), compared
to 0.36% of average loans (LHFS and LHFI) in 2020 and 0.12% of average loans
(LHFS and LHFI) in 2019. The negative PCL, LHFI for 2021 primarily reflected
improvements in the macroeconomic forecasts and credit quality, partially offset
by an increase in specific reserves for individually analyzed credits within the
commercial and industrial LHFI portfolio.
Off-Balance Sheet Credit Exposures
Trustmark maintains a separate ACL on off-balance sheet credit exposures, including unfunded loan commitments and letters of credit, which is included on the accompanying consolidated balance sheets. 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 PCL, off-balance sheet credit exposures. AtDecember 31, 2021 , the ACL on off-balance sheet credit exposures totaled$35.6 million compared to$38.6 million atDecember 31, 2020 , a decrease of$2.9 million , or 7.6%. The PCL on off-balance sheet credit exposures totaled a negative$2.9 million for 2021, compared to PCL on off-balance sheet credit exposures of$8.9 million for 2020. The negative PCL, off-balance sheet credit exposures for 2021 primarily reflected the overall decrease in the total reserve rates applied to off-balance sheet credit exposures as a result of improvements in macroeconomic forecasts and credit quality.
Nonperforming Assets, Excluding PPP Loans
The table below provides the components of the nonperforming assets, excluding PPP loans, by geographic market region atDecember 31, 2021 and 2020 ($ in thousands): December 31, 2021 2020 Nonaccrual LHFI Alabama$ 8,182 $ 9,221 Florida 313 572 Mississippi 21,636 35,015 Tennessee 10,501 12,572 Texas 22,066 5,748 Total nonaccrual LHFI 62,698 63,128 Other real estate Alabama - 3,271 Mississippi 4,557 8,330 Tennessee - 50 Total other real estate 4,557 11,651 Total nonperforming assets$ 67,255 $ 74,779
Nonperforming assets/total loans (LHFS and LHFI)
and other real estate 0.64 % 0.73 % Loans Past Due 90 days or more LHFI$ 2,114 $ 1,576
LHFS - Guaranteed GNMA services loans (1)
(1)
No obligation to repurchase.
58-------------------------------------------------------------------------------- For additional information regarding the Trustmark's serviced GNMA loans eligible for repurchase, please see the section captioned "Loans Held for Sale (LHFS)" included in Note 1 - Significant Accounting Policies of Part II. Item 8. - Financial Statements and Supplementary Data of this report.
Nonaccrual LHFI
AtDecember 31, 2021 , nonaccrual LHFI totaled$62.7 million , or 0.60% of total LHFS and LHFI, reflecting a decrease of$430 thousand , or 0.7%, relative toDecember 31, 2020 . The decrease in nonaccrual LHFI was primarily due to reductions, pay-offs and charge-offs of nonaccrual LHFI were largely offset by LHFI placed on nonaccrual status. AtDecember 31, 2021 , nonaccrual energy-related LHFI totaled$2 thousand and represented less than 1 basis point of Trustmark's total energy-related portfolio, compared to$10.4 million , or 10.2% of Trustmark's total energy-related portfolio atDecember 31, 2020 . For additional information regarding nonaccrual LHFI, see the section captioned "Nonaccrual and Past Due LHFI" in Note 4 - LHFI and Allowance for Credit Losses, LHFI included in Part II. Item 8. - Financial Statements and Supplementary Data of this report.
Other Real Estate
Other real estate at
The following tables illustrate changes in other real estate by geographic market region for the periods presented ($ in thousands):
Year Ended
Total Alabama Florida Mississippi Tennessee Texas
Balance at beginning of period $ 11,651 $ 3,271 $ - $ 8,330 $ 50 $ -
Additions 770 - - 717 53 -
Disposals (6,932 ) (3,063 ) - (3,741 ) (128 ) -
Write-downs (932 ) (208 ) - (749 ) 25 -
Balance at end of period $ 4,557 $ - $ - $ 4,557 $ - $ -
Year Ended December 31, 2020
Total Alabama Florida Mississippi Tennessee Texas
Balance at beginning of period $ 29,248 $ 8,133 $ 5,877 $ 14,919 $ 319 $ -
Additions 635 77 - 339 219 -
Disposals (16,446 ) (3,887 ) (5,861 ) (6,230 ) (468 ) -
Write-downs (1,786 ) (1,052 ) (16 ) (698 ) (20 ) -
Balance at end of period
8,330 $ 50 $ -
Year Ended December 31, 2019
Total Alabama Florida Mississippi Tennessee Texas
Balance at beginning of period $ 34,668 $ 6,873 $ 8,771 $ 17,255 $ 1,025 $ 744
Additions 8,598 2,908 - 5,575 115 -
Disposals (11,474 ) (1,198 ) (2,783 ) (5,967 ) (800 ) (726 )
Write-downs (2,544 ) (450 ) (111 ) (1,944 ) (21 ) (18 )
Balance at end of period
14,919
Write-downs of other real estate decreased$854 thousand , or 47.8%, during 2021 compared to a decrease of$758 thousand , or 29.8%, during 2020. The decrease in write-downs of other real estate during 2021 compared to 2020 was primarily due to a decrease in write-downs of other real estate properties in theAlabama market region.
The following table illustrates other real estate by type of property at
December 31, 2021
2020
Construction, land development and other land properties $ -
94 1,349
Nonfarm, nonresidential properties 4,463 6,445 Total other real estate$ 4,557 $ 11,651 59
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Acquired Loans
Trustmark's loss share agreement with the
Upon adoption of FASB ASC Topic 326, which was effective for Trustmark onJanuary 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 PCL, LHFI. As a result of adopting FASB ASC Topic 326, Trustmark transferred$72.6 million of acquired loans and$815 thousand of related allowance for loan losses, acquired loans and recorded$1.0 million of ACL calculated for these loans to LHFI onJanuary 1, 2020 . The acquired loans and related allowance transferred were acquired in the BancTrust merger. For additional information regarding acquired loans, 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, MMDA, certificates of deposit and individual retirement accounts. Total deposits were$15.087 billion atDecember 31, 2021 compared to$14.049 billion atDecember 31, 2020 , an increase of$1.038 billion , or 7.4%, reflecting increases in both noninterest-bearing and interest-bearing deposit accounts. During 2021, noninterest-bearing deposits increased$422.1 million , or 9.7%, primarily due to growth in all categories of noninterest-bearing deposit accounts. Interest-bearing deposits increased$616.3 million , or 6.4%, during 2021, primarily due to growth in consumer and commercial interest checking and MMDA as well as consumer savings accounts, partially offset by declines in all categories of certificates of deposits and public interest checking accounts.
The maturities of time deposits that exceed the
Three months or less$ 59,586 Over three months through six months 28,087 Over six months through twelve months 47,782 Over twelve months 28,511
Total time deposits in excess of
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$238.6 million atDecember 31, 2021 compared to$164.5 million atDecember 31, 2020 , an increase of$74.1 million , or 45.0%, and represented customer related transactions, such as commercial sweep repurchase balances. Trustmark had no upstream federal funds purchased atDecember 31, 2021 and 2020. Other borrowings totaled$91.0 million atDecember 31, 2021 , a decrease of$77.2 million , or 45.9%, when compared with$168.3 million atDecember 31, 2020 , primarily due to a decrease in the amount of GNMA loans eligible for repurchase and the pay-off of the SERP policy loan during the third quarter of 2021. 60 --------------------------------------------------------------------------------
Benefit Plans Defined Benefit 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 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. AtDecember 31, 2021 , the fair value of the Continuing Plan's assets totaled$2.9 million and was exceeded by the projected benefit obligation of$8.6 million by$5.7 million . Net periodic benefit cost equaled$1.1 million in 2021, compared to$786 thousand in 2020 and$1.1 million in 2019. 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 2021, 2020 and 2019, 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. The range of potential contributions to the Continuing Plan is determined annually by the Continuing Plan's actuary in accordance with applicableIRS 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 isDecember 31 . For the plan year endingDecember 31, 2021 , Trustmark's minimum required contribution to the Continuing Plan was$312 thousand ; however, Trustmark contributed$324 thousand ,$12 thousand in excess of the minimum required. For the plan year endingDecember 31, 2022 , Trustmark's minimum required contribution to the Continuing Plan is expected to be$164 thousand ; however, Management and the Board of Directors of Trustmark will monitor the Continuing Plan throughout 2022 to determine any additional funding requirements by the plan's measurement date. 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 isDecember 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. AtDecember 31, 2021 , the accrued benefit obligation for the supplemental retirement plans equaled$55.0 million , while the net periodic benefit cost equaled$2.5 million in 2021,$2.8 million in 2020 and$3.0 million in 2019. 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. AtDecember 31, 2021 , 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.
61
--------------------------------------------------------------------------------Capital Resources and Liquidity
AtDecember 31, 2021 , Trustmark's total shareholders' equity was$1.741 billion , an increase of$194 thousand when compared toDecember 31, 2020 . The slight increase in shareholders' equity during 2021 was primarily as a result of net income of$147.4 million , which was largely offset by common stock repurchases of$61.8 million , common stock dividends of$58.1 million and a decrease in the fair market value of available for sale securities, net of tax, of$37.1 million . Trustmark utilizes a capital model in order to provide Management with a monthly tool for analyzing changes in its strategic capital ratios. This allows Management to hold sufficient capital to provide for growth opportunities and protect the balance sheet against sudden adverse market conditions, while maintaining an attractive return on equity to shareholders.
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 a capital conservation buffer of 2.500% atDecember 31, 2021 and 2020. AOCI is not included in computing regulatory capital. Trustmark has elected the five-year phase-in transition period (throughDecember 31, 2024 ) related to adopting FASB ASU 2016-13 for regulatory capital purposes. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of Trustmark and TNB and limit Trustmark's and TNB's ability to pay dividends. AtDecember 31, 2021 , Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered well-capitalized atDecember 31, 2021 . 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 sinceDecember 31, 2021 , which Management believes have affected Trustmark's or TNB's present classification. During the fourth quarter of 2020, Trustmark enhanced its capital structure with the issuance of$125.0 million of subordinated notes. The subordinated notes were sold at an underwriting discount of 1.2%, resulting in net proceeds to Trustmark of$123.5 million before deducting offering expenses. AtDecember 31, 2021 and 2020, the carrying amount of the subordinated notes was$123.0 million and$122.9 million , respectively. The subordinated notes matureDecember 1, 2030 and are redeemable at Trustmark's option under certain circumstances. For regulatory capital purposes, the subordinated notes qualified as Tier 2 capital for Trustmark atDecember 31, 2021 and 2020. Trustmark may utilize the full carrying value of the subordinated notes as Tier 2 capital untilDecember 1, 2025 (five years prior to maturity). BeginningDecember 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 atDecember 31, 2021 and 2020. 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 atDecember 31, 2021 and 2020.
Dividends on Common Stock
Dividends per common share for each of the years endedDecember 31, 2021 , 2020 and 2019 were$0.92 . Trustmark's dividend payout ratio for 2021, 2020 and 2019 was 39.15%, 36.51%, and 39.48%, respectively. Since Trustmark is a holding company and does not conduct operations, its primary source of liquidity are dividends paid from TNB and borrowings from outside sources. 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 2022, TNB will have available approximately$161.9 million plus its net income for that year to pay as dividends to Trustmark. The actual amount of any dividends declared in 2022 by Trustmark will be determined by Trustmark's Board of Directors. Trustmark's Board of Directors declared a quarterly cash dividend of$0.23 per share payable ofMarch 15, 2022 , to shareholders of record onMarch 1, 2022 . 62 --------------------------------------------------------------------------------
Stock Repurchase Plan
From time to time, Trustmark's Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow Trustmark to proactively manage its capital position and return excess capital to shareholders. Shares purchased also provide Trustmark with shares of common stock necessary to satisfy obligations related to stock compensation awards. Under the stock repurchase plan effectiveApril 1, 2019 throughMarch 30, 2020 , Trustmark repurchased approximately 1.5 million shares its common stock valued at$47.2 million . Under the stock repurchase plan effectiveApril 1, 2020 throughDecember 31, 2021 , Trustmark repurchased approximately 1.9 million shares of its common stock valued at$61.8 million . OnDecember 7, 2021 , the Board of Directors of Trustmark authorized a new stock repurchase program, effectiveJanuary 1, 2022 , under which$100.0 million of Trustmark's outstanding common stock may be acquired throughDecember 31, 2022 . These shares may be purchased from time to time at prevailing market prices, through open market or private transactions, depending on market conditions, and in conjunction with its disciplined share repurchase framework. There is no guarantee as to the number of shares that may be repurchased by Trustmark, and Trustmark may discontinue repurchases at any time at Management's discretion. Under this authority, Trustmark repurchased approximately 156 thousand shares of its common stock value at$5.2 million duringJanuary 2022 .
Liquidity
Liquidity is the ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs and other corporate purposes. Consistent cash flows from operations and adequate capital provide internally generated liquidity. Furthermore, Management maintains funding capacity from a variety of external sources to meet daily funding needs, such as those required to meet deposit withdrawals, loan disbursements and security settlements. Liquidity strategy also includes the use of wholesale funding sources to provide for the seasonal fluctuations of deposit and loan demand and the cyclical fluctuations of the economy that impact the availability of funds. Management keeps excess funding capacity available to meet potential demands associated with adverse circumstances. The asset side of the balance sheet provides liquidity primarily through maturities and cash flows from loans and securities as well as the ability to sell certain loans and securities while the liability portion of the balance sheet provides liquidity primarily through noninterest and interest-bearing deposits. Trustmark utilizes federal funds purchased, FHLB advances, securities sold under repurchase agreements as well as the Discount Window and, on a limited basis as discussed below, brokered deposits to provide additional liquidity. Access to these additional sources represents Trustmark's incremental borrowing capacity. Trustmark's liquidity position is continuously monitored and adjustments are made to manage the balance as deemed appropriate. Liquidity risk management is an important element to Trustmark's asset/liability management process. Trustmark regularly models liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions or other significant occurrences as deemed appropriate by Management. These scenarios are incorporated into Trustmark's contingency funding plan, which provides the basis for the identification of its liquidity needs. Deposit accounts represent Trustmark's largest funding source. Average deposits totaled to$14.538 billion for 2021 and represented approximately 85.2% of average liabilities and shareholders' equity, compared to average deposits of$12.916 billion , which represented 84.8% of average liabilities and shareholders' equity for 2020.
Trustmark had
Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. AtDecember 31, 2021 , brokered sweep Money Market Deposit Account (MMDA) deposits totaled$29.6 million compared to$28.1 million atDecember 31, 2020 .
At
Trustmark maintains a relationship with the FHLB ofDallas , which provided no outstanding short-term or long-term advances atDecember 31, 2021 and 2020. Trustmark had no letters of credit outstanding with the FHLB ofDallas atDecember 31, 2021 , compared to$600.0 million in outstanding letters of credit atDecember 31, 2020 . Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances with the FHLB ofDallas by$3.449 billion atDecember 31, 2021 . In addition, atDecember 31, 2021 , Trustmark had no short-term and$97 thousand in long-term FHLB advances outstanding with the FHLB ofAtlanta , which were acquired in the BancTrust merger, compared to$625 thousand in short-term and$116 thousand in 63 --------------------------------------------------------------------------------
long-term FHLB advances outstanding at
Additionally, Trustmark has the ability to leverage its unencumbered investment securities as collateral. AtDecember 31, 2021 , Trustmark had approximately$751.0 million available in unencumberedTreasury and agency securities compared to$560.0 million atDecember 31, 2020 .
Another borrowing source is the Discount Window. At
Additionally, on
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. AtDecember 31, 2021 and 2020, the carrying amount of the subordinated notes was$123.0 million and$122.9 million , respectively. The subordinated notes matureDecember 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 formedDelaware trust affiliate, the Trust. The trust preferred securities matureSeptember 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. AtDecember 31, 2021 , Trustmark had no shares of preferred stock issued and outstanding. Management believes that Trustmark has sufficient liquidity and capital resources to meet presently known cash flow requirements arising from ongoing business transactions. As ofDecember 31, 2021 , Management is not aware of any events that are reasonable likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, Management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on Trustmark. In the ordinary course of business, Trustmark has entered into contractual obligation and have made other commitments to make future payments. Please refer to the accompanying notes to the consolidated financial statements included in Part II. Item 8. - Financial Statements and Supplementary Data of this report for the expected timing of such payments as ofDecember 31, 2021 . These include payments related to (i) short-term and long-term borrowings (Note 12 - Borrowings), (ii) operating and finance leases (Note 10 - Leases), (iii) time deposits with stated maturity dates (Note 11 - Deposits) and (iv) commitments to extend credit and standby letters of credit (Note 17 - Commitments and Contingencies). 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. OnMarch 5, 2021 , theUnited Kingdom's Financial Conduct Authority , which regulates LIBOR, confirmed that the publication of most LIBOR term rates will end onJune 20, 2023 (excluding one-weekU.S. LIBOR and two-monthU.S. LIBOR, the publication of which ended onDecember 31, 2021 ). Trustmark has a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Trustmark cannot predict what the ultimate impact of the transition from LIBOR will be; 64 -------------------------------------------------------------------------------- however, failure to adequately manage the transition could have a material adverse effect on Trustmark's business, financial condition and results of operations. For additional information regarding the transition from LIBOR and Trustmark's management of this transition, please see the respective risk factor included in Part I. Item 1A. - Risk Factors of 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$378.6 million atDecember 31, 2021 , with a positive valuation adjustment of$1.8 million , compared to$706.8 million , with a positive valuation adjustment of$6.4 million atDecember 31, 2020 . Trustmark utilizes a portfolio of exchange-traded derivative instruments, such asTreasury 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$409.5 million atDecember 31, 2021 compared to$326.5 million atDecember 31, 2020 . These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value recorded as noninterest income in mortgage banking, net and are offset by the changes in the fair value of the MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net positive ineffectiveness of$2.5 million for the year endedDecember 31, 2021 , compared to a net positive ineffectiveness of$7.8 million for the year endedDecember 31, 2020 and a net negative ineffectiveness of$11.5 million for the year endedDecember 31, 2019 . 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. TheChicago 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. AtDecember 31, 2021 , Trustmark had interest rate swaps with an aggregate notional amount of$1.225 billion related to this program, compared to$1.125 billion atDecember 31, 2020 . 65 --------------------------------------------------------------------------------
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.
AtDecember 31, 2021 and 2020, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was$655 thousand and$1.3 million , respectively. AtDecember 31, 2021 , Trustmark had posted collateral of$850 thousand against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions atDecember 31, 2021 , it could have been required to settle its obligations under the agreements at the termination value (which is expected to approximate fair market value). Credit risk participation agreements arise when Trustmark contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third-party default on the underlying swap. AtDecember 31, 2021 , Trustmark had entered into six risk participation agreements as a beneficiary with and aggregate notional amount of$52.0 million compared to three risk participation agreements as a beneficiary with an aggregate notional amount of$41.1 million atDecember 31, 2020 . At bothDecember 31, 2021 and 2020, Trustmark had entered into twenty-four risk participation agreements as a guarantor with an aggregate notional amount of$173.5 million and$172.0 million , respectively. The aggregate fair values of these risk participation agreements were immaterial atDecember 31, 2021 and 2020. Trustmark's participation in the derivatives markets is subject to increased federal regulation of these markets. Trustmark believes that it may continue to use financial derivatives to manage interest rate risk and also to offer derivatives products to certain qualified commercial lending clients in compliance with the Volcker Rule. However, the increased federal regulation of the derivatives markets has increased the cost to Trustmark of administering its derivatives programs. Some of these costs (particularly compliance costs related to the Volcker Rule and other federal regulations) are expected to recur in the future.
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