The following provides a narrative discussion and analysis of Trustmark
Corporation's (Trustmark) financial condition and results of operations. This
discussion should be read in conjunction with the unaudited consolidated
financial statements and the supplemental financial data included in Part I.
Item 1. - Financial Statements of this report.
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Description of Business
Trustmark, a Mississippi business corporation incorporated in 1968, is a bank
holding company headquartered in Jackson, Mississippi. Trustmark's principal
subsidiary is Trustmark National Bank (TNB), initially chartered by the State of
Mississippi in 1889. At September 30, 2021, TNB had total assets of $17.363
billion, which represented approximately 99.99% of the consolidated assets of
Trustmark.
Through TNB and its other subsidiaries, Trustmark operates as a financial
services organization providing banking and other financial solutions through
180 offices and 2,680 full-time equivalent associates (measured at September 30,
2021) located in the states of Alabama, Florida (primarily in the northwest or
"Panhandle" region of that state, which is referred to herein as Trustmark's
Florida market), Mississippi, Tennessee (in the Memphis and Northern Mississippi
regions, which are collectively referred to herein as Trustmark's Tennessee
market), and Texas (primarily in Houston, which is referred to herein as
Trustmark's Texas market). Trustmark's operations are managed along three
operating segments: General Banking Segment, Wealth Management Segment and
Insurance Segment. For a complete overview of Trustmark's business, see the
section captioned "The Corporation" included in Part I. Item 1. - Business of
Trustmark's Annual Report on Form 10-K for its fiscal year ended December 31,
2020 (2020 Annual Report).
Executive Overview
Trustmark has been committed to meeting the banking and financial needs of its
customers and communities for over 130 years, and remains focused on providing
support, advice and solutions to meet its customers' unique needs. Trustmark's
financial performance during the nine months ended September 30, 2021 reflected
continued balance sheet growth, with growth in loans held for investment (LHFI)
of $350.4 million, or 3.6%, and deposits of $874.1 million, or 6.2%, as well as
strong credit quality and disciplined expense management. Trustmark remains
focused on expanding customer relationships, which was reflected in the solid
performance of its banking, insurance and wealth management businesses. Mortgage
banking revenue remained strong during the first nine months of 2021 following
record setting levels in the prior year.
During the third quarter of 2021, Trustmark completed a voluntary early
retirement program, resulting in non-routine expenses of $5.7 million (salaries
and employee benefits expense of $5.6 million and other miscellaneous expense of
$89 thousand). In addition, Trustmark's third quarter results were impacted by
its previously disclosed settlement with regulatory authorities to resolve fair
lending allegations in the Memphis metropolitan statistical area (MSA). As
previously disclosed, Trustmark incurred a one-time settlement expense of $5.0
million, and undertook other commitments to enhance credit opportunities to
residents of majority-Black and Hispanic neighborhoods in the Memphis MSA.
Trustmark is committed to managing the franchise for the long term, supporting
investments to promote profitable revenue growth, realigning delivery channels
to support changing customer preferences as well as reengineering and efficiency
opportunities to enhance long-term shareholder value. Trustmark's Board of
Directors declared a quarterly cash dividend of $0.23 per share. The dividend is
payable December 15, 2021, to shareholders of record on December 1, 2021.
Recent Economic and Industry Developments
The COVID-19 pandemic and actions taken to mitigate the spread of it have had
and may continue to have an adverse impact on economic activity globally,
nationally and locally, including the geographical area in which Trustmark
operates and industries in which Trustmark regularly extends credit. For
additional information regarding Trustmark's exposure to industries impacted by
the COVID-19 pandemic, please see the section captioned "Exposure to COVID-19
Stressed Industries." Economic activity during the first nine months of 2021
increased as certain restrictions were lifted following increased COVID-19
vaccination rates; however, restrictions remain in place for many areas and the
long-term effectiveness of the vaccine and the full impact of the COVID-19
pandemic on economies and financial markets remains unknown.
Additionally, the COVID-19 pandemic has significantly affected the financial
markets and resulted in a number of actions by the FRB during 2020 and
continuing in 2021. Market interest rates declined to and remain at historical
lows. During 2020, the ten-year Treasury yield fell below 1.00% for the first
time, and the FRB reduced the target federal funds rate to a range of 0.00% to
0.25% and announced a $700 billion quantitative easing program in response to
the expected economic downturn caused by the COVID-19 pandemic. The FRB reduced
the interest that it pays on excess reserves from 1.60% to 0.10% during the
first quarter of 2020. These rates have continued into the third quarter of
2021. The prolonged reduction in interest rates has had and is expected to
continue to have an adverse effect on net interest income and margins and
profitability for financial institutions, including Trustmark.
In the October 2021 "Summary of Commentary on Current Economic Conditions by
Federal Reserve District," the twelve Federal Reserve Districts' reports
suggested that economic activity during the reporting period (covering the
period from August 31, 2021 through October 8, 2021) strengthened further,
displaying a modest to moderate rate of growth; however, several Districts noted
that
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the pace of growth slowed, constrained by supply chain disruptions, labor
shortages and uncertainty around the Delta variant of COVID-19. Reports by the
twelve Federal Reserve Districts (Districts) noted the following during the
reporting period:
?
Positive growth in consumer spending; however, auto sales were widely reported
as declining due to low inventory levels and rising prices. Travel and tourism
varied by District, with some seeing continued or strengthening leisure travel
while other saw declines that coincided with rises in COVID-19 cases and the
start of the school year. Manufacturing grew moderately to robustly, as did
trucking and freight. Growth in nonmanufacturing activity ranged from slight to
moderate for most Districts. Agriculture conditions were mixed and energy
markets were little changed on balance.
?
Residential real estate activity was unchanged or slowed slightly, but the
market remained healthy overall, while nonresidential real estate activity
varied across Districts and market segments.
?
Prices were significantly elevated, fueled by rising demand for goods and raw
materials. Input cost increases were widespread across industry sectors, driven
by product scarcity resulting from supply chain bottlenecks. Price pressures
also arose from increased transportation and labor constraints as well as
commodity shortages. Prices of steel and electronic components as well as
freight costs rose markedly during the reporting period. Many firms raised
selling prices, indicating a greater ability to pass along cost increases to
customers amid strong demand.
?
Employment increased at a modest to moderate rate as demand for workers was
high, but labor growth was dampened by a low supply of workers. Transportation
and technology firms saw particularly low labor supply, while many retail,
hospitality and manufacturing firms cut hours or production because they did not
have enough workers. Firms reported high turnover as workers left for other jobs
or retired. Child-care issues and vaccine mandates were widely cited as
contributing to the problem, along with COVID-19-related absences. Wage growth
was robust. Firms reported increasing starting wages to attract talent and
increasing wages for existing workers to retain them.
?
Banking contacts in most Districts reported that loan demand was flat to modest
during the period.
?
Outlooks for near-term economic activity remain positive overall, but some
Districts noted increased uncertainty and more cautious optimism than previous
reports.
Reports by the Federal Reserve's Sixth District, Atlanta (which includes
Trustmark's Alabama, Florida and Mississippi market regions), Eighth District,
St. Louis (which includes Trustmark's Tennessee market region), and Eleventh
District, Dallas (which includes Trustmark's Texas market region), noted similar
findings for the reporting period as those discussed above. The Federal
Reserve's Eleventh District also reported that elevated growth continued and
optimism improved in the oil and gas sector, spurred by higher oil and natural
gas prices, and although supply-chain problems continue to worsen, contacts
noted that current prices are conducive to increasing production and drilling
and well completion activity rose steadily.
It is unknown what the complete financial effect of the COVID-19 pandemic will
be on Trustmark. It is reasonably possible that estimates made in the financial
statements, including the expected credit losses on loans and off-balance sheet
credit exposures, could be materially and adversely impacted in the near term as
a result of the adverse conditions associated with the COVID-19 pandemic.
Exposure to COVID-19 Stressed Industries
The full impact of COVID-19 is unknown and continues to evolve rapidly. It has
caused substantial disruption in international and domestic economies, markets
and employment. The pandemic has had and may continue to have a significant
adverse impact on certain industries Trustmark serves. The following provides a
summary of Trustmark's exposure to COVID-19 impacted industries within the LHFI
portfolio as of September 30, 2021:
?
Restaurants: Aggregate outstanding balance of $104.0 million, credit exposure of
$121.0 million, 299 total loans, represents 1.0% of Trustmark's outstanding LHFI
portfolio, 88% of the loans are real estate secured, 38% are full-service
restaurants, 59% are limited-service restaurants and 3% are other.
?
Hotels: Aggregate outstanding balance of $354.0 million, credit exposure of
$373.0 million, 84 total loans, represents 3.5% of Trustmark's outstanding LHFI
portfolio, 99% of the loans are real estate secured, consists of experienced
operators and carry secondary guarantor support, 95% operate under a major hotel
chain.
?
Retail (Commercial Real Estate): Aggregate outstanding balance of $422.0
million, credit exposure of $494.0 million, 288 total loans, represents 4.2% of
Trustmark's outstanding LHFI portfolio, 22% are stand-alone buildings with
strong essential services tenants, 2% are national grocery store-anchored, 19%
are investment grade anchored centers, mall exposure in only one borrower with
$5.0 million outstanding.
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?
Energy: Aggregate outstanding balance of $101.2 million, credit exposure of
$316.0 million, 111 total loans, represents 0.99% of Trustmark's outstanding
LHFI portfolio, no loans where repayment or underlying security ties to
realization of value from energy reserves.
?
Higher Risk Commercial and Industrial: Aggregate outstanding balance of $10.3
million, credit exposure of $13.6 million, one borrower.
During the third quarter of 2021, Trustmark conducted an analysis of borrowers
with $1.0 million or more in outstanding balances in the COVID-19 impacted
industries as well as borrowers in other selected categories, primarily nursing
homes and senior living facilities, healthcare facilities and churches.
Collectively, the review included borrowers with $1.700 billion in outstanding
balances at September 30, 2021, including $705.0 million in outstanding balances
of borrowers in COVID-19 impacted industries. As a result of this review, no
credits were downgraded to a criticized category. A total of $20.0 million was
removed from a criticized category, which included borrowers in COVID-19
impacted industries.
COVID-19 Related Loan Concessions
On March 22, 2020, the federal banking agencies issued an "Interagency Statement
on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus." This guidance encouraged financial
institutions to work prudently with borrowers that may be unable to meet their
contractual obligations because of the effects of COVID-19. The guidance went on
to explain that, in consultation with the FASB staff, the federal banking
agencies concluded that short-term modifications (i.e., six months) made on a
good faith basis to borrowers that were current as of the implementation date of
a relief program were not TDRs. On March 27, 2020, the Coronavirus Aid, Relief,
and Economic Security Act (the CARES Act), a stimulus package intended to
provide relief to businesses and consumers in the United States struggling as a
result of the pandemic, was signed into law. Section 4013 of the CARES Act also
addressed COVID-19 related modifications and specified that COVID-19 related
modifications on loans that were current as of December 31, 2019 were not TDRs.
On April 7, 2020, the federal banking agencies revised its earlier guidance to
clarify the interaction between the March 22, 2020 interagency statement and
section 4013 of the CARES Act, as well as the agencies' views on consumer
protection considerations. The Consolidated Appropriations Act, 2021, enacted on
December 27, 2020, amended section 4013 of the CARES Act to provide an extension
of the period in which TDR relief is available to financial institutions. At
September 30, 2021, the balance of loans remaining under some type of COVID-19
related concession totaled $20.0 million compared to $34.2 million at December
31, 2020. Commercial concessions were primarily either interest only for 90 days
or full payment deferrals for 90 days. Consumer concessions were 90-day full
payment deferrals.
Paycheck Protection Program
A provision in the CARES Act included initial funds for the creation of the PPP
through the Small Business Administration (SBA) and Treasury Department. The PPP
is intended to provide loans to small businesses, sole proprietorships,
independent contractors and self-employed individuals to pay their employees,
rent, mortgage interest and utilities. PPP loans are forgivable, in whole or in
part, if the proceeds are used for payroll and other permitted purposes in
accordance with the requirements of the PPP. The loans are 100% guaranteed by
the SBA. The SBA and Treasury Department released a series of rules, guidance
documents and processes governing the PPP, including a streamlined process for
loan forgiveness of PPP loans of $150 thousand or less. The Consolidated
Appropriations Act, 2021 extended some of the relief provisions in certain
respects of the CARES Act, and appropriated additional funds to the PPP and
permitted certain PPP borrowers to make "second draw" loans. Subsequently, the
American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded the
eligibility criteria for both first and second draw PPP loans and revised the
exclusions from payroll costs for purposes of loan forgiveness. The PPP
Extension Act of 2021, enacted on March 30, 2021, extended the PPP through May
31, 2021.
From April to August 2020, Trustmark originated PPP loans for qualified small
businesses and other borrowers. Trustmark resumed submitting PPP applications to
the SBA on behalf of qualified small businesses and other borrowers under the
CARES Act, as amended by the Consolidated Appropriations Act, 2021, in January
2021. During the first nine months of 2021, Trustmark originated 5,727 PPP loans
totaling $376.2 million ($354.5 million net of $21.7 million of deferred fees
and costs).
On June 30, 2021, Trustmark announced the sale of approximately $354.2 million
of its outstanding PPP loans, substantially all PPP loans originated in 2021, to
The Loan Source, Inc. (Loan Source), a firm with significant expertise in PPP
loans. As a result of this transaction, Loan Source will assume responsibility
for the servicing and forgiveness process for the loans it has acquired from
Trustmark. This transaction will allow Trustmark to focus on more traditional
lending efforts and increase its ability to provide customers with financial
services in an improving economic environment. Trustmark accelerated the
recognition of unamortized PPP loan origination fees, net of cost, of
approximately $18.6 million, in the second quarter of 2021 due to the sale. This
revenue is substantially the same as Trustmark would expect to recognize upon
the maturity or forgiveness of the PPP loans being sold in this transaction, and
thus this transaction serves to accelerate revenue anticipated in future periods
and recognize it during the second quarter of 2021.
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At September 30, 2021, Trustmark had 197 PPP loans outstanding totaling $47.3
million ($46.5 million net of $798 thousand of deferred fees and costs),
compared to 7,398 PPP loans outstanding totaling $623.0 million ($610.1 million
net of $12.9 million of deferred fees and costs) at December 31, 2020. In
addition to the loans sold, PPP loans totaling $597.9 million were forgiven by
SBA during the first nine months of 2021, compared to PPP loans totaling $346.9
million forgiven by the SBA during the fourth quarter of 2020.
Due to the amount and nature of the PPP loans, these loans are not included in
Trustmark's LHFI portfolio and are presented separately in the accompanying
consolidated balance sheet. Trustmark cannot predict the amount of PPP loans
that will be forgiven in whole or in part by the SBA, nor can it predict the
magnitude and timing of the impact the PPP loans and related fees will have on
Trustmark's net interest margin.
Financial Highlights
Trustmark reported net income of $21.2 million, or basic and diluted earnings
per share (EPS) of $0.34, in the third quarter of 2021, compared to $54.4
million, or basic and diluted EPS of $0.86, in the third quarter of 2020.
Trustmark's reported performance during the quarter ended September 30, 2021
produced a return on average tangible equity of 6.16%, a return on average
assets of 0.49%, an average equity to average assets ratio of 10.39% and a
dividend payout ratio of 67.65%, compared to a return on average tangible equity
of 16.82%, a return on average assets of 1.37%, an average equity to average
assets ratio of 10.75% and a dividend payout ratio of 26.74% during the quarter
ended September 30, 2020.
Trustmark reported net income of $121.1 million, or basic and diluted EPS of
$1.92, for the nine months ended September 30, 2021, compared to $108.8 million,
or basic and diluted EPS of $1.71, for the nine months ended September 30, 2020.
Trustmark's reported performance during the first nine months of 2021 produced a
return on average tangible equity of 11.84%, a return on average assets of
0.96%, an average equity to average assets ratio of 10.47% and a dividend payout
ratio of 35.94%, compared to a return on average tangible equity of 11.57%, a
return on average assets of 0.97%, an average equity to average assets ratio of
11.13% and a dividend payout ratio of 40.35% for the first nine months of 2020.
Total revenue, which is defined as net interest income plus noninterest income,
for the three and nine months ended September 30, 2021 was $152.4 million and
$491.2 million, respectively, a decrease of $27.5 million, or 15.3%, and $32.5
million, or 6.2%, respectively, when compared to the same time periods in 2020.
The decrease in total revenue for the third quarter of 2021 when compared to the
same time period in 2020, resulted from a decline in noninterest income,
primarily due to a decline in mortgage banking, net, as well as a decline in net
interest income, primarily due to decreases in interest and fees on PPP loans,
interest and fees on LHFS and LHFI and interest on securities, partially offset
by a decline in interest on deposits. The decrease in total revenue for the nine
months ended September 30, 2021 when compared to the same time period in 2020,
resulted from a decline in noninterest income, primarily due to a decrease in
mortgage banking, net, partially offset by an increase in net interest income,
primarily due to an increase in interest and fees on PPP loans, primarily due to
the accelerated recognition of the unamortized loan fees on the PPP loans sold
during the quarter ended June 30, 2021, and a decline in interest on deposits,
partially offset by declines in interest and fees on LHFS and LHFI and interest
on securities. These factors are discussed in further detail below.
Net interest income for the three and nine months ended September 30, 2021
totaled $98.3 million and $320.0 million, respectively, a decrease of $7.9
million, or 7.5%, and an increase of $4.9 million, or 1.5%, respectively, when
compared to the same time periods in 2020. Interest income totaled $103.7
million and $339.1 million for the three and nine months ended September 30,
2021, respectively, a decrease of $10.6 million, or 9.3%, and $10.3 million, or
2.9%, respectively, when compared to the same time periods in 2020. The decrease
in interest income for the three months ended September 30, 2021 when compared
to the same time period in 2020 was principally due to a decline in interest and
fees on PPP loans, primarily due to PPP loans forgiven by the SBA, as well as
declines in interest and fees on LHFS and LHFI and interest on securities
primarily due to lower interest rates. The decrease in interest income when the
first nine months of 2021 is compared to the same time period in 2020 was
principally due to declines in interest and fees from LHFS and LHFI and interest
on securities as a result of lower interest rates, partially offset by the
increase in interest and fees from PPP loans. Interest expense totaled $5.5
million and $19.1 million for the three and nine months ended September 30,
2021, respectively, a decrease of $2.7 million, or 32.9%, and $15.1 million, or
44.2%, respectively, when compared to the same time periods in 2020, principally
due to the decline in interest on deposits as a result of lower interest rates.
Noninterest income for the three months ended September 30, 2021 totaled $54.1
million, a decrease of $19.6 million, or 26.5%, when compared to the same time
period in 2020, primarily due to a decline in mortgage banking, net, partially
offset by increases in wealth management and service charges on deposit
accounts. Mortgage banking, net totaled $14.0 million for the three months ended
September 30, 2021, a decrease of $22.4 million, or 61.6%, when compared to the
same time period in 2020, principally due to a decline in the gain on sales of
loans, net. Wealth management income totaled $9.1 million for the third quarter
of 2021, an increase of $1.4 million, or 18.1%, when compared to the third
quarter of 2020, primarily due to increases in income from both investment
services and trust management services. Service charges on deposit accounts
totaled $8.9 million for the three months ended September 30, 2021, an increase
of $1.3 million, or 17.6%, when compared to the same time period in 2020
principally due to an increase in the amount of
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non-sufficient funds (NSF) and overdraft occurrences on consumer demand deposit
accounts (DDAs) and interest checking accounts and commercial DDAs, primarily as
a result of an increase in customer transactions with the further abatement of
pandemic-related concerns.
Noninterest income for the first nine months of 2021 totaled $171.1 million, a
decrease of $37.3 million, or 17.9%, when compared to the same time period in
2020. The decrease in noninterest income when the first nine months of 2021 is
compared to the same time period in 2020 was principally due to a decline in
mortgage banking, net, partially offset by increases in bank card and other fees
and wealth management. Mortgage banking, net totaled $52.1 million for the nine
months ended September 30, 2021, a decrease of $45.5 million, or 46.6%, when
compared to the same time period in 2020, principally due to declines in the
gain on sales of loans, net and the net hedge ineffectiveness and an increase in
the run-off of the MSR. Bank card and other fees totaled $26.3 million for the
first nine months of 2021, an increase of $4.4 million, or 20.1%, when compared
to the same time period in 2020, principally due to increases in interchange
income from point-of-sale transactions and the credit valuation adjustment on
customer derivatives partially offset by declines in interchange income from
signature transactions and income from customer derivatives. Wealth management
income totaled $26.4 million for the first nine months of 2021, an increase of
$2.6 million, or 11.1%, when compared to the same time period in 2020, primarily
due to increases in income from both investment services and trust management
services.
Noninterest expense for the three months ended September 30, 2021 totaled $129.6
million, an increase of $12.6 million, or 10.8%, when compared to the same time
period in 2020, principally due to increases in salaries and employee benefits,
other expense and services and fees. Salaries and employee benefits totaled
$74.6 million for the three months ended September 30, 2021, an increase of $7.3
million, or 10.8%, when compared to the same time period in 2020. The increase
in salaries and employee benefits when the third quarter of 2021 is compared to
the same time period in 2020 was principally due to the $5.6 million of
non-routine expenses related to the voluntary early retirement program completed
during the third quarter of 2021. Excluding these non-routine expenses, salaries
and employee benefits increased $1.7 million, or 2.5%, when the third quarter of
2021 is compared to the third quarter of 2020, principally due to increases in
salary expense, primarily resulting from general merit increases, and accruals
for annual performance incentives. Other expense totaled $18.5 million for the
three months ended September 30, 2021, an increase of $3.9 million, or 26.9%,
when compared to the same time period in 2020, principally due to the previously
disclosed one-time settlement expense of $5.0 million and other commitments to
enhance credit opportunities to residents of majority-Black and Hispanic
neighborhoods in the Memphis MSA. Services and fees totaled $22.3 million for
the three months ended September 30, 2021, an increase of $1.3 million, or 6.3%,
when compared to the same time period in 2020, primarily due to increases in
data processing charges related to software.
Noninterest expense for the nine months ended September 30, 2021 totaled $369.8
million, an increase of $23.4 million, or 6.8%, when compared to the same time
period in 2020, principally due to increases in salaries and employee benefits,
services and fees and other expense. Salaries and employee benefits totaled
$215.9 million for the nine months ended September 30, 2021, an increase of
$13.3 million, or 6.6%, when compared to the same time period in 2020. The
increase in salaries and employee benefits when the first nine months of 2021 is
compared to the same time period in 2020 was principally due to the non-routine
expense related to the voluntary early retirement program completed in the third
quarter of 2021 as well as increases in salary expense as a result of general
merit increases, commissions expense resulting primarily from improvements in
mortgage originations and production and accruals for annual incentive
compensation, partially offset by non-routine expenses related to the voluntary
early retirement program completed by Trustmark during the first quarter of
2020. Trustmark incurred $5.6 million of non-routine salaries and employee
benefits expense during the third quarter of 2021 compared to $4.3 million
during the first quarter of 2020 related to these programs. Excluding these
non-routine expenses, salaries and employee benefits increased $12.0 million, or
6.0%, when the first nine months of 2021 is compared to the same time period in
2020. Services and fees totaled $66.6 million for the nine months ended
September 30, 2021, an increase of $5.1 million, or 8.2%, when compared to the
same time period in 2020, primarily due to increases in data processing charges
related to software and outside services and fees related to independent
contractors expenses. Other expense totaled $46.2 million for the first nine
months of 2021, an increase of $3.6 million, or 8.4%, when compared to the same
time period in 2020, principally due to the previously disclosed one-time
settlement expense of $5.0 million and other commitments to enhance credit
opportunities to residents of majority-Black and Hispanic neighborhoods in the
Memphis MSA.
Trustmark's provision for credit losses (PCL) on LHFI for the three and nine
months ended September 30, 2021 totaled a negative $2.5 million and a negative
$17.0 million, respectively, a decrease of $4.3 million and $57.5 million,
respectively, when compared to the same time periods in 2020. The PCL on
off-balance sheet credit exposures totaled a negative $1.0 million and a
negative $5.9 million for the three and nine months ended September 30, 2021,
respectively, an increase of $2.0 million and a decrease of $15.9 million,
respectively, when compared to the same time periods in 2020. The negative PCL
on LHFI for the third quarter of 2021 primarily reflected a decline in required
reserves as a result of risk rate upgrades resulting from improved credit
quality and improvements in the overall economy and macroeconomic forecasting
variables used in the allowance for credit losses (ACL) modeling, partially
offset by an increase in specific reserves for individually analyzed credits.
The negative PCL on off-balance sheet credit exposures for the third quarter of
2021 primarily reflected a decline in required reserves as a result of decreases
in the total reserve rate used in the calculation of the ACL. The negative PCL
on both LHFI and off-balance sheet credit exposures for the first nine months of
2021 primarily reflected declines in required reserves as a result of
improvements in the overall economy and macroeconomic factors used in the
calculation of
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the ACL. Please see the section captioned "Provision for Credit Losses" for
additional information regarding the PCL on LHFI and off-balance sheet credit
exposures.
At September 30, 2021, nonperforming assets totaled $72.5 million, a decrease of
$2.3 million, or 3.1%, compared to December 31, 2020, due to a decline in other
real estate partially offset by an increase in nonaccrual LHFI. Nonaccrual LHFI
totaled $66.2 million at September 30, 2021, an increase of $3.1 million, or
4.9%, relative to December 31, 2020, primarily due to one large commercial
credit in the Texas market region totaling $16.7 million that was placed on
nonaccrual status during the third quarter of 2021, partially offset by the pay
down and charge off of one large energy-related commercial credit of $8.5
million as well as a $2.8 million commercial credit which was returned to
accrual status in Trustmark's Mississippi market region. Other real estate
totaled $6.2 million at September 30, 2021, a decline of $5.4 million, or 46.7%,
compared to December 31, 2020, principally due to properties sold in the Alabama
and Mississippi market regions as well as an increase in reserves for other real
estate write-downs in Trustmark's Mississippi market region.
LHFI totaled $10.175 billion at September 30, 2021, an increase of $350.4
million, or 3.6%, compared to December 31, 2020. The increase in LHFI during the
first nine months of 2021 was primarily due to net growth in LHFI secured by
real estate in Trustmark's Mississippi and Alabama market regions and state and
other political subdivision loans in the Mississippi, Texas, Florida and Alabama
market regions, partially offset by net declines in LHFI secured by real estate
in the Texas and Florida market regions and other commercial LHFI in the
Mississippi market region. For additional information regarding changes in LHFI
and comparative balances by loan category, see the section captioned "LHFI."
Management has continued its practice of maintaining excess funding capacity to
provide Trustmark with adequate liquidity for its ongoing operations. In this
regard, Trustmark benefits from its strong deposit base, its highly liquid
investment portfolio and its access to funding from a variety of external
funding sources such as upstream federal funds lines, FHLB advances and, on a
limited basis, brokered deposits. See the section captioned "Liquidity" for
further discussion of the components of Trustmark's excess funding capacity.
Total deposits were $14.923 billion at September 30, 2021, an increase of $874.1
million, or 6.2%, compared to December 31, 2020, primarily reflecting deposits
of proceeds from line draws, PPP loans and other COVID-19 related stimulus
programs. During the first nine months of 2021, noninterest-bearing deposits
increased $638.9 million, or 14.7%, reflecting growth in all categories of
noninterest-bearing DDAs. Interest-bearing deposits increased $235.2 million, or
2.4%, during the first nine months of 2021, primarily due to growth in consumer
and commercial interest checking and Money Market Deposit Accounts (MMDA) as
well as consumer savings accounts, partially offset by declines in all
categories of certificates of deposits and public interest checking accounts.
Recent Legislative and Regulatory Developments
On March 5, 2021, the United Kingdom Financial Conduct Authority (FCA), which
regulates London Interbank Offered Rate (LIBOR), confirmed that the publication
of most LIBOR term rates will end on June 30, 2023 (excluding one-week U.S.
LIBOR and two-month U.S. LIBOR, the publication of which will end on December
31, 2021). Additionally, on April 6, 2021, New York Governor Cuomo signed into
law legislation that provides for the substitution of an alternative reference
rate, the Secured Overnight Funding Rate (SOFR), in any LIBOR-based contract
governed by New York state law that does not include clear fallback language,
once LIBOR is discontinued. The FRB and other federal banking agencies have
continued to encourage banks to transition away from LIBOR as soon as
practicable. Given LIBOR's extensive use across financial markets, the
transition away from LIBOR presents various risks and challenges to financial
markets and institutions, including Trustmark. For additional information
regarding the transition from LIBOR and Trustmark's management of this
transition, please see the respective risk factor included in Part I. Item 1A. -
Risk Factors, of Trustmark's 2020 Annual Report.
For additional information regarding legislation and regulation applicable to
Trustmark, see the section captioned "Supervision and Regulation" included in
Part I. Item 1. - Business of Trustmark's 2020 Annual Report.
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