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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following provides a narrative discussion and analysis of Trustmark’s financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements and the supplemental financial data included in Part II. Item 8. – Financial Statements and Supplementary Data of this report. Discussion and analysis of Trustmark’s financial condition and results of operations for the years ended December 31, 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 ended December 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 in March 2020 to protect the health and safety of its employees and customers, and continues to take additional precautions as recommended by the Centers for Disease Control and Prevention (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 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 at December 31, 2021:

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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.

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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.

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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

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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.

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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.

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Higher Risk Commercial and Industrial: Aggregate outstanding balance of $10.0 million, credit exposure of $13.5 million, one borrower.

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

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, that the federal banking agencies conclude that short-term modifications (e.g., six months) made on a good faith basis to borrowers that were current as of the implementation date of a relief program are not TDRs. On March 27, 2020, the CARES Act, a 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 at December 31, 2019 are not TDRs. On April 7, 2020, the federal banking agencies revised its earlier guidance to clarify the interaction between the March 22, 2020 interagency statement and section 4013 of the CARES Act, as well as the agencies’ views on consumer protection considerations. 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 was available to financial institutions. At December 31, 2021, the balance of loans remaining under some type of COVID-19 related concession totaled $1.1 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 SBA 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 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, amended by the Consolidated Appropriations Act, 2021, in January 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).

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 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.

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At December 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) at December 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 the Memphis 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 payable March 15, 2022, to shareholders of record on March 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 ended December 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 ended December 31, 2020.

Revenue, which is defined as net interest income plus noninterest income, totaled $149.1 million for the quarter ended December 31, 2021 compared to $177.5 million for the quarter ended December 31, 2020, a decrease of $28.4 million, or 16.0%. The decrease in total revenue for the fourth quarter of 2021 compared to the same time period in 2020 was principally due to declines in mortgage banking, net and interest and fees on PPP loans.

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

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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 ended December 31, 2021 totaled a negative $4.5 million compared to a negative $4.4 million for the three months ended December 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 ended December 31, 2021 compared to a negative $1.1 million for the three months ended December 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 ended December 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 ended December 31, 2020 and $150.5 million, or basic and diluted EPS of $2.33 and $2.32, respectively, for the year ended December 31, 2019. Trustmark’s reported performance for the year ended December 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 ended December 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 ended December 31, 2019. Trustmark’s average equity to average assets ratio was 10.38%, 11.05% and 12.02% for the years ended December 31, 2021, 2020 and 2019, respectively.

Revenue totaled $640.3 million for the year ended December 31, 2021, compared to $701.1 million and $613.6 million for the years ended December 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 ended December 31, 2021 totaled $418.4 million, a decrease of $8.2 million, or 1.9%, when compared to the year ended December 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.

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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.

At December 31, 2021, nonperforming assets totaled $67.3 million, a decrease of $7.5 million, or 10.1%, compared to December 31, 2020 principally due to a decline other real estate. Total nonaccrual LHFI were $62.7 million at December 31, 2021, representing a slight decrease of $430 thousand, or 0.7%, relative to December 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 at December 31, 2021, a decline of $7.1 million, or 60.9%, when compared to December 31, 2020, principally due to properties sold in Trustmark’s Mississippi, Alabama, and Tennessee market regions.

LHFI totaled $10.248 billion at December 31, 2021, an increase of $423.3 million, or 4.3%, compared to December 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 at December 31, 2021, an increase of $1.038 billion, or 7.4%, compared to December 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.

At December 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 at December 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,

AVERAGE BALANCES

PERIOD END BALANCES

TANGIBLE ASSETS

NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION

TANGIBLE EQUITY MEASUREMENTS

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 %

COMMON EQUITY TIER 1 CAPITAL (CET1) - BASEL III

CET1 adjustments and deductions:

Other adjustments and deductions for CET1 (3) (4,392 ) (6,190 ) (5,896 )

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.

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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,

Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS

Significant non-routine transactions:

Regulatory settlement charge (not tax deductible) 5,000 0.08 — — — —

Voluntary Early Retirement Program

During the third quarter of 2021, Trustmark completed a voluntary early retirement program and incurred one-time charges of $5.7 million ($5.6 million of non-routine salaries and employee benefits expense and $89 thousand of non-routine other miscellaneous expense) related to this program.

During the first quarter of 2020, Trustmark completed a voluntary early retirement program and incurred one-time charges of $4.4 million ($4.3 million of non-routine salaries and employee benefits expense and $102 thousand of non-routine other miscellaneous expense) related to this program.

Regulatory Settlement Charge

During the third quarter of 2021, Trustmark finalized a settlement with regulatory authorities to resolve fair lending allegations in the Memphis 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 ended December 31, 2021 decreased $8.5 million, or 1.9%, when compared with the year ended December 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 the Federal 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

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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.

At December 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, at December 31, 2020. Processing fees earned by TNB as the originating lender are being amortized over the life of the loans. Payments on PPP loans are deferred until the date the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period). 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 at December 31, 2021 are compared to balances at December 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.

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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,

Average Yield/ Average Yield/ Average Yield/

Balance Interest Rate Balance Interest Rate Balance Interest Rate

Assets

Interest-earning assets:

Securities available for sale:

Securities held to maturity:

Liabilities and Shareholders' Equity

Interest-bearing liabilities:

Less tax equivalent adjustments:

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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):

Increase (Decrease) Due To: Increase (Decrease) Due To:

Yield/ Yield/

Volume Rate Net Volume Rate Net

Interest earned on:

Securities available for sale:

Securities held to maturity:

Interest paid on:

Junior subordinated debt securities — (499 ) (499 ) — (922 ) (922 )

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.

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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,

Amount % Change Amount % Change Amount % Change

n/m - percentage changes greater than +/- 100% are not considered meaningful

Changes in various components of noninterest income for the year ended December 31, 2021 are discussed in further detail below. For analysis of Trustmark’s insurance commissions and wealth management income, please see the section captioned “Results of Segment Operations.”

Bank Card and Other Fees

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,

Amount % Change Amount % Change Amount % Change

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-year Treasury 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 at December 31, 2021, compared with $7.657 billion at December 31, 2020, and $7.157 billion at December 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.

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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,

Amount % Change Amount % Change Amount % Change

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,

Amount % Change Amount % Change Amount % Change

Other real estate expense:

Net (gain)/loss on sale 1,869 n/m (897 ) n/m 291 n/m

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 ended December 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 ended December 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.

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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,

Amount % Change Amount % Change Amount % Change

Regulatory settlement charge 5,000 n/m — — — —

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 the Retail Private Banking Group from the General Banking Segment to the Wealth Management Segment as a result of a change in supervision of this group for segment reporting purposes. Prior periods include reclassifications to conform to current period presentation.

The following table provides the net income by reportable segment for the periods presented ($ in thousands):

Years Ended December 31,

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

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and a provision for loan losses, net of $10.6 million during 2019. For more information on these net interest income items, please see the sections captioned “Financial Highlights” and “Results of Operations.”

Noninterest income for the General Banking Segment 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 the Private 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 December 31, 2021 and 2020, Trustmark held assets under management and administration of $15.703 billion and $11.463 billion and brokerage assets of $2.417 billion and $2.148 billion, respectively.

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.

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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 of October 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 ended December 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, at December 31, 2021, compared with $13.740 billion, or 90.3% of total average assets, at December 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 at December 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 with December 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. At December 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) at December 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. At December 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%, at December 31, 2020. At December 31, 2021, unrealized losses, net on available for sale securities totaled $17.4 million compared to unrealized gains, net of $32.0 million at December 31, 2020. At December 31, 2021, available for sale securities consisted of U.S. Treasury securities, obligations of states and political subdivisions, GSE guaranteed mortgage-related securities and direct obligations of government agencies and GSEs.

Held to maturity securities are carried at amortized cost and represent those securities that Trustmark both intends and has the ability to hold to maturity. At December 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%, at December 31, 2020.

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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 December 31, 2021 (tax equivalent basis):

Maturing

Securities available for sale

U.S. Treasury securities — 0.77 % 1.05 % — 0.86 %

Obligations of states and political subdivisions 2.07 % 2.77 % 4.52 % — 4.04 %

Mortgage-backed securities

Residential mortgage pass-through securities

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 %

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 by FNMA, FHLMC, or GNMA — — 1.76 % 1.90 % 1.90 %

Commercial mortgage-backed securities

Issued or guaranteed by FNMA, FHLMC, or GNMA 2.28 % 2.22 % — 2.48 % 2.30 %

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 of Dallas, FHLB of Atlanta and Federal Reserve Bank of Atlanta, Trustmark does not hold any other equity investment in a GSE.

At December 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.

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The following table presents Trustmark’s securities portfolio by amortized cost and estimated fair value and by credit rating, as determined by Moody’s, at December 31, 2021 ($ in thousands):

Amortized Cost Estimated Fair Value

Amount % Amount %

Securities Available for Sale

Securities Held to Maturity

(1)

Not rated issues primarily consist of Mississippi municipal general obligations.

The table above presenting the credit rating of Trustmark’s securities is formatted to show the securities according to the credit rating category, and not by category of the underlying security. At December 31, 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

At December 31, 2021, LHFS totaled $275.7 million, consisting of $191.2 million of residential real estate mortgage loans in the process of being sold to third parties and $84.5 million of Government National Mortgage Association (GNMA) optional repurchase loans. At December 31, 2020, LHFS totaled $447.0 million, consisting of $305.8 million of residential real estate mortgage loans in the process of being sold to third parties and $141.2 million of 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.

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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 and 2020 ($ in thousands):

December 31,

Amount % Amount %

Loans secured by real estate:

Other loans secured by real estate:

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.

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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,

Percentage of loans and lines for which Trustmark holds first lien 58.2 % 59.5 %

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 Mississippi market region because they are centrally analyzed and approved as part of a specific line of business located at Trustmark’s headquarters in Jackson, Mississippi.

The following table presents the LHFI composition by region at December 31, 2021 and reflects a diversified mix of loans by region ($ in thousands):

Total Alabama Florida Mississippi Tennessee Texas

LHFI Composition by Region

Loans secured by real estate:

Other loans secured by real estate:

Construction, Land Development and Other Land Loans by Region

Loans Secured by Nonfarm, Nonresidential (NFNR) Properties by Region

Nonowner-occupied:

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Owner-occupied:

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 of January 1, 2022. The following table provides information regarding Trustmark’s LHFI maturities by loan class and interest rate terms at December 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:

Other loans secured by real estate:

Loans with fixed interest rates:

Loans secured by real estate:

Other loans secured by real estate:

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Loans with variable interest rates:

Loans secured by real estate:

Other loans secured by real estate:

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.

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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.

At December 31, 2021, the ACL on LHFI was $99.5 million, a decrease of $17.8 million, or 15.2%, when compared with December 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% at December 31, 2021. This compares with an ACL to total LHFI of 1.19% at December 31, 2020, which was allocated to commercial LHFI at 1.20% and to consumer and home mortgage LHFI at 1.16%.

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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,

FASB ASU 2016-03 Adoption Adjustment:

Allowance for loan losses, acquired loans transfer — 815 —

Acquired loans ACL adjustment — 1,007 —

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 the Alabama and Tennessee market regions as well as an increase in recoveries in the Mississippi, Texas, Tennessee and Alabama market regions, partially offset by an increase in charge-offs in the Mississippi market region. The increase in charge-offs in the Mississippi 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,

Total net (charge-offs) recoveries $ 3,650 $ (1,867 ) $ (5,810 )

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The following table presents selected credit ratios for the periods presented ($ in thousands):

Years Ended December 31,

Nonaccrual LHFI to total LHFI 0.61 % 0.64 % 0.57 %

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 $ 396 $ 261 $ 135

Loans secured by nonfarm, nonresidential properties 0.04 % -0.12 % 0.01 %

Other loans secured by real estate — 0.01 % —

Net (charge-offs) recoveries $ 20 $ 60 $ 29

Other construction loans (2) 0.01 % 0.03 % —

Net (charge-offs) recoveries $ 47 $ 208 $ —

Loans secured by 1-4 family residential properties (2) — 0.01 % —

Net (charge-offs) recoveries $ (49 ) $ 160 $ —

Commercial and industrial loans 0.03 % 0.01 % -0.27 %

Net (charge-offs) recoveries $ 336 $ 179 $ (4,087 )

Net (charge-offs) recoveries $ 25 $ (215 ) $ (449 )

State and other political subdivision loans — — —

Net (charge-offs) recoveries $ — $ — $ —

Other commercial loans (2) 0.06 % — -0.49 %

Net (charge-offs) recoveries $ 274 $ 7 $ (2,442 )

(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.

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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. At December 31, 2021, the ACL on off-balance sheet credit exposures totaled $35.6 million compared to $38.6 million at December 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 at December 31, 2021 and 2020 ($ in thousands):

December 31,

Nonaccrual LHFI

Other real estate

Tennessee — 50

Loans Past Due 90 days or more

(1)

No obligation to repurchase.

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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

At December 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 to December 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.

At December 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 at December 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 December 31, 2021 decreased $7.1 million, or 60.9%, when compared with December 31, 2020, principally due to properties sold in Trustmark’s Mississippi, Alabama, and Tennessee market regions.

The following tables illustrate changes in other real estate by geographic market region for the periods presented ($ in thousands):

Total Alabama Florida Mississippi Tennessee Texas

Balance at end of period $ 4,557 $ — $ — $ 4,557 $ — $ —

Total Alabama Florida Mississippi Tennessee Texas

Total Alabama Florida Mississippi Tennessee Texas

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 the Alabama market region.

The following table illustrates other real estate by type of property at December 31, 2021 and 2020 ($ in thousands):

December 31,

Construction, land development and other land properties $ — $ 3,857

1-4 family residential properties 94 1,349

Nonfarm, nonresidential properties 4,463 6,445

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Acquired Loans

Trustmark’s loss share agreement with the FDIC covering the acquired covered loans secured by 1-4 family residential properties expired in 2021.

Upon adoption of FASB ASC Topic 326, which was effective for Trustmark on January 1, 2020 in accordance with the amendments in FASB ASU 2016-13, Trustmark elected to account for its existing acquired loans as PCD loans included within the LHFI portfolio. Trustmark elected to maintain pools of loans that were previously accounted for under FASB ASC Subtopic 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality,” and will continue to account for these pools as a unit of account. Loans are only removed from the existing loan pools if they are written off, paid off or sold. Upon adoption of FASB ASC Topic 326, the ACL was determined for each pool and added to the pool’s carrying value to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the noncredit premium or discount which will be amortized into interest income over the remaining life of the pool. Changes to the ACL after adoption of FASB ASC Topic 326 are recorded through the 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 on January 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 at December 31, 2021 compared to $14.049 billion at December 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 FDIC insurance limit of $250 thousand at December 31, 2021 are as follows ($ in thousands):

Three months or less $ 59,586

Over three months through six months 28,087

Over six months through twelve months 47,782

Total time deposits in excess of FDIC insurance limit $ 163,966

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 at December 31, 2021 compared to $164.5 million at December 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 at December 31, 2021 and 2020.

Other borrowings totaled $91.0 million at December 31, 2021, a decrease of $77.2 million, or 45.9%, when compared with $168.3 million at December 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.

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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.

At December 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 applicable IRS rules and regulations. Trustmark’s policy is to fund amounts that are sufficient to satisfy the annual minimum funding requirements and do not exceed the maximum that is deductible for federal income tax purposes. The actual amount of the contribution is determined annually based on the Continuing Plan’s funded status and return on plan assets as of the measurement date, which is December 31. For the plan year ending December 31, 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 ending December 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 is December 31. As a result of mergers prior to 2014, Trustmark became the administrator of small nonqualified supplemental retirement plans, for which the plan benefits were frozen prior to the merger dates.

At December 31, 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. At December 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.

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Capital Resources and Liquidity

At December 31, 2021, Trustmark’s total shareholders’ equity was $1.741 billion, an increase of $194 thousand when compared to December 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.

Regulatory Capital

Trustmark and TNB are subject to minimum risk-based capital and leverage capital requirements, as described in the section captioned “Capital Adequacy” included in Part I. Item 1. – Business of this report, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Trustmark’s and TNB’s minimum risk-based capital requirements include a capital conservation buffer of 2.500% at December 31, 2021 and 2020. AOCI is not included in computing regulatory capital. Trustmark has elected the five-year phase-in transition period (through December 31, 2024) related to adopting FASB ASU 2016-13 for regulatory capital purposes. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of Trustmark and TNB and limit Trustmark’s and TNB’s ability to pay dividends. At December 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 at December 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 since December 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. At December 31, 2021 and 2020,the carrying amount of the subordinated notes was $123.0 million and $122.9 million, respectively. The subordinated notes mature December 1, 2030 and are redeemable at Trustmark’s option under certain circumstances. For regulatory capital purposes, the subordinated notes qualified as Tier 2 capital for Trustmark at December 31, 2021 and 2020. Trustmark may utilize the full carrying value of the subordinated notes as Tier 2 capital until December 1, 2025 (five years prior to maturity). Beginning December 1, 2025, the subordinated notes will phase out of Tier 2 capital 20.0% each year until maturity.

In 2006, Trustmark enhanced its capital structure with the issuance of trust preferred securities. For regulatory capital purposes, the trust preferred securities qualified as Tier 1 capital at December 31, 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 at December 31, 2021 and 2020.

Dividends on Common Stock

Dividends per common share for each of the years ended December 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 of March 15, 2022, to shareholders of record on March 1, 2022.

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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 effective April 1, 2019 through March 30, 2020, Trustmark repurchased approximately 1.5 million shares its common stock valued at $47.2 million. Under the stock repurchase plan effective April 1, 2020 through December 31, 2021, Trustmark repurchased approximately 1.9 million shares of its common stock valued at $61.8 million. On December 7, 2021, the Board of Directors of Trustmark authorized a new stock repurchase program, effective January 1, 2022, under which $100.0 million of Trustmark’s outstanding common stock may be acquired through December 31, 2022. 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 during January 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 $2.064 billion held in an interest-bearing account at the FRBA at December 31, 2021, compared to $1.718 billion at December 31, 2020.

Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. At December 31, 2021, brokered sweep Money Market Deposit Account (MMDA) deposits totaled $29.6 million compared to $28.1 million at December 31, 2020.

At December 31, 2021 and 2020, Trustmark had no upstream federal funds purchased. Trustmark maintains adequate federal funds lines to provide sufficient short-term liquidity.

Trustmark maintains a relationship with the FHLB of Dallas, which provided no outstanding short-term or long-term advances at December 31, 2021 and 2020. Trustmark had no letters of credit outstanding with the FHLB of Dallas at December 31, 2021, compared to $600.0 million in outstanding letters of credit at December 31, 2020. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances with the FHLB of Dallas by $3.449 billion at December 31, 2021.

In addition, at December 31, 2021, Trustmark had no short-term and $97 thousand in long-term FHLB advances outstanding with the FHLB of Atlanta, which were acquired in the BancTrust merger, compared to $625 thousand in short-term and $116 thousand in

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long-term FHLB advances outstanding at December 31, 2020. Trustmark has non-member status and thus no additional borrowing capacity with the FHLB of Atlanta.

Additionally, Trustmark has the ability to leverage its unencumbered investment securities as collateral. At December 31, 2021, Trustmark had approximately $751.0 million available in unencumbered Treasury and agency securities compared to $560.0 million at December 31, 2020.

Another borrowing source is the Discount Window. At December 31, 2021, Trustmark had approximately $876.8 million available in collateral capacity at the Discount Window primarily from pledges of commercial and industrial LHFI, compared with $893.5 million at December 31, 2020.

Additionally, on March 15, 2020, in response to the COVID-19 pandemic, the FRB reduced reserve requirements for insured depository institutions to zero percent, which increased TNB’s available liquidity.

During the fourth quarter of 2020, Trustmark agreed to issue and sell $125.0 million aggregate principal amount of its 3.625% fixed-to-floating rate subordinated notes. The subordinated notes were sold at an underwriting discount of 1.2%, resulting in net proceeds to Trustmark of $123.5 million before deducting offering expenses. At December 31, 2021 and 2020,the carrying amount of the subordinated notes was $123.0 million and $122.9 million, respectively. The subordinated notes mature December 1, 2030 and are redeemable at Trustmark’s option under certain circumstances. The subordinated notes are unsecured obligations and are subordinated in right of payment to all of Trustmark’s existing and future senior indebtedness, whether secured or unsecured. The subordinated notes are obligations of Trustmark only and are not obligations of, and are not guaranteed by, any of its subsidiaries, including TNB. Trustmark intends to use the net proceeds for general corporate purposes.

During 2006, Trustmark completed a private placement of $60.0 million of trust preferred securities through a newly formed Delaware trust affiliate, the Trust. The trust preferred securities mature September 30, 2036 and are redeemable at Trustmark’s option. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase $61.9 million in aggregate principal amount of Trustmark’s junior subordinated debentures.

The Board of Directors of Trustmark currently has the authority to issue up to 20.0 million preferred shares with no par value. The ability to issue preferred shares in the future will provide Trustmark with additional financial and management flexibility for general corporate and acquisition purposes. At December 31, 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 of December 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 of December 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.

On March 5, 2021, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, confirmed that the publication of most LIBOR term rates will end on June 20, 2023 (excluding one-week U.S. LIBOR and two-month U.S. LIBOR, the publication of which ended on December 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;

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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 at December 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 at December 31, 2020.

Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting under GAAP. The total notional amount of these derivative instruments was $409.5 million at December 31, 2021 compared to $326.5 million at December 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 ended December 31, 2021, compared to a net positive ineffectiveness of $7.8 million for the year ended December 31, 2020 and a net negative ineffectiveness of $11.5 million for the year ended December 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. The Chicago Mercantile Exchange rules legally characterize variation margin collateral payments made or received for centrally cleared interest rate swaps as settlements rather than collateral. As a result, centrally cleared interest rate swaps included in other assets and other liabilities are presented on a net basis in the accompanying consolidated balance sheets. At December 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 at December 31, 2020.

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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.

At December 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. At December 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 at December 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. At December 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 at December 31, 2020. At both December 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 at December 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market/Interest Rate Risk Management

The primary purpose in managing interest rate risk is to invest capital effectively and preserve the value created by the core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.

Financial simulation models are the primary tools used by Management’s Asset/Liability Committee to measure interest rate exposure. Using a wide range of scenarios, Management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Trustmark’s balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of Trustmark’s balance sheet, resulting from both strategic plans and customer behavior. In addition, the model incorporates Management’s assumptions and expectations regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates.

Based on the results of the simulation models using static balances, the table below summarizes the effect various one-year interest rate shift scenarios would have on net interest income compared to a base case, flat scenario at December 31, 2021 and 2020. At December 31, 2021 and 2020, the impact of a 200-basis point drop scenario was not calculated due to the low interest rate environment.

Estimated % Change

in Net Interest Income

Management cannot provide any assurance about the actual effect of changes in interest rates on net interest income. The estimates provided do not include the effects of possible strategic changes in the balances of various assets and liabilities throughout 2022 or additional actions Trustmark could undertake in response to changes in interest rates. Management will continue to prudently manage the balance sheet in an effort to control interest rate risk and maintain profitability over the long term.

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Another component of interest rate risk management is measuring the economic value-at-risk for a given change in market interest rates. The economic value-at-risk may indicate risks associated with longer-term balance sheet items that may not affect net interest income at risk over shorter time periods. Trustmark uses computer-modeling techniques to determine the present value of all asset and liability cash flows (both on- and off-balance sheet), adjusted for prepayment expectations, using a market discount rate. The economic value of equity (EVE), also known as net portfolio value, is defined as the difference between the present value of asset cash flows and the present value of liability cash flows. The resulting change in EVE in different market rate environments, from the base case scenario, is the amount of EVE at risk from those rate environments.

The following table summarizes the effect that various interest rate shifts would have on net portfolio value at December 31, 2021 and 2020. Based upon quarter-end current and implied market rates, scenarios reflecting lower rates could result in negative interest rates. The U.S. has never experienced an interest rate environment where the FRB has a negative interest rate policy. While the impact of negative interest rates on earnings-at-risk would vary by scenario, a parallel shift downward would be expected to negatively impact net interest income. However, in a negative interest rate environment, the modeling assumptions used for certain assets and liabilities require additional management judgment and therefore, the actual outcomes may differ from the modeled assumptions. At December 31, 2021 and 2020, the results of the 100-basis point drop scenario and the 200-basis point drop scenario were excluded from the table below due to the low interest rate environment.

Estimated % Change

in Net Portfolio Value

Trustmark determines the fair value of the MSR using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income and other ancillary income such as late fees. Management reviews all significant assumptions quarterly. Mortgage loan prepayment speeds, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.

By way of example, an increase in either the prepayment speed or discount rate assumption will result in a decrease in the fair value of the MSR, while a decrease in either assumption will result in an increase in the fair value of the MSR. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and discount rates. These fluctuations can be rapid and may continue to be significant. Therefore, estimating prepayment speed and/or discount rates within ranges that market participants would use in determining the fair value of the MSR requires significant management judgment.

At December 31, 2021, the MSR fair value was $87.7 million, compared to $66.5 million at December 31, 2020. The impact on the MSR fair value of a 10% adverse change in prepayment speeds or a 100 basis point increase in discount rates at December 31, 2021, would be a decline in fair value of approximately $4.4 million and $3.2 million, respectively, compared to a decline in fair value of approximately $4.3 million and $2.4 million, respectively, at December 31, 2020. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of Trustmark Corporation

Jackson, Mississippi

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Trustmark Corporation and subsidiaries (the "Corporation") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Corporation has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Corporation adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

Basis for Opinions

The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the

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company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.

Allowance for Credit Losses, LHFI Reasonable and Supportable Forecasts