ITEM 1A. RISK FACTORS
Trustmark and its subsidiaries could be adversely impacted by various risks and uncertainties, which are difficult to predict. As a financial institution, Trustmark has significant exposure to market risks, including interest rate risk, liquidity risk and credit risk. This section includes a description of the risks, uncertainties and assumptions identified by Management that could, individually or in combination, materially affect Trustmark’s financial condition and results of operations, as well as the value of Trustmark’s financial
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instruments in general, and Trustmark common stock, in particular. Additional risks and uncertainties that Management currently deems immaterial or is unaware of may also impair Trustmark’s financial condition and results of operations. This report is qualified in its entirety by the risk factors that are identified below.
Risks Related to Trustmark’s Business
Interest Rate Risks
Trustmark’s largest source of revenue (net interest income) is subject to interest rate risk.
Trustmark’s profitability depends to a large extent on net interest income, which is the difference between income on interest-earning assets, such as loans and investment securities, and expense on interest-bearing liabilities, such as deposits and borrowings. Trustmark is exposed to interest rate risk in its core banking activities of lending and deposit taking, since assets and liabilities reprice at different times and by different amounts as interest rates change. Trustmark is unable to predict changes in market interest rates, which are affected by many factors beyond Trustmark’s control, including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets. Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of actions by the FRB. Market interest rates have declined to historical lows. On March 3, 2020, the ten-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds rate by 100 basis points to a range of 0.00% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. The FRB reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. Trustmark expects that these reductions in interest rates, especially if prolonged, could adversely affect its net interest income and margins and its profitability.
Financial simulation models are the primary tools used by Trustmark to measure interest rate exposure. Using a wide range of scenarios, Management is provided with extensive information on the potential impact to net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Trustmark’s balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of Trustmark’s balance sheet, resulting from both strategic plans and customer behavior. In addition, the model incorporates Management’s assumptions and expectations regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates. Trustmark’s simulation model using static balances at December 31, 2020, estimated that in the event of a hypothetical 200 basis point increase in interest rates, net interest income may increase 20.4%, while a hypothetical 100 basis point increase in interest rates, may increase net interest income 10.8%. In the event of a hypothetical 100 basis point decrease in interest rates using static balances at December 31, 2020, it is estimated net interest income may decrease by 5.7%.
Net interest income is Trustmark’s largest revenue source, and it is important to discuss how Trustmark’s interest rate risk may be influenced by the various factors shown below:
Financial instruments do not respond in a parallel fashion to rising or falling interest rates. This causes asymmetry in the magnitude of changes in net interest income, net economic value and investment income resulting from the hypothetical increases and decreases in interest rates. Therefore, Management monitors interest rate risk and adjusts Trustmark’s investment, funding and hedging strategies to mitigate adverse effects of interest rate shifts on Trustmark’s balance sheet.
Trustmark utilizes derivative contracts to hedge the mortgage servicing rights (MSR) in order to offset changes in fair value resulting from changes in interest rate environments. In spite of Trustmark’s due diligence in regard to these hedging strategies, significant risks are involved that, if realized, may prove such strategies to be ineffective, which could adversely affect Trustmark’s financial condition or results of operations. Risks associated with these strategies include the risk that counterparties in any such derivative and
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other hedging transactions may not perform; the risk that these hedging strategies rely on Management’s assumptions and projections regarding these assets and general market factors, including prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, and that these assumptions and projections may prove to be incorrect; the risk that these hedging strategies do not adequately mitigate the impact of changes in interest rates, prepayment speeds or other forecasted inputs to the hedging model; and the risk that the models used to forecast the effectiveness of hedging instruments may project expectations that differ from actual results. In addition, increased regulation of the derivative markets may increase the cost to Trustmark to implement and maintain an effective hedging strategy.
Trustmark closely monitors the sensitivity of net interest income and investment income to changes in interest rates and attempts to limit the variability of net interest income as interest rates change. Trustmark makes use of both on- and off-balance sheet financial instruments to mitigate exposure to interest rate risk.
Trustmark may be adversely affected by the transition from the London Interbank Offered Rate (LIBOR) as a reference rate.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after the end of 2021 it would no longer compel banks to submit the rates required to calculate LIBOR. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after the end of 2021. The Alternative Reference Rates Committee (ARRC), a committee of U.S. financial market participants, has proposed the Secured Overnight Financing Rate (SOFR) as the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. However, there are conceptual and technical differences between LIBOR and SOFR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. While the benchmark provider for US$ LIBOR (which is typically the benchmark that Trustmark uses) has announced that it intends to provide the benchmark through June 2023, Trustmark continues to work to transition to SOFR by the end of 2021.
Trustmark has a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change Trustmark’s market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Trustmark has organized an internal initiative to identify operational and contractual best practices, assess its risks, manage the transition, facilitate communication with its customers, and monitor the impacts. Trustmark cannot predict what the ultimate impact of the transition from LIBOR will be; however, failure to adequately manage the transition could have a material adverse effect on Trustmark’s business, financial condition, results of operations and reputation with its customers.
Credit and Lending Risks
Trustmark is subject to lending risk, which could impact the adequacy of the allowance for credit losses and results of operations.
There are inherent risks associated with Trustmark’s lending activities. While the housing and real estate markets have shown continued improvement, they remain at depressed levels in certain regions. If trends in the housing and real estate markets were to revert or further decline below recession levels, Trustmark may experience higher than normal delinquencies and credit losses. Moreover, if the United States economy returns to a recessionary state, Management expects that it could severely affect economic conditions in Trustmark’s market areas and that Trustmark could experience significantly higher delinquencies and credit losses. In addition, bank regulatory agencies periodically review Trustmark’s allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further charge-offs, based on judgments different from those of Management. As a result, Trustmark may elect, or be required, to make further increases in its provision for credit losses in the future, particularly if economic conditions deteriorate.
Additionally, Trustmark may rely on information furnished by or on behalf of customers and counterparties in deciding whether to extend credit or enter into other transactions. This information could include financial statements, credit reports, business plans, and other information. Trustmark may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other information could have a material adverse impact on Trustmark’s business, financial condition, and results of operations.
Declines in asset values may result in credit losses and adversely affect the value of Trustmark’s investments.
Trustmark maintains an investment portfolio that includes, among other asset classes, obligations of states and municipalities, agency debt securities and agency mortgage-related securities. The market value of investments in Trustmark’s investment portfolio may be
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affected by factors other than interest rates or the underlying performance of the issuer of the securities, such as ratings downgrades, adverse changes in the business climate and a lack of pricing information or liquidity in the secondary market for certain investment securities. In addition, government involvement or intervention in the financial markets or the lack thereof or market perceptions regarding the existence or absence of such activities could affect the market and the market prices for these securities.
On a quarterly basis, Trustmark evaluates investments and other assets for expected credit losses. As of December 31, 2020, gross unrealized losses on securities for which an allowance for credit losses has not been recorded totaled $1.9 million. Trustmark may be required to record credit loss expense if these investments suffer a decline in value that is the result of a credit loss. If Trustmark determines that a credit loss exists, the credit portion of the allowance would be measured using a discounted cash flow (DCF) analysis using the effective interest rate as of the security’s purchase date. The amount of credit loss Trustmark may record is limited to the amount by which the amortized cost exceeds the fair value, which could have a material adverse effect on results of operations in the period in which a credit loss, if any, occurs.
Liquidity Risk
Trustmark is subject to liquidity risk, which could disrupt its ability to meet its financial obligations.
Liquidity refers to Trustmark’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs and other corporate purposes. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ or when assets cannot be liquidated at fair market value as needed. Trustmark obtains funding through deposits and various short-term and long-term wholesale borrowings, including federal funds purchased and securities sold under repurchase agreements, the Federal Reserve Discount Window (Discount Window) and Federal Home Loan Bank (FHLB) advances. Any significant restriction or disruption of Trustmark’s ability to obtain funding from these or other sources could have a negative effect on Trustmark’s ability to satisfy its current and future financial obligations, which could materially affect Trustmark’s financial condition or results of operations.
In addition to the risk that one or more of the funding sources may become constrained due to market conditions unrelated to Trustmark, there is the risk that Trustmark’s credit profile may decline such that one or more of these funding sources becomes partially or wholly unavailable to Trustmark.
Trustmark attempts to quantify such credit event risk by modeling bank specific and systemic scenarios that estimate the liquidity impact. Trustmark estimates such impact by attempting to measure the effect on available unsecured lines of credit, available capacity from secured borrowing sources and securitizable assets. To mitigate such risk, Trustmark maintains available lines of credit with the Federal Reserve Bank of Atlanta and the FHLB of Dallas that are secured by loans and investment securities. Management continuously monitors Trustmark’s liquidity position for compliance with internal policies.
External and Market-Related Risks
Trustmark’s business may be adversely affected by conditions in the financial markets and economic conditions in general.
On March 11, 2020, the WHO declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 pandemic has adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many regions, including the geographical area in which Trustmark operates and industries in which Trustmark regularly extends credit. Doubts surrounding the near-term direction of global markets, and the potential impact of these trends on the United States economy, are expected to persist for the near term. While Trustmark’s customer base is wholly domestic, international economic conditions affect domestic conditions, and thus may have an impact upon Trustmark’s financial condition or results of operations. While domestic demand for loans has improved, further meaningful gains will depend on sustained economic growth. Strategic risk, including threats to business models from rising rates and modest economic growth, remains high. Management’s ability to plan, prioritize and allocate resources in this new environment will be critical to Trustmark’s ability to sustain earnings that will attract capital. Because of the complexities presented by current economic conditions, Management will continue to be challenged in identifying alternative sources of revenue, prudently diversifying assets, liabilities and revenue and effectively managing the costs of compliance.
Interest rates remain within a historically low level that, when combined with the extended period of lower interest rates in recent years, continue to place pressure on net interest margins for Trustmark (as well as its competitors). Any further declines in interest rates will place additional competitive pressure on net interest margins. Conversely, increases in interest rates will place competitive pressures on the deposit cost of funds. It is not possible to predict the pace and magnitude of changes to interest rates, or the impact rate changes will have on Trustmark’s results of operations.
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Despite recent optimism resulting from stabilization in the housing sector, improvement of unemployment data and credit quality improvement, Trustmark does not assume that current uncertain conditions in the economy will improve significantly in the near future. A further weakened economy could affect Trustmark in a variety of substantial and unpredictable ways. In particular, Trustmark may face the following risks in connection with these events:
It is difficult to predict the extent to which these challenging economic conditions will persist or whether recent progress in the economic recovery will instead shift to the potential for further decline. If the economy does weaken in the future, it is uncertain how Trustmark’s business would be affected and whether Trustmark would be able successfully to mitigate any such effects on its business. Accordingly, these factors in the United States (and, indirectly, global) economy could have a material adverse effect on Trustmark’s financial condition and results of operations.
For a further discussion of the potential risks posed by the COVID-19 pandemic, see the risk factors under the section captioned “Risks Related to the COVID-19 Pandemic” below.
Trustmark operates in a highly competitive financial services industry.
Trustmark faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have greater financial resources. Such competitors primarily include banks, as well as community banks operating nationwide and regionally within the various markets in which Trustmark operates. Trustmark also faces competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. Additionally, fintech developments, such as blockchain and other distributed ledger technologies, have the potential to disrupt the financial industry and change the way banks do business. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.
Some of Trustmark’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many of Trustmark’s larger competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than Trustmark.
Trustmark’s ability to compete successfully depends on a number of factors, including: the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets; the ability to continue to expand Trustmark’s market position through organic growth and acquisitions; the scope, relevance and pricing of products and services offered to meet customer needs and demands; the rate at which Trustmark introduces new products and services relative to its competitors; and industry and general economic trends. Failure to perform in any of these areas could significantly weaken Trustmark’s competitive position, which could adversely affect Trustmark’s financial condition or results of operations.
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The soundness of other financial institutions could adversely affect Trustmark.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or questions or rumors about, one or more financial services institutions or the financial services industry in general, could lead to market-wide liquidity problems, which could, in turn, lead to defaults or losses by Trustmark and by other institutions. Trustmark has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, mutual funds, and other institutional clients. Many of these transactions expose Trustmark to credit risk in the event of default of its counterparty or client. In addition, Trustmark’s credit risk may be exacerbated when the collateral it holds cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure owed to Trustmark. Losses related to these credit risks could materially and adversely affect Trustmark’s results of operations.
Compliance and Regulatory Risks
Trustmark is subject to extensive government regulation and supervision and possible enforcement and other legal actions.
Trustmark, primarily through TNB and certain nonbank subsidiaries, is subject to extensive federal and state regulation and supervision, which vests a significant amount of discretion in the various regulatory authorities. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These regulations and supervisory guidance affect Trustmark’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations or regulatory policies or supervisory guidance, including changes in interpretation or implementation or statutes, regulations, policies and supervisory guidance, could affect Trustmark in substantial and unpredictable ways. Such changes could subject Trustmark to additional costs, limit the types of financial services and products Trustmark may offer and/or increase the ability of nonbanks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the revocation of a banking charter, civil money penalties, other sanctions by regulatory agencies and/or reputational damage. In this regard, government authorities, including bank regulatory agencies, continue to pursue enforcement agendas with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures. Any of the foregoing could have a material adverse effect on Trustmark’s financial condition or results of operations.
Trustmark is subject to stringent capital requirements.
Under the regulatory capital rules of the FRB, OCC, and FDIC that implement a set of capital requirements issued by the Basel Committee on Banking Supervision known as Basel III, Trustmark and TNB are required to maintain a common equity Tier 1 capital to risk-weighted assets ratio of at least 7.0% (a minimum of 4.5% plus a capital conservation buffer of 2.5%), a Tier 1 capital to risk-weighted assets ratio of at least 8.5% (a minimum of 6.0% plus a capital conservation buffer of 2.5%), a total capital to risk-weighted assets ratio of at least 10.5% (a minimum of 8.0% plus a capital conservation buffer of 2.5%) and a leverage ratio of Tier 1 capital to total consolidated assets of at least 4.0%. In addition, for TNB to be “well-capitalized” under the banking agencies’ prompt corrective action framework, it must have a common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 capital ratio of at least 8.0%, a total capital ratio of at least 10.0% and a leverage ratio of at least 5.0%, and must not be subject to any written agreement, order or capital directive, or prompt corrective action directive issued by its primary federal regulator to meet and maintain a specific capital level for any capital measure.
The capital rules also include stringent criteria for capital instruments to qualify as Tier 1 or Tier 2 capital. For instance, the rules effectively disallow newly-issued trust preferred securities to be a component of a holding company’s Tier 1 capital. Trustmark will continue to count $60.0 million in outstanding trust preferred securities issued by the Trust as Tier 1 capital up to the regulatory limit, as permitted by a grandfather provision in the capital rules, but this grandfather provision may cease to apply if Trustmark grows to $15 billion or more in total assets as a result of an acquisition of a depository institution holding company.
Additionally, the FASB Accounting Standard Update (ASU) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which implements CECL as a new impairment model based on expected credit losses, requires Trustmark to recognize all expected credit losses over the life of a loan based on historical experience, current conditions and reasonable and supportable forecasts. CECL generally is expected to result in earlier recognition of credit losses, which would increase reserves and decrease capital. Additionally, the CECL model could be materially impacted by changes in current and forecasted macroeconomic conditions. It is not possible to predict the timing or magnitude of changes in macroeconomic conditions or the impact such changes could have on Trustmark’s allowance for credit losses; however, material changes in the allowance for credit losses could have a material impact on Trustmark’s reserves and capital.
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The regulatory capital rules applicable to Trustmark and TNB may continue to evolve as a result of new requirements established by the Basel Committee on Banking Supervision or legislative, regulatory or accounting changes in the United States. Management cannot predict the effect that any changes to current capital requirements would have on Trustmark and TNB.
Trustmark’s use of third-party service providers and Trustmark’s other ongoing third-party business relationships are subject to increasing regulatory requirements and attention.
Trustmark regularly uses third-party service providers and subcontractors as part of its business. Trustmark also has substantial ongoing business relationships with partners and other third-parties and relies on certain third-parties to provide products and services necessary to maintain day-to-day operations. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by regulators, including the FRB, OCC, CFPB and FDIC. Under regulatory guidance, Trustmark is required to apply stringent due diligence, conduct ongoing monitoring and maintain effective control over third-party service providers and subcontractors and other ongoing third-party business relationships. Trustmark expects that the regulators will hold Trustmark responsible for deficiencies in its oversight and control of its third-party relationships and in the performance of the parties with which Trustmark has these relationships. Trustmark maintains a system of policies and procedures designed to ensure adequate due diligence is performed and to monitor vendor risks. While Trustmark believes these policies and procedures effectively mitigate risk, if the regulators conclude that Trustmark has not exercised adequate oversight and control over third-party service providers and subcontractors or other ongoing third-party business relationships or that such third-parties have not performed appropriately, Trustmark could be subject to enforcement actions, including civil monetary penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation.
Operational Risks
There may be risks resulting from the extensive use of models in Trustmark’s business.
Trustmark relies on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, assessing potential acquisition opportunities, developing presentations made to market analysts and others, creating loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, calculating regulatory capital levels and estimating the fair value of financial instruments and balance sheet items. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If models for determining interest rate risk and asset-liability management are inadequate, Trustmark may incur increased or unexpected losses upon changes in market interest rates or other market measures. If models for determining expected credit losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If models to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what Trustmark could realize upon sale or settlement of such financial instruments. Any such failure in the analytical or forecasting models could have a material adverse effect on Trustmark’s financial condition or results of operations.
Also, information Trustmark provides to its regulators based on poorly designed or implemented models could be inaccurate or misleading. Certain decisions that the regulators make, including those related to capital distributions and dividends to Trustmark’s shareholders, could be adversely affected due to the regulator’s perception that the quality of Trustmark’s models used to generate the relevant information is insufficient.
Trustmark could be required to write down goodwill and other intangible assets.
If Trustmark consummates an acquisition, a portion of the purchase price would generally be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. At December 31, 2020, goodwill and other identifiable intangible assets were $392.7 million. Under current accounting standards, if Trustmark determines goodwill or intangible assets are impaired, Trustmark would be required to write down the carrying value of these assets. Trustmark’s annual goodwill impairment evaluation performed during the fourth quarter of 2020 indicated no impairment of goodwill for any reporting segment. Management cannot provide assurance, however, that Trustmark will not be required to take an impairment charge in the future. Any impairment charge would have an adverse effect on Trustmark’s shareholders’ equity and financial condition and could cause a decline in Trustmark’s stock price.
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Trustmark holds a significant amount of other real estate and may acquire and hold significant additional amounts, which could lead to increased operating expenses and vulnerability to additional declines in real property values.
As business necessitates, Trustmark forecloses on and takes title to real estate serving as collateral for loans. At December 31, 2020, Trustmark held $11.7 million of other real estate, compared to $29.2 million at December 31, 2019. The amount of other real estate held by Trustmark may increase in the future as a result of, among other things, business combinations, increased uncertainties in the housing market or increased levels of credit stress in residential real estate loan portfolios. Increased other real estate balances could lead to greater expenses as Trustmark incurs costs to manage, maintain and dispose of real properties as well as to remediate any environmental cleanup costs incurred in connection with any contamination discovered on real property on which Trustmark has foreclosed and to which Trustmark has taken title. As a result, Trustmark’s earnings could be negatively affected by various expenses associated with other real estate owned, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with real property ownership, as well as by the funding costs associated with other real estate assets. The expenses associated with holding a significant amount of other real estate could have a material adverse effect on Trustmark’s financial condition or results of operations.
If Trustmark is required to repurchase a significant number of mortgage loans that it had previously sold, such repurchases could negatively affect earnings.
One of Trustmark’s primary business operations is mortgage banking under which residential mortgage loans are sold in the secondary market under agreements that contain representations and warranties related to, among other things, the origination and characteristics of the mortgage loans. Trustmark may be required to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the anticipated economic benefits of a loan if it is determined that the loan sold was in violation of representations or warranties made by Trustmark at the time of the sale, herein referred to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that had missing or insufficient file documentation, loans that do not meet investor guidelines, loans in which the appraisal does not support the value and/or loans obtained through fraud by the borrowers or other third parties. Generally, putback requests may be made until the loan is paid in full. However, mortgage loans delivered to the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) on or after January 1, 2013 are subject to the Lending and Selling Representations and Warranties Framework updated in May 2014, which provides certain instances in which FNMA and FHLMC will not exercise their remedies, including a putback request, for breaches of certain selling representations and warranties, such as payment history and quality control review.
Changes in retail distribution strategies and consumer behavior may adversely impact Trustmark’s investments in premises, equipment, technology and other assets and may lead to increased expenditures to change its retail distribution channel.
Trustmark has significant investments in bank premises and equipment for its branch network. Advances in technology such as ecommerce, telephone, internet and mobile banking, and in-branch self-service technologies including interactive teller machines and other equipment, as well as an increasing customer preference for these other methods of accessing Trustmark’s products and services, could decrease the value of its branch network, technology, or other retail distribution physical assets and may cause Trustmark to change its retail distribution strategy, close and/or sell certain branches or parcels of land held for development and restructure or reduce its remaining branches and work force. These actions could lead to losses on these assets or could adversely impact the carrying value of any long-lived assets and may lead to increased expenditures to renovate, reconfigure or close a number of Trustmark’s remaining branches or to otherwise reform its retail distribution channel.
Trustmark may experience disruptions of its operating systems or breaches in its information system security.
Trustmark is dependent upon communications and information systems to conduct business as such systems are used to manage virtually all aspects of Trustmark’s business. Trustmark’s operations rely on the secure processing, storage and transmission of confidential and other information within its computer systems and networks. Trustmark has taken protective measures, which are continuously monitored and modified as warranted; however, Trustmark’s computer systems, software and networks may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond Trustmark’s control. There could be sudden increases in customer transaction volume; electrical, telecommunications or other major physical infrastructure outages; natural disasters; and events arising from local or larger scale political or social matters, including terrorist acts. Further, Trustmark’s operational and security systems and infrastructure may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious codes and cyber-attacks that could affect their information system security. If one or more of these events were to occur, Trustmark’s or its customers’ confidential and other information would be jeopardized, or such an event could cause interruptions or malfunctions in Trustmark’s or its customers’ or counterparties’ operations. Trustmark may be required to expend significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities or other exposures in its computer systems and networks, and Trustmark may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by Trustmark. Any such losses, which
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may be difficult to detect, could adversely affect Trustmark’s financial condition or results of operations. In addition, the occurrence of such a loss could expose Trustmark to reputational risk, the loss of customer business and additional regulatory scrutiny.
Security breaches in Trustmark’s internet and mobile banking activities (myTrustmarkSM) could further expose Trustmark to possible liability and reputational risk. Any compromise in security could deter customers from using Trustmark’s internet and mobile banking services that involve the transmission of confidential information. Trustmark relies on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. However, these precautions may not protect Trustmark’s systems from compromise or breaches of security, which could result in significant legal liability and significant damage to Trustmark’s reputation and business.
Trustmark relies upon certain third-party vendors to provide products and services necessary to maintain day-to-day operations. Accordingly, Trustmark’s operations are exposed to the risk that these vendors might not perform in accordance with applicable contractual arrangements or service level agreements or that the security of the third-party vendors’ computer systems, software and networks may be vulnerable to compromises that could impact information system security. Trustmark maintains a system of policies and procedures designed to monitor vendor risks. While Trustmark believes these policies and procedures effectively mitigate risk, the failure of an external vendor to perform in accordance with applicable contractual arrangements or service level agreements or any compromise in the security of an external vendor’s information systems could be disruptive to Trustmark’s operations, which could have a material adverse effect on its financial condition or results of operations.
Trustmark must utilize new technologies to deliver its products and services, which could require significant resources and expose Trustmark to additional risks, including cyber-security risks.
In order to deliver new products and services and to improve the productivity of existing products and services, the banking industry relies on rapidly evolving technologies. Trustmark continues to invest in technology to facilitate the ability of its customers to engage in financial transactions, and otherwise enhance the customer experience with respect to its products and services. Trustmark’s ability to effectively utilize new technologies to address customer needs and create operating efficiencies could materially affect future prospects. Management cannot provide any assurances that Trustmark will be successful in utilizing such new technologies. Incorporation of new products and services, such as internet and mobile banking services, may require significant resources and expose Trustmark to additional risks, including cyber-security risks.
Trustmark’s controls and procedures may fail or be circumvented.
Trustmark’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures are based in part on assumptions, and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of Trustmark’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on Trustmark’s business, financial condition and results of operations.
Trustmark may be subject to increased claims and litigation, which could result in legal liability and reputational damage.
Trustmark has been named from time to time as a defendant in litigation relating to its businesses and activities. Litigation may include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages.
In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders.
Substantial legal liability against Trustmark, including its subsidiaries, could materially adversely affect Trustmark’s business, financial condition or results of operations, or cause significant harm to its reputation.
Damage to Trustmark’s reputation could have a significant negative impact on Trustmark’s business.
Trustmark’s ability to attract and retain customers, clients, investors, and highly-skilled management and employees is affected by its reputation. Public perception of the financial services industry declined as a result of the economic downturn and related government response. Trustmark faces increased public and regulatory scrutiny resulting from the financial crisis and economic downturn. Significant harm to Trustmark’s reputation can also arise from other sources, including employee misconduct, actual or perceived unethical behavior, litigation or regulatory outcomes, failing to deliver minimum or required standards of service and quality, compliance failures, disclosure of confidential information, significant or numerous failures, interruptions or breaches of its information systems and the activities of its clients, customers and counterparties, including vendors. Actions by the financial services industry generally or by certain members or individuals in the industry may have a significant adverse effect on Trustmark’s
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reputation. Trustmark could also suffer significant reputational harm if it fails to properly identify and manage potential conflicts of interest. Management of potential conflicts of interests has become increasingly complex as Trustmark expands its business activities through more numerous transactions, obligations and interests with and among its clients. The actual or perceived failure to adequately address conflicts of interest could affect the willingness of clients to deal with Trustmark, which could adversely affect Trustmark’s businesses.
Risk Related to Acquisition Activity
Potential acquisitions by Trustmark may disrupt Trustmark’s business and dilute shareholder value.
Trustmark continuously monitors the market for merger or acquisition opportunities and, depending upon business and other considerations, may elect to pursue one or more such opportunities in the future. Any such merger or acquisition candidate would need to have a similar culture to Trustmark, have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including: potential exposure to unknown or contingent liabilities of the target company, exposure to potential asset quality issues of the target company, difficulty and expense of integrating the operations and personnel of the target company, potential disruption to Trustmark’s business, potential diversion of Trustmark’s Management’s time and attention, the possible loss of key employees and customers of the target company, difficulty in estimating the value of the target company and potential changes in banking or tax laws or regulations that may affect the target company. Acquisitions may involve the payment of a premium over book and market values, and, therefore, some dilution of Trustmark’s tangible book value and net income per share of common stock may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue projections, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on Trustmark’s financial condition or results of operations.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic and actions taken to mitigate its spread and economic impact, or an outbreak of another highly infectious or contagious disease, could adversely affect Trustmark’s business activities, financial condition and results of operations.
The spread of a highly infectious or contagious disease, such as COVID-19, and actions taken by governmental and public health authorities to mitigate its spread, such as instituting quarantines, travel restrictions and “shelter in place” orders, have lead to severe disruptions in the United States economy, which could continue to disrupt the business, activities and operations of Trustmark’s customers, as well as its business and operations. Moreover, since the beginning of January 2020, the COVID-19 pandemic has caused significant disruption in the financial markets both globally and in the United States.
Trustmark’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. A significant increase in the number of COVID-19 cases, or an outbreak of another highly infectious or contagious disease, may result in a significant decrease in business and/or cause Trustmark’s customers to be unable to meet existing payment or other obligations, particularly in the event of a significant increase in COVID-19 cases or an outbreak of an infectious disease in Trustmark’s market regions. Although Trustmark maintains contingency plans for pandemic outbreaks, a significant increase in COVID-19 case above current levels, or an outbreak of another contagious disease, could also negatively impact the availability of key personnel necessary to conduct its business activities. Such an increase or outbreak could also negatively impact the business and operations of third-party service providers who perform critical services for Trustmark. If COVID-19, or another highly infectious or contagious disease, spreads or the response to contain COVID-19 is unsuccessful, Trustmark could continue to experience a material adverse effect to its business, financial condition, and results of operations.
Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of actions by the FRB that affect Trustmark. Market interest rates have declined significantly. On March 3, 2020, the ten-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds rate by 100 basis points to a range of 0.00% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. The FRB reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. Trustmark expects that these reductions in interest rates, especially if prolonged, could adversely affect its net interest income and margins and its profitability. In addition, the federal banking agencies have also issued guidance encouraging financial institutions to prudently work with affected borrowers and have providing relief from reporting loan classifications due to modifications related to the COVID-19 pandemic. Pursuant to such guidance and related provisions of the CARES Act, Trustmark is not treating certain COVID-19-related loan modifications as TDRs. For additional details regarding COVID-related loan modification, see the section captioned “COVID-19 Update – Loan Concessions” included in Part II. Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report. Finally, in response to the COVID-19 pandemic, the FRB established numerous emergency programs, including various liquidity facilities, intended to mitigate disruptions
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to certain financial markets. The expiration or termination of any of these FRB emergency programs could result in further financial market disruptions, and adversely affect Trustmark’s business.
In addition, the spread of COVID-19 has caused Trustmark to modify its business practices, including the implementation of temporary branch and office closures. Trustmark may take further actions as may be required by government authorities or that it determines are in the best interests of its employees, customers and business partners. Although Trustmark has initiated a remote work protocol and restricted business travel in its workforce, if significant portions of its workforce, including key personnel, are unable to work effectively because of illness, government actions or other restrictions in connection with the pandemic, the impact of the pandemic on Trustmark’s business could be exacerbated. Further, increased levels of remote access may create additional opportunities for cybercriminals to attempt to exploit vulnerabilities, and Trustmark’s employees may be more susceptible to phishing and social engineering attempts in the remote environment. In addition, Trustmark’s technological resources may be strained due to the number of remote users.
The spread of COVID-19 and its impact on the economy heightens the risk associated with many of the risk factors described in this report, such as those related to credit losses and Trustmark’s reliance on its executives and third-party service providers, for example. The extent to which the COVID-19 pandemic will impact Trustmark’s business, results of operations and financial condition, as well as its regulatory capital, liquidity ratios and stock price, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
As a participating lender in the SBA’s PPP, Trustmark is subject to additional risks of litigation from its customers or other parties regarding TNB’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
Trustmark is participating as an eligible lender under the PPP. Since the opening of the PPP, several financial institutions have been subject to litigation regarding the processes and procedures used in processing applications for the PPP. Trustmark may be exposed to the risk of similar litigation, from both customers and non-customers that approached TNB regarding PPP loans, regarding its processes and procedures used in processing applications for the PPP. In addition to litigation, Trustmark’s participation in the PPP exposes Trustmark to the possibility of governmental investigations, enforcement actions and negative publicity. If any such litigation, enforcement action or other action is filed against Trustmark and is not resolved in a manner favorable to Trustmark, it may result in significant financial liability or adversely affect Trustmark’s reputation. In addition, litigation and investigations can be costly, regardless of outcome. Any financial liability, litigation and investigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on Trustmark’s business, financial condition and results of operations.
Trustmark also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by TNB, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by TNB, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from Trustmark.
General Risk Factors
The stock price of financial institutions, like Trustmark, can be volatile.
The volatility in the stock prices of companies in the financial services industry, such as Trustmark, may make it more difficult for shareholders to resell Trustmark common stock at attractive prices in a timely manner. Trustmark’s stock price can fluctuate significantly in response to a variety of factors, including factors affecting the financial industry as a whole. The factors affecting financial stocks generally and Trustmark’s stock price in particular include:
• actual or anticipated variations in earnings;
• changes in analysts’ recommendations or projections;
• operating and stock performance of other companies deemed to be peers;
• changes in government regulation;
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• volatility affecting the financial markets in general.
General market fluctuations, the potential for breakdowns on electronic trading or other platforms for executing securities transactions, industry factors and general economic and political conditions could also cause Trustmark’s stock price to decrease regardless of operating results.
Changes in accounting standards may affect how Trustmark reports its financial condition and results of operations.
Trustmark’s accounting policies and methods are fundamental to how Trustmark records and reports its financial condition and results of operations. From time to time, the FASB changes the financial accounting and reporting standards that govern the preparation of Trustmark’s financial statements. The most recent economic recession resulted in increased scrutiny of accounting standards by regulators and legislators, particularly as they relate to fair value accounting principles. In addition, ongoing efforts to achieve convergence between GAAP and International Financial Reporting Standards may result in changes to GAAP. Any such changes can be difficult to predict and can materially affect how Trustmark records and reports its financial condition or results of operations. For additional details regarding recently adopted and pending accounting pronouncements, see Note 1 – Significant Accounting Policies included in Part II. Item 8. - Financial Statements and Supplementary Data of this report.
Trustmark may not be able to attract or retain key employees.
Trustmark’s success depends substantially on its ability to attract and retain skilled, experienced personnel. Competition for qualified candidates in the activities and markets that Trustmark serves is intense. While Trustmark invests significantly in the training and development of its employees, it is possible that Trustmark may not be able to retain key employees. If Trustmark were unable to retain its most qualified employees, its performance and competitive positioning could be materially adversely affected.
Natural disasters, such as hurricanes, could have a significant negative impact on Trustmark’s business.
Many of Trustmark’s loans are secured by property or are made to businesses in or near the Gulf Coast regions of Alabama, Florida, Mississippi and Texas, which are often in the path of seasonal hurricanes. Natural disasters, such as hurricanes, could have a significant negative impact on the stability of Trustmark’s deposit base, the ability of borrowers to repay outstanding loans and the value of collateral securing loans, and could cause Trustmark to incur material additional expenses. Although Management has established disaster recovery policies and procedures, the occurrence of a natural disaster, especially if any applicable insurance coverage is not adequate to enable Trustmark’s borrowers to recover from the effects of the event, could have a material adverse effect on Trustmark’s financial condition or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Trustmark’s principal offices are housed in its main office building located in downtown Jackson, Mississippi and owned by TNB. Trustmark’s main office building is primarily allocated for bank use with a small portion available for occupancy by tenants on a lease basis, although such incidental leasing activity is not material to Trustmark’s operations. As of December 31, 2020, Trustmark, through TNB, operated 174 full-service branches, 12 limited-service branches and an ATM network, which included 230 automated teller machines (ATMs) and 34 interactive teller machines (ITMs) at its branches and other locations. During January 2021, Trustmark consolidated two branch locations into one new central branch location and converted two drive-thru limited service branch locations to ITM only locations. In addition, Trustmark operated 12 offices in various locations providing mortgage banking, wealth management and insurance services. Trustmark leases 31 of its branch and other office locations with the remainder being owned. Trustmark believes its properties are suitable and adequate to operate its financial services business.
ITEM 3. LEGAL PROCEEDINGS
Information required in this section is set forth under the heading “Legal Proceedings” of Note 17 – Commitments and Contingencies in Part II. Item 8. – Financial Statements and Supplementary Data of this report.
In accordance FASB ASC Subtopic 450-20, “Loss Contingencies,” Trustmark will establish an accrued liability for litigation matters when those matters present loss contingencies that are both probable and reasonably estimable. At the present time, Trustmark believes, based on its evaluation and the advice of legal counsel, that a loss in any such proceeding is not probable and reasonably
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estimable. All matters will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. In view of the inherent difficulty of predicting the outcome of legal proceedings, Trustmark cannot predict the eventual outcomes of the currently pending matters or the timing of their ultimate resolution. Management currently believes, however, based upon the advice of legal counsel and Management’s evaluation and after taking into account its current insurance coverage, that the legal proceedings currently pending should not have a material adverse effect on Trustmark’s consolidated financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
Common Stock Prices and Dividends
Trustmark’s common stock is listed on the Nasdaq Stock Market and is traded under the symbol “TRMK.”
Trustmark paid quarterly cash dividends to shareholders of $0.23 per share, or $0.92 per share annually, in 2020. As a component of return to common shareholders, Trustmark intends to pay cash dividends when corporate financial performance and capital strength allow it to do so. All dividend payments must be approved and declared by the Board of Directors of Trustmark and are required to be in compliance with all applicable laws and regulations.
At January 31, 2021, there were approximately 3,319 registered shareholders of record and approximately 16,117 beneficial account holders of shares in nominee name of Trustmark’s common stock. Other information required by this item can be found in Note 18 - Shareholders’ Equity included in Part II. Item 8. - Financial Statements and Supplementary Data of this report.
Stock Repurchase Program
The Board of Directors of Trustmark authorized a stock repurchase program effective April 1, 2019, under which $100.0 million of Trustmark’s outstanding common shares could be acquired through March 31, 2020. Trustmark repurchased approximately 887 thousand shares of its outstanding common stock valued at $27.5 million during the three months ended March 31, 2020. Under this authority, Trustmark repurchased approximately 1.5 million shares valued at $47.2 million.
On January 28, 2020, the Board of Directors of Trustmark authorized a new stock repurchase program, effective April 1, 2020, under which $100.0 million of Trustmark’s outstanding common stock may be acquired through December 31, 2021. On March 9, 2020, Trustmark suspended its share repurchase programs to preserve capital to support customers during the COVID-19 pandemic. Trustmark resumed the repurchase of its shares in January 2021. Under this authority, Trustmark repurchased approximately 16 thousand shares of its outstanding common stock valued at $446 thousand during January 2021. The shares may be purchased from time to time at prevailing market prices, through open market or private transactions, depending on market conditions, and in conjunction with its disciplined share repurchase framework. There is no guarantee as to the number of shares that may be repurchased by Trustmark, and Trustmark may discontinue repurchases at any time at Management’s discretion.
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Performance Graph
The following graph compares Trustmark’s annual percentage change in cumulative total return on common shares over the past five years with the cumulative total return of companies comprising the Nasdaq market value index and the S&P 500 – Regional Banks index. The S&P 500 – Regional Banks index is an industry index published by S&P Dow Jones Indices, a division of S&P Global, and is comprised of stock in the S&P Total Market Index that are classified in the Global Industry Classification Standard regional banks sub-industry. This presentation assumes that $100 was invested in shares of the relevant issuers on December 31, 2015, and that dividends received were immediately invested in additional shares. The graph plots the value of the initial $100 investment at one-year intervals for the fiscal years shown. The S&P 500 – Regional Banks index replaces the Morningstar Banks - Regional – US index in this analysis and going forward, as the latter data is no longer accessible. The latter index has been included with data through 2019.
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ITEM 6. SELECTED FINANCIAL DATA
The following unaudited consolidated financial data is derived from Trustmark’s audited financial statements as of and for the five years ended December 31, 2020 ($ in thousands, except per share data). The data should be read in conjunction with Part II. Item 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. – Financial Statements and Supplementary Data.
Consolidated Statements of Income
Per Share Data
Performance Ratios
Credit Quality Ratios (3)
Net charge-offs (recoveries)/average loans 0.02 % 0.06 % 0.19 % 0.11 % 0.10 %
(3) Excludes PPP and Acquired Loans.
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Consolidated Balance Sheets
Stock Performance
Capital Ratios
The following unaudited tables represent Trustmark’s summary of quarterly operations for the years ended December 31, 2020 and 2019 ($ in thousands, except per share data):
Earnings per share
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Provision for loan losses, acquired loans 78 106 (140 ) (2 )
Earnings per share
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The following provides a narrative discussion and analysis of Trustmark’s financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements and the supplemental financial data included in Part II. Item 8. – Financial Statements and Supplementary Data of this report. Discussion and analysis of Trustmark’s financial condition and results of operations for the years ended December 31, 2019 and 2018 are included in the respective sections within Part II. Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of Trustmark’s Annual Report filed on Form 10-K for the year ended December 31, 2019.
COVID-19 Update
Trustmark has been proactive in responding to the COVID-19 pandemic, taking comprehensive action to support customers, associates and the communities it serves. Trustmark activated its Pandemic Preparedness Plan in March 2020 to protect the health and safety of its employees and customers, and continues to take additional precautions as recommended by the Centers for Disease Control and Prevention and mandated by government ordinances. Trustmark remains committed to serving its customers through its branches, actively promoting digital touchpoints including its ATM and ITM network and robust digital and mobile banking options. Trustmark has been proactive in reaching out to customers to discuss challenges and solutions, provided waivers of certain fees and charges, granted extensions, deferrals and forbearance as appropriate, paused all foreclosures and repossessions and refrained from negative credit bureau reporting for previously up-to-date customers. To date, Trustmark has not incurred any significant disruptions to its business activities.
Exposure to Stressed Industries
The full impact of COVID-19 is unknown and rapidly evolving. It has caused substantial disruption in international and the United States economies, markets and employment. The outbreak has had and may continue to have a significant adverse impact on certain industries Trustmark serves. The following provides a summary of Trustmark’s exposure to COVID-19 impacted industries within the LHFI portfolio as of December 31, 2020:
During the year ended December 31, 2020, Trustmark incurred total credit loss expenses of $45.0 million, primarily due to net changes in the economic forecast due to the negative effects of the COVID-19 pandemic on the overall economy and macroeconomic factors. During the fourth quarter of 2020, Trustmark conducted an updated analysis of previously reviewed borrowers receiving payment concessions and other borrowers in industries significantly impacted by the COVID-19 pandemic, which included certain pass rated credits of $500 thousand or more and watch or criticized rated credits of $100 thousand or more. Collectively, an aggregate outstanding balance of $969.7 million was reviewed, which included approximately 47.0% of borrowers receiving payment concessions, 93.0% of outstanding hotel loans, 46.0% of outstanding restaurant loans and 41.0% of outstanding retail commercial real estate loans. As a result of this review, approximately $32.0 million of the outstanding balances reviewed were downgraded to a criticized risk rating category, including $18.0 million in hotel loans, $2.0 million in restaurant loans and $2.0 million in retail commercial real estate loans. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect Trustmark’s loan portfolio.
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Loan Concessions
On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that in consultation with the FASB staff that the federal banking agencies conclude that short-term modifications (e.g., six months) made on a good faith basis to borrowers that were current as of the implementation date of a relief program are not TDRs. On March 27, 2020, the CARES Act, a $2 trillion stimulus package intended to provide relief to businesses and consumers in the United States struggling as a result of the pandemic, was signed into law. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. On April 7, 2020, the federal banking agencies revised its earlier guidance to clarify the interaction between the March 22, 2020 interagency statement and section 4013 of the CARES Act, as well as the agencies’ views on consumer protection considerations. During 2020, Trustmark modified 2,362 individual loans with aggregate principal balances totaling $1.266 billion at December 31, 2020 under this guidance, as well as 61 individual loans with aggregate principal balances totaling $4.7 million at December 31, 2020 which were not eligible under this guidance, but were not classified as a TDR under Trustmark’s existing policies. More of these types of modifications are likely to be executed in the first quarter of 2021. Commercial concessions were primarily either interest only for 90 days or full payment deferrals for 90 days. Consumer concessions were 90-day full payment deferrals.
Paycheck Protection Program
A provision in the CARES Act included a $349 billion fund for the creation of the PPP through the SBA and Treasury Department. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. If not forgiven, in whole or in part, these loans carry a fixed rate of 1.00% per annum with payments deferred until the date the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period). Originally, the loans carried a term of two years under SBA rules implemented by the CARES Act, but a June 5, 2020 amendment to the CARES Act provided for a five-year minimum loan term for loans made beginning as of such date, and permitted lenders and borrowers to mutually agree to amend existing two-year loans to have terms of five years. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1.0% to 5.0%, based on the size of the loan. The SBA began accepting submissions for these PPP loans on April 3, 2020 and reached the limit of funds originally available to disburse under this program on April 16, 2020. Legislation providing an additional $320 billion in funding for the PPP was signed into law on April 24, 2020. The SBA began accepting applications for the new funding on April 27, 2020 and stopped accepting applications on August 8, 2020. The SBA and Treasury Department have released a series of rules, guidance documents and processes governing all aspects of the PPP, including a streamlined process for loan forgiveness of PPP loans of $50 thousand or less. Under the CARES Act and interim and final rules released by the federal banking agencies, PPP loans receive a zero percent risk weight for regulatory capital purposes, and if pledged as part of the Paycheck Protection Program Liquidity Facility (PPPLF), are subtracted from the lender’s Tier 1 leverage ratio. The PPPLF was established by the FRB to provide a liquidity source to PPP lenders, through non-recourse credit secured by PPP loans. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, extended some of the relief provisions in certain respects of the CARES Act, and appropriated an additional $284.0 billion to the PPP and permitted certain PPP borrowers to make “second draw” loans.
TNB began submitting applications to the SBA on behalf of its customers on April 4, 2020 and began funding those loans on April 13, 2020. Through the PPP, TNB had 7,398 loans totaling $623.0 million outstanding as of December 31, 2020. Net of deferred fees and costs of $12.9 million, PPP loans totaled $610.1 million at December 31, 2020. Trustmark began submitting applications to the SBA on behalf of qualified small businesses under the third appropriation of PPP funds in January 2021. Due to the amount and nature of the PPP loans, these loans are not included in Trustmark’s LHFI portfolio and are presented separately in the accompanying consolidated balance sheet. At December 31, 2020, TNB had no outstanding PPP loans pledged as collateral at the PPPLF. Trustmark cannot predict the amount of PPP loans that will be forgiven in whole or in part by the SBA, nor can it predict the magnitude and timing of the impact the PPP loans and related fees will have on Trustmark’s net interest margin. However, TNB’s participation in the PPP will likely have a significant impact on Trustmark’s asset mix and net interest margin in 2021 as a result of the addition of these low interest rate loans and the related processing fees earned on these loans.
Executive Overview
Trustmark has been committed to meeting the banking and financial needs of its customers and communities for over 130 years. During the COVID-19 pandemic, Trustmark remains focused on providing support, advice and solutions to meet its customers’ unique needs. During 2020, Trustmark experienced strong growth in its mortgage banking business, which increased noninterest income by $20.2 million and $96.0 million, respectively, when the three months and year ended December 31, 2020 are compared to the same time period in 2019. Trustmark continued to maintain and expand customer relationships as reflected by growth in the LHFI portfolio of $488.9 million, or 5.2%, and growth in deposits of $2.803 billion, or 24.9%, during 2020. Trustmark is committed to managing the
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franchise for the long term, supporting investments to promote profitable revenue growth, realigning delivery channels to support changing customer preferences as well as reengineering and efficiency opportunities to enhance long-term shareholder value. Trustmark continued to invest in its insurance business with the completion of the acquisition of a Mississippi-based agency during the second quarter of 2020. Trustmark’s capital position remained solid, reflecting the consistent profitability of its diversified financial services businesses. The Board of Directors of Trustmark declared a quarterly cash dividend of $0.23 per share. The dividend is payable March 15, 2021, to shareholders of record on March 1, 2021.
Financial Highlights
Trustmark reported net income of $51.2 million, or basic and diluted earnings per share (EPS) of $0.81, for the fourth quarter of 2020, compared to $33.9 million, or basic and diluted EPS of $0.53, in the fourth quarter of 2019. Trustmark’s reported performance during the quarter ended December 31, 2020, produced a return on average tangible equity of 15.47%, a return on average assets of 1.28%, an average equity to average assets ratio of 10.82% and a dividend payout ratio of 28.40%, compared to a return on average tangible equity of 10.85%, a return on average assets of 1.00%, an average equity to average assets ratio of 12.30% and a dividend payout ratio of 43.40% during the quarter ended December 31, 2019.
Revenue, which is defined as net interest income plus noninterest income, totaled $177.5 million for the quarter ended December 31, 2020 compared to $153.2 million for the quarter ended December 31, 2019, an increase of $24.3 million, or 15.9%. The increase in total revenue for the fourth quarter of 2020 was principally due to an increase in total noninterest income primarily as a result of the increase in mortgage banking, net.
Net interest income for the fourth quarter of 2020 totaled $111.4 million, an increase of $5.8 million, or 5.5%, when compared to the fourth quarter of 2019, principally due to interest and fees on PPP loans of $14.9 million and a decline in interest on deposits of $11.4 million, or 64.1%, partially offset by a decline in interest and fees on LHFS and LHFI of $14.8 million, or 13.6%. The declines in interest on deposits and interest and fees on LHFS and LHFI for the fourth quarter of 2020 were principally due to lower interest rates. Noninterest income for the fourth quarter of 2020 totaled $66.1 million, an increase of $18.5 million, or 39.0%, when compared to the fourth quarter of 2019, principally due to an increase in mortgage banking, net of $20.2 million. The increase in mortgage banking, net for the fourth quarter of 2020 was principally due to an increase in gain on sales of loans, net. Noninterest expense for the fourth quarter of 2020 totaled $118.8 million, an increase of $8.8 million, or 8.0%, when compared to the fourth quarter of 2019, principally due to increases in salaries and employee benefits of $7.3 million, or 11.8%, and services and fees of $2.8 million, or 14.5%. The increase in salaries and employee benefits when the fourth quarter of 2020 is compared to the fourth quarter of 2019 was principally due to increases in performance based incentives, mortgage origination commissions, general merit increases and additional salaries expense related to the COVID-19 pandemic. The increase in services and fees when the fourth quarter of 2020 is compared to the fourth quarter of 2019 was principally due to increases in legal fees related to ongoing litigation matters and data processing charges related to software.
Trustmark adopted FASB ASC Topic 326, in accordance with the amendments of FASB ASU 2016-13, effective January 1, 2020. The guidance in FASB ASC Topic 326 replaced Trustmark’s previous incurred loss methodology with a methodology that reflects the current expected credit losses (often referred to as CECL) and requires consideration of a broader range of reasonable and supportable information to determine credit losses. Trustmark’s allowance for credit losses (ACL) for LHFI is an estimate of expected credit losses inherent within Trustmark’s existing LHFI portfolio. The ACL, LHFI is adjusted through the provision for credit losses and reduced by the charge off of loan amounts, net of recoveries. FASB ASC Topic 326 also requires Trustmark to estimate expected credit losses for off-balance sheet credit exposures which are not unconditionally cancellable by Trustmark. Trustmark maintains a separate allowance for credit losses for off-balance sheet credit exposures, including unfunded commitments and letters of credit. Adjustments to the allowance for credit losses on off-balance sheet credit exposures are recorded as noninterest expense in credit loss expense related to off-balance sheet credit exposures. Trustmark adopted FASB ASC Topic 326 using the modified retrospective approach prescribed by the amendments of FASB ASU 2016-13; therefore, prior period loan loss provision balances are presented under legacy GAAP and may not be comparable to current period credit loss presentation.
Trustmark’s provision for credit losses for the three months ended December 31, 2020 totaled a negative $4.4 million compared to a provision for loan losses, LHFI of $3.7 million for the three months ended December 31, 2019. Credit loss expense related to off-balance sheet credit exposures totaled a negative $1.1 million for the three months ended December 31, 2020. The decrease in the provision for credit losses and the credit loss expense related to off-balance sheet credit exposures for the fourth quarter of 2020 was primarily due to improvements in the economic forecast and macroeconomic factors. Please see the section captioned “Allowance for Credit Losses,” for additional information regarding the provision for credit losses and credit loss expense related to off-balance sheet credit exposures.
For the year ended December 31, 2020, Trustmark reported net income of $160.0 million, or basic and diluted EPS of $2.52 and $2.51, respectively, compared to $150.5 million, or basic and diluted EPS of $2.33 and $2.32, respectively, for the year ended December 31, 2019 and $149.6 million, or basic and diluted EPS of $2.22 and $2.21, respectively, for the year ended December 31,
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2018. Trustmark’s reported performance for the year ended December 31, 2020, produced a return on average tangible equity of 12.58%, a return on average assets of 1.05% and a dividend payout ratio of 36.51%, compared to a return on average tangible equity of 12.45%, a return on average assets of 1.11% and a dividend payout ratio of 39.48% for the year ended December 31, 2019 and a return on average tangible equity of 12.86%, a return on average assets of 1.11% and a dividend payout ratio of 41.44% for the year ended December 31, 2018. Trustmark’s average equity to average assets ratio was 11.05%, 12.02% and 11.78% for the years ended December 31, 2020, 2019 and 2018, respectively.
Revenue totaled $701.1 million for the year ended December 31, 2020, compared to $613.6 million and $604.3 million for the years ended December 31, 2019 and 2018, respectively. The increase in total revenue for 2020 compared to 2019 was principally due to an increase in total noninterest income primarily as a result of the increase in mortgage banking, net.
Net interest income for the year ended December 31, 2020 totaled $426.5 million, relatively unchanged when compared to the year ended December 31, 2019, principally due to declines in interest and fees on LHFS and LHFI of $49.4 million, or 11.2%, interest and fees on acquired loans of $8.4 million, interest on securities of $7.0 million, or 12.5%, and other interest income of $3.8 million, or 70.9%, offset by a decline in interest on deposits of $41.7 million, or 52.7%, and the addition of interest and fees on PPP loans of $26.6 million. Declines in interest and fees on LHFS and LHFI, interest on securities and interest on deposits for 2020 were principally due to the decline in interest rates. The decline in interest and fees on acquired loans for 2020 was due to the reclassification of the remaining balance of acquired loans to LHFI upon the adoption of FASB ASC Topic 326. See the section captioned “Acquired Loans,” for additional information regarding the acquired loans reclassified to LHFI. The decline in other interest income for 2020 was principally due to a decline in interest earned on deposits held at the Federal Reserve as a result of the FRB’s decision to reduce the interest it pays on excess reserves from 1.60% to 0.10% in March of 2020.
Noninterest income totaled $274.6 million for 2020, an increase of $87.5 million, or 46.8%, when compared to 2019, principally due to an increase in mortgage banking, net partially offset by a decline in service charges on deposit accounts. Mortgage banking, net increased $96.0 million when 2020 is compared to 2019, principally due to increases in gain on sales of loans, net and a positive net hedge ineffectiveness. Service charges on deposit accounts declined $10.3 million, or 24.2%, when 2020 is compared to 2019, principally due to declines in non-sufficient funds (NSF) and overdraft fees on consumer demand deposit and interest checking accounts and commercial demand deposit accounts, primarily due to declines in overdraft occurrences as a result of COVID-19 related business closures, stay-at-home orders and government stimulus programs.
Noninterest expense totaled $475.2 million for 2020, an increase of $46.2 million, or 10.8%, when compared to 2019, principally due to increases in salaries and employee benefits and services and fees, as well as the addition of the credit loss expense related to off-balance sheet credit exposures. Salaries and employee benefits expense increased $24.5 million, or 9.9%, when 2020 is compared to 2019. During the first quarter of 2020, Trustmark completed a voluntary early retirement program and incurred $4.3 million of non-routine salaries and employee benefits expense related to this program. Excluding these non-routine expenses, salaries and employee benefits increased $20.3 million, or 8.2%, when 2020 is compared to 2019. The increase in salaries and employee benefits expense, excluding the non-routine expenses, for the year ended December 31, 2020 was principally due to higher commissions expense resulting from improvements in mortgage production as well as an increase in salary expenses as a result of an increase in performance incentives, general merit increases, an increase in overtime pay and temporary compensation adjustments and one-time payments to front-line associates as a result of the COVID-19 pandemic. Services and fees increased $10.5 million, or 14.3%, when 2020 is compared to 2019, primarily due to increases in legal fees related to ongoing litigation matters and data processing charges related to software.
Trustmark’s provision for credit losses for 2020 totaled $36.1 million compared to a provision for loan losses, LHFI of $10.8 million for 2019. Credit loss expense related to off-balance sheet credit exposures totaled $8.9 million for 2020. The increase in the provision for credit losses and the credit loss expense related to off-balance sheet credit exposures for the year ended December 31, 2020 was primarily due to net changes in the economic forecast due to the anticipated negative effects of the COVID-19 pandemic on the overall economy and macroeconomic factors. Please see the section captioned “Allowance for Credit Losses” for additional information regarding the provision for credit losses and credit loss expense related to off-balance sheet credit exposures.
At December 31, 2020, nonperforming assets totaled $74.8 million, a decrease of $7.7 million, or 9.3%, compared to December 31, 2019 due to a decline other real estate partially offset by an increase in nonaccrual LHFI. Total nonaccrual LHFI were $63.1 million at December 31, 2020, representing an increase of $9.9 million, or 18.6%, relative to December 31, 2019, primarily due to LHFI placed on nonaccrual status in Trustmark’s Alabama, Tennessee, Texas and Mississippi market regions, partially offset by reductions, pay-offs and charge-offs of nonaccrual LHFI in Trustmark’s Mississippi and Tennessee market regions. The percentage of loans, excluding PPP and acquired loans, that are 30 days or more past due and nonaccrual LHFI increased in 2020 to 2.08% compared to 1.28% in 2019 and 1.56% in 2018. Other real estate totaled $11.7 million at December 31, 2020, a decline of $17.6 million, or 60.2%, when compared to December 31, 2019, principally due to properties sold in Trustmark’s Mississippi, Florida, Alabama, and Tennessee market regions.
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LHFI totaled $9.825 billion at December 31, 2020, an increase of $488.9 million, or 5.2%, compared to December 31, 2019. On January 1, 2020, Trustmark transferred $72.6 million, the remaining balance of the loans acquired in the BancTrust merger, from acquired impaired loans to LHFI as purchased credit deteriorated (PCD) loans as part of its adoption of FASB ASC Topic 326. For additional information regarding the acquired loans transferred to LHFI, see the section captioned “Acquired Loans.” Excluding the transferred acquired loans, LHFI increased $416.3 million, or 4.4%, compared to December 31, 2019. The increase in LHFI during 2020, excluding the transferred acquired loans, was primarily due to net growth in LHFI secured by real estate in Trustmark’s Texas, Alabama, Mississippi and Tennessee market regions, partially offset by declines in commercial and industrial LHFI in the Mississippi, Tennessee and Alabama market regions. For additional information regarding changes in LHFI and comparative balances by loan category, see the section captioned “LHFI.”
Management has continued its practice of maintaining excess funding capacity to provide Trustmark with adequate liquidity for its ongoing operations. In this regard, Trustmark benefits from its strong deposit base, its highly liquid investment portfolio and its access to funding from a variety of external funding sources such as upstream federal funds lines, FHLB advances and, on a limited basis, brokered deposits. See the section captioned “Liquidity” for further discussion of the components of Trustmark’s excess funding capacity.
Total deposits were $14.049 billion at December 31, 2020, an increase of $2.803 billion, or 24.9%, compared to December 31, 2019, reflecting increases in both noninterest-bearing and interest-bearing deposit accounts as customers deposited proceeds from line draws, PPP loans and other COVID-19 related stimulus programs. During 2020, noninterest-bearing deposits increased $1.458 billion, or 50.4%, primarily due to growth in all categories of noninterest-bearing deposit accounts. Interest-bearing deposits increased $1.345 billion, or 16.1%, during 2020, primarily due to growth in public and consumer interest checking accounts, commercial and consumer money market deposit accounts and consumer savings accounts, partially offset by declines in consumer time deposits.
During the fourth quarter of 2020, Trustmark issued $125.0 million of 3.625% fixed-to-floating rate subordinated notes due in 2030 for general corporate purposes, further strengthening its regulatory capital position.
Critical Accounting Policies
Trustmark’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the financial services industry. Application of these accounting principles requires Management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual financial results could differ from those estimates.
Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. These critical accounting policies are described below.
For additional information regarding the accounting policies discussed below, please see Note 1 – Significant Accounting Policies set forth in Part II. Item 8. – Financial Statements and Supplementary Data of this report.
Allowance for Credit Losses (ACL)
LHFI
The ACL for LHFI is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the LHFI portfolio is continuously monitored by Management and is reflected within the ACL for loans. The ACL for LHFI is an estimate of expected losses inherent within Trustmark’s existing LHFI portfolio. The ACL for LHFI is adjusted through the provision for credit losses and reduced by the charge off of loan amounts, net of recoveries.
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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. In future periods, evaluations of the overall LHFI portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. Given the nature of many of the factors, forecasts and assumptions in the ACL methodology, it is not possible to provide meaningful estimates of the impact of any such potential change.
For a complete description of Trustmark’s ACL methodology for the LHFI portfolio, please see Note 4 – LHFI and Allowance for Credit Losses, LHFI included in Part II. Item 8. – Financial Statements and Supplementary Data of this report.
Off-Balance Sheet Credit Exposures
Trustmark maintains a separate ACL on off-balance sheet credit exposures, including unfunded loan commitments and letters of credit, which are not unconditionally cancellable. Adjustments to the ACL on off-balance sheet credit exposures are recorded to credit loss expense related to off-balance sheet credit exposures in noninterest expense.
Expected credit losses for off-balance sheet credit exposures are estimated by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by Trustmark. Trustmark calculates a loan pool level unfunded amount for the period. In addition to the unfunded balances, Trustmark uses a funding rate for loan pools that are considered open-ended. In order to mitigate volatility and incorporate historical experience in the funding rate, Trustmark uses a twelve-quarter moving average. For the closed-ended loan pools, Trustmark takes a conservative approach and uses a 100% funding rate. The expected funding rate is applied to each pool’s unfunded commitment balances to ensure that reserves will be applied to each pool based upon balances expected to be funded based upon historical levels. In addition to the funding rate being applied to the unfunded commitment balance, a reserve rate is applied that is loan pool specific and is applied to the unfunded amount to ensure loss factors, both quantitative and qualitative, are being considered on the unfunded portion of the loan pool, consistent with the methodology applied to the funded loan pools.
Evaluations of the unfunded commitments are inherently subjective, as they require estimates, assumptions and judgments as to the facts and circumstances of particular situations. Determining the appropriateness of the ACL is complex and requires judgement by Management about the effect of matters that are inherently uncertain. In future periods, evaluations of off-balance sheet credit exposures, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. Given the nature of many of the factors, forecasts and assumptions in the ACL methodology, it is not possible to provide meaningful estimates of the impact of any such potential change.
For a complete description of Trustmark’s ACL methodology for the off-balance sheet credit exposures, please see the section captioned “Lending Related” in Note 17 – Commitments and Contingencies included in Part II. Item 8. – Financial Statements and Supplementary Data of this report.
Mortgage Servicing Rights (MSR)
Trustmark recognizes as assets the rights to service mortgage loans based on the estimated fair value of the MSR when loans are sold and the associated servicing rights are retained. Trustmark has elected to account for the MSR at fair value.
The fair value of the MSR is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income and other ancillary income such as late fees. Management reviews all significant assumptions quarterly. Mortgage loan prepayment speeds, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.
By way of example, an increase in either the prepayment speed or discount rate assumption will result in a decrease in the fair value of the MSR, while a decrease in either assumption will result in an increase in the fair value of the MSR. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and discount rates. These fluctuations can be rapid and may
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continue to be significant. Therefore, estimating prepayment speed and/or discount rates within ranges that market participants would use in determining the fair value of the MSR requires significant management judgment.
At December 31, 2020, the MSR fair value was $66.5 million. The impact on the MSR fair value of either a 10% adverse change in prepayment speeds or a 100 basis point increase in discount rates at December 31, 2020, would be a decline in fair value of approximately $4.3 million and $2.4 million, respectively. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts.
Goodwill and Identifiable Intangible Assets
Trustmark records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value as required by FASB ASC Topic 805. The carrying amount of goodwill at December 31, 2020 totaled $334.6 million for the General Banking Segment and $50.7 million for the Insurance Segment, a consolidated total of $385.3 million. Trustmark’s goodwill is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate it may be impaired. Trustmark’s identifiable intangible assets, which totaled $7.4 million at December 31, 2020, are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount.
The initial recording and subsequent impairment testing of goodwill requires subjective judgments concerning estimates of the fair value of the acquired assets. The goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. An impairment loss would be recorded for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill allocated to that reporting unit. Trustmark performed an annual impairment test of goodwill for reporting units contained in both the General Banking and Insurance Segments as of October 1, 2020, 2019, and 2018, respectively, which indicated that no impairment charge was required. The impairment test for the General Banking Segment utilized valuations based on comparable deal values for financial institutions while the test for the Insurance Segment utilizes varying valuation scenarios for the multiple of earnings before interest, income taxes, depreciation and amortization method based on recent acquisition activity. Based on this analysis, Trustmark concluded that the fair value of the reporting units exceeded the carrying value for both the General Banking Segment and the Insurance Segment; therefore, no impairment charge was required. Significant changes in future profitability and value of its reporting units could affect Trustmark’s impairment evaluation.
The carrying amount of Trustmark’s identifiable intangible assets subject to amortization is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition. That assessment is based on the carrying amount of the intangible assets subject to amortization at the date it is tested for recoverability. Intangible assets subject to amortization shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
Fair values may be determined using market prices, comparison to similar assets, market multiples and other determinants. Factors that may significantly affect the estimates include, among others, competitive forces, customer behavior and attrition, changes in revenue growth trends and specific industry or market sector conditions. Other key judgments in accounting for intangibles include determining the useful life of the particular asset and classifying assets as either goodwill (which does not require amortization) or identifiable intangible assets (which does require amortization).
Contingent Liabilities
Trustmark estimates contingent liabilities based on Management’s evaluation of the probability of outcomes and their ability to estimate the range of exposure. As stated in FASB ASC Topic 450, “Contingencies,” a liability is contingent if the amount is not presently known but may become known in the future as a result of the occurrence of some uncertain future event. Accounting standards require that a liability be recorded if Management determines that it is probable that a loss has occurred, and the loss can be reasonably estimated. It is implicit in this standard that it must be probable that the loss will be confirmed by some future event. As part of the estimation process, Management is required to make assumptions about matters that are, by their nature, highly uncertain. The assessment of contingent liabilities, including legal contingencies and income tax liabilities, involves the use of critical estimates, assumptions and judgments. Management’s estimates are based on their belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures. However, there can be no assurance that future events, such as court decisions or Internal Revenue Service (IRS) positions, will not differ from Management’s assessments. Whenever practicable, Management consults with outside experts (attorneys, consultants, claims administrators, etc.) to assist with the gathering and evaluation of information related to contingent liabilities.
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Recent Legislative and Regulatory Developments
For information regarding legislation and regulation applicable to Trustmark, see the section captioned “Supervision and Regulation” included in Part I. Item 1. – Business of this report.
Non-GAAP Financial Measures
In addition to capital ratios defined by GAAP and banking regulators, Trustmark utilizes various tangible common equity measures when evaluating capital utilization and adequacy. Tangible common equity, as defined by Trustmark, represents common equity less goodwill and identifiable intangible assets.
Trustmark believes these measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of Trustmark’s capitalization to other organizations. These ratios differ from capital measures defined by banking regulators principally in that the numerator excludes shareholders’ equity associated with preferred securities, the nature and extent of which varies across organizations. In Management’s experience, many stock analysts use tangible common equity measures in conjunction with more traditional bank capital ratios to compare capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions.
These calculations are intended to complement the capital ratios defined by GAAP and banking regulators. Because GAAP does not include these capital ratio measures, Trustmark believes there are no comparable GAAP financial measures to these tangible common equity ratios. Despite the importance of these measures to Trustmark, there are no standardized definitions for them and, as a result, Trustmark’s calculations may not be comparable with other organizations. Also, there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its audited consolidated financial statements and the notes related thereto in their entirety and not to rely on any single financial measure.
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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) 8.34 % 9.72 % 9.31 %
Tangible equity/risk-weighted assets (a)/(c) 11.22 % 11.58 % 11.11 %
COMMON EQUITY TIER 1 CAPITAL (CET1) - BASEL III
CECL transition adjustment (2) 31,199 — —
CET1 adjustments and deductions:
Other adjustments and deductions for CET1 (3) (6,190 ) (5,896 ) (9,815 )
Common equity tier 1 risk-based capital ratio (e)/(c) 11.62 % 11.93 % 11.77 %
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:
Voluntary early retirement program 3,281 0.05 — — — —
Voluntary Early Retirement Program
During the first quarter of 2020, Trustmark completed a voluntary early retirement program and incurred one-time charge of $4.4 million ($4.3 million of non-routine salaries and employee benefits expense and $102 thousand of other miscellaneous expense) related to this program.
Results of Operations
Net Interest Income
Net interest income is the principal component of Trustmark’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The net interest margin is computed by dividing fully taxable equivalent (FTE) net interest income by average interest-earning assets and measures how effectively Trustmark utilizes its interest-earning assets in relationship to the interest cost of funding them. The accompanying Yield/Rate Analysis Table shows the average balances for all assets and liabilities of Trustmark and the interest income or expense associated with earning assets and interest-bearing liabilities. The yields and rates have been computed based upon interest income and expense adjusted to a FTE basis using the federal statutory corporate tax rate in effect for each of the periods shown. Loans on nonaccrual have been included in the average loan balances, and interest collected prior to these loans having been placed on nonaccrual has been included in interest income. Loan fees included in interest associated with the average LHFS and LHFI balances are immaterial.
Net interest income-FTE for the year ended December 31, 2020 decreased $906 thousand, or 0.2%, when compared with the year ended December 31, 2019. The net interest margin for 2020 decreased 43 basis points to 3.19% when compared to 2019. The net interest margin excluding PPP and acquired loans, which equals the reported net interest income-FTE excluding interest and fees on PPP and acquired loans, as a percentage of average earning assets excluding average PPP and acquired loans, was 3.15% for 2020, a decrease of 43 basis points when compared to 2019. The decrease in the net interest margin for 2020 was principally due to declines in the yield on the LHFI and LHFS and securities portfolios and the acquired loans that were transferred to LHFI as a result of the adoption of FASB ASC Topic 326, partially offset by lower costs of interest-bearing deposits and the addition of the PPP loans.
As of December 31, 2020, TNB had 7,398 PPP loans outstanding totaling $623.0 million. Net of deferred fees and costs of $12.9 million, PPP loans totaled $610.1 million at December 31, 2020. Processing fees earned by TNB as the originating lender are being amortized over the life of the loans. Payments on PPP loans are deferred until the date the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period). Trustmark cannot predict the amount of PPP loans that will be forgiven in whole or in part by the SBA, nor can it predict the magnitude and timing of the impact the PPP loans and related fees will have on Trustmark’s net interest margin. However, TNB’s participation in the PPP will likely have a significant impact on Trustmark’s asset mix and net interest margin in 2021 as a result of the addition of these low interest rate loans and the related processing fees earned on these loans.
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Average interest-earning assets for 2020 were $13.740 billion compared to $12.131 billion for 2019, an increase of $1.609 billion, or 13.3%. The increase in average earning assets during 2020 was primarily due to increases in average loans (LHFS and LHFI) of $694.2 million, or 7.5%, average PPP loans of $646.7 million and average other earning assets of $416.5 million, which were partially offset by decreases in average securities of $50.4 million, or 2.0%, and average acquired loans of $88.9 million. The increase in average loans (LHFS and LHFI) was primarily attributable to the $488.9 million, or 5.2%, increase in the LHFI portfolio and a $220.6 million, or 97.5%, increase in LHFS when balances at December 31, 2020 are compared to balances at December 31, 2019. The increase in LHFI was principally due to net growth in LHFI secured by real estate in Trustmark’s Texas, Alabama, Mississippi and Tennessee market regions, partially offset by declines in commercial and industrial LHFI in the Mississippi, Tennessee and Alabama market regions. The increase in LHFS was principally due to the increase in mortgage loan originations, primarily due to lower interest rates on mortgage loans. The increase in average other earning assets when 2020 is compared to 2019 was primarily due to an increase in interest-bearing deposits due from banks, principally related to excess reserves held at the FRB as a result of the increase in customer deposit account balances. The decrease in average securities when 2020 is compared to 2019 was primarily due to calls, maturities and pay-downs of the underlying loans of government-sponsored enterprise (GSE) guaranteed securities, partially offset by purchase of securities available for sale. The decline in average acquired loans was due to the acquired loans that were transferred to LHFI as PCD loans on January 1, 2020 as part of Trustmark’s adoption of FASB ASC Topic 326.
During 2020, interest income-FTE totaled $480.4 million, a decrease of $43.0 million, or 8.2%, while the yield on total earning assets declined 81 basis points to 3.50% when compared to 2019. The decrease in interest income-FTE in 2020 reflects declines in all categories of interest income partially offset by the addition of interest and fees on PPP loans. Interest and fees on PPP loans totaled $26.6 million for the year ended December 31, 2020, while the yield on these loans was 4.12%. During 2020, interest and fees on LHFS and LHFI-FTE declined $50.0 million, or 11.1%, when compared to 2019, while the yield on loans (LHFS and LHFI) decreased 84 basis points to 4.03% as a result of lower interest rates. Interest and fees on acquired loans declined $8.4 million when 2020 is compared to 2019 due to the acquired loans that were transferred to LHFI as PCD loans on January 1, 2020 as part of Trustmark’s adoption of FASB ASC Topic 326. During 2020, interest on securities-taxable decreased $6.4 million, or 11.7%, while the yield on securities-taxable declined 24 basis points to 2.01% when compared to 2019, primarily due to the run off of maturing investment securities and lower interest rates on securities available for sale purchased during 2020. Other interest income declined $3.8 million, or 70.9%, when 2020 is compared to 2019, while the yield on other earning assets declined to 0.24% for 2020 compared to 2.23% for 2019. The decline in other interest income and the yield on other earning assets was principally due to the decline in the interest rate paid on excess reserves held at the FRB.
Average interest-bearing liabilities for 2020 totaled $9.627 billion compared to $8.741 billion for 2019, an increase of $886.3 million, or 10.1%. The increase in average interest-bearing liabilities was primarily the result of the increase in average interest-bearing deposits. Average interest-bearing deposits for 2020 increased $783.5 million, or 9.2%, when compared to 2019, primarily due to growth in average interest-bearing demand deposits and savings deposits as customers deposited proceeds from line draws, PPP loans and other COVID-19 related stimulus programs, partially offset by a decline in average time deposits.
Interest expense for 2020 totaled $41.8 million, a decrease of $42.1 million, or 50.2%, when compared with 2019, while the rate on total interest-bearing liabilities decreased 53 basis points to 0.43%. The decrease in total interest expense for 2020 when compared to 2019 was primarily due to a decline in interest on deposits. Interest on deposits decreased $41.7 million, or 52.7%, while the rate on interest-bearing deposits decreased 53 basis points to 0.40% when 2020 is compared to 2019, primarily due to lower interest rates.
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The following table provides the tax equivalent basis yield or rate for each component of the tax equivalent net interest margin for the periods presented ($ 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:
Subordinated notes 474 — 474 — — —
Junior subordinated debt securities — (922 ) (922 ) — 163 163
The change in interest due to both volume and yield or rate has been allocated to change due to volume and change due to yield or rate in proportion to the absolute value of the change in each. Tax-exempt income has been adjusted to a tax equivalent basis using the federal statutory corporate tax rate in effect for each of the three years presented. The balances of nonaccrual loans and related income recognized have been included for purposes of these computations.
Provision for Credit Losses
Trustmark adopted FASB ASC Topic 326, in accordance with the amendments of FASB ASU 2016-13, effective January 1, 2020. The guidance in FASB ASC 326 replaces Trustmark’s previous incurred loss methodology with a methodology that reflects the current expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit losses. The provision for credit losses is the amount necessary to maintain the allowance for credit losses, LHFI at the amount of expected credit losses inherent within the LHFI portfolio. The amount of provision for credit losses and the related ACL for LHFI are based on Trustmark’s ACL methodology.
The provision for credit losses totaled $36.1 million for 2020, compared to a provision for loan losses, LHFI of $10.8 million for 2019 and $18.0 million for 2018. The provision for credit losses for the year ended December 31, 2020 primarily reflected net changes in the economic forecast due to the current and anticipated negative effects of the COVID-19 pandemic on the overall economy and macroeconomic factors. See the section captioned “Allowance for Credit Losses, LHFI” for information regarding Trustmark’s ACL methodology as well as further analysis of the provision for credit losses.
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Noninterest Income
Noninterest income represented 39.2%, 30.5% and 30.6% of total revenue, before securities gains (losses), net in 2020, 2019 and 2018, respectively. The following table provides the comparative components of noninterest income for the periods presented ($ in thousands):
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, 2020 are discussed in further detail below. For analysis of Trustmark’s insurance commissions and wealth management income, please see the section captioned “Results of Segment Operations.”
Service Charges on Deposit Accounts
The decline in service charges on deposit accounts when 2020 is compared to 2019 was principally due to declines in NSF and overdraft fees on consumer and commercial demand deposit accounts and consumer interest checking accounts, primarily due to declines in overdraft occurrences as a result of COVID-19 related business closures, stay-at-home orders and government stimulus programs.
Mortgage Banking, Net
The following table illustrates the components of mortgage banking, net included in noninterest income for the periods presented ($ in thousands):
Years Ended December 31,
Amount % Change Amount % Change Amount % Change
Change in fair value of derivatives 33,973 n/m 9,556 n/m (4,942 ) n/m
n/m - percentage changes greater than +/- 100% are not considered meaningful
The increase in mortgage banking, net when 2020 is compared to 2019 was principally due to increases in gain on sales of loans, net and a positive net hedge ineffectiveness. The positive net hedge ineffectiveness for the year ended December 31, 2020 was primarily due to widening spreads between mortgage and ten-year Treasury rates. Mortgage loan production totaled $2.985 billion for 2020 an increase of $1.222 billion, or 69.4%, when compared to 2019. Mortgage loan production totaled $1.762 billion for 2019 an increase of $361.1 million, or 25.8%, when compared to 2018. The increase in mortgage loan production during 2020 was primarily due to the increase in refinance activity driven by the low interest rate environment. Loans serviced for others totaled $7.657 billion at December 31, 2020, compared with $7.157 billion at December 31, 2019, and $6.835 billion at December 31, 2018.
Representing a significant component of mortgage banking income is gain on sales of loans, net. The increase in the gain on sales of loans, net when 2020 is compared to 2019 was primarily the result of higher profit margins in secondary marketing activities and increases in the volume of loans sold and the mortgage valuation adjustment. Loan sales increased $1.128 billion, or 80.4%, during
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2020 to total $2.532billion compared to anincrease of $311.3 million, or 28.5%, during 2019 to total $1.404 billion. The increases in loan sales during 2020 and 2019were principally due to increases in mortgage lending activity as a result of lower interest rates.
Other Income, Net
The following table illustrates the components of other income, net included in noninterest income for the periods presented ($ in thousands):
Years Ended December 31,
Amount % Change Amount % Change Amount % Change
The decrease in other income, net when 2020 is compared to 2019 was primarily due to a decline in other miscellaneous income, principally due to settlement proceeds received during the fourth quarter of 2019 as well as declines in other partnership investments and net gains on sales of premises and equipment in 2020, partially offset by a decrease in the amortization of tax credit partnerships.
Noninterest Expense
The following table illustrates the comparative components of noninterest expense for the periods presented ($ in thousands):
Years Ended December 31,
Amount % Change Amount % Change Amount % Change
Other real estate expense:
Credit loss expense for off-balance sheet credit exposures 8,934 100.0 % — — — —
n/m - percentage changes greater than +/- 100% are not considered meaningful
Changes in the various component of noninterest expense for the year ended December 31, 2020 are discussed in further detail below. Management considers disciplined expense management a key area of focus in the support of improving shareholder value.
Salaries and Employee Benefits
During the first quarter of 2020, Trustmark completed a voluntary early retirement program and incurred $4.3 million of non-routine salaries and employee benefits expense related to this program. Excluding these non-routine expenses, salaries and employee benefits increased $20.3 million, or 8.2%, when 2020 is compared to 2019. The increase in salaries and employee benefits expense, excluding the non-routine expenses, for the year ended December 31, 2020 was principally due to higher commissions expense resulting from improvements in mortgage production as well as an increase in salary expenses as a result of an increase in performance incentives, general merit increases, an increase in overtime pay and temporary compensation adjustments and one-time payments to front-line associates as a result of the COVID-19 pandemic.
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Services and Fees
The increase in services and fees when 2020 is compared to 2019 was primarily due to increases in legal fees related to ongoing litigation matters and data processing charges related to software due to continued investments in technology to enhance growth and efficiency opportunities.
Other Real Estate Expense, Net
The decrease in other real estate expense, net for 2020 compared to 2019 was principally due to an increase in net gains on sales of other real estate properties as well as a decline in write-downs of other real estate. For additional analysis of other real estate and foreclosure expenses, please see the section captioned “Nonperforming Assets, Excluding PPP and Acquired Loans.”
Credit Loss Expense Related to Off-Balance Sheet Credit Exposures
Trustmark adopted FASB ASC Topic 326, in accordance with the amendments of FASB ASU 2016-13, effective January 1, 2020. The guidance in FASB ASC 326 replaces Trustmark’s previous incurred loss methodology with a methodology that reflects the current expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit losses. FASB ASC Topic 326 also requires Trustmark to estimate expected credit losses for off-balance sheet credit exposures which are not unconditionally cancellable by Trustmark. Trustmark maintains a separate ACL for off-balance sheet credit exposures, including unfunded commitments and letters of credit. Adjustments to the ACL on off-balance sheet credit exposures are recorded as noninterest expense in credit loss expense related to off-balance sheet credit exposures. The increase in the credit loss expense related to off-balance sheet exposures for the year ended December 31, 2020 was primarily due to net changes in the economic forecast due to the current and anticipated negative effects of the COVID-19 pandemic on the overall economy and macroeconomic factors.
Other Expense
The following table illustrates the comparative components of other noninterest expense for the periods presented ($ in thousands):
Years Ended December 31,
Amount % Change Amount % Change Amount % Change
The increase in other miscellaneous expense when 2020 is compared to 2019 was principally due to the settlement proceeds received during the third quarter of 2019 related to the Trust Department and increases in other miscellaneous charges, charitable contributions and sponsorships and property valuation adjustments related to properties transferred to assets held for sale, partially offset by a decline in travel and entertainment expenses as a result of travel restrictions during the COVID-19 pandemic. The increase in loan expense for 2020 when compared to 2019 was primarily due to increases in appraisal fees.
Results of Segment Operations
Trustmark’s operations are managed along three operating segments: General Banking, Wealth Management and Insurance. A description of each segment and the methodologies used to measure financial performance and financial information by reportable segment are included in Note 21 – Segment Information located in Part II. Item 8. – Financial Statements and Supplementary Data of this report. During the first quarter of 2020, Trustmark revised the composition of its operating segments by moving the Retail Private Banking Group from the General Banking Segment to the Wealth Management Segment as a result of a change in supervision of this group for segment reporting purposes. Prior periods include reclassifications to conform to current period presentation.
The following table provides the net income by reportable segment for the periods presented ($ in thousands):
Years Ended December 31,
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General Banking
Net interest income for the General Banking Segment for 2020 increased $628 thousand, or 0.1%, when compared with 2019. The slight increase in net interest income was principally due to a decline in interest on deposits and the addition of interest and fees on PPP loans, largely offset by declines in all other sources of interest income. Net interest income for the General Banking Segment for 2019 increased $7.1 million, or 1.7%, when compared with 2018. The increase in net interest income was principally due to increases in interest and fees on LHFS and LHFI and decreases in other interest expense and interest expense on federal funds purchased and repurchase agreements, which were largely offset by an increase in interest on deposits and declines in interest on securities and interest and fees on acquired loans. The provision for credit losses for 2020 totaled $36.1 million compared to a provision for loan losses, net of $10.6 million during 2019 and $17.1 million during 2018. For more information on these net interest income items, please see the sections captioned “Financial Highlights” and “Results of Operations.”
Noninterest income for the General Banking Segment increased $83.9 million, or 73.8%, during 2020 compared to a decrease of $174 thousand, or 0.2%, during 2019. The increase in noninterest income for the General Banking Segment during 2020 was primarily due to increase in mortgage banking, net, partially offset by a decline in service charges on deposit accounts. The slight decrease in noninterest income for the General Banking Segment during 2019 was primarily due to the declines in mortgage banking, net and service charges on deposit accounts, which were largely offset by increases in bank card and other fees and other noninterest income, net. Noninterest income for the General Banking Segment represented 32.0% of total revenue for 2020, 21.3% for 2019 and 21.6% for 2018. Noninterest income for the General Banking Segment includes service charges on deposit accounts; bank card and other fees; mortgage banking, net; other income, net and securities gains (losses), net. For more information on these noninterest income items, please see the analysis included in the section captioned “Noninterest Income.”
Noninterest expense for the General Banking Segment increased $42.8 million, or 11.6%, during 2020 compared to an increase of $14.8 million, or 4.2%, during 2019. The increase in noninterest expense for the General Banking Segment for 2020 was principally due to increases in salaries and employee benefits, services and fees and the addition of the credit loss expense related to off-balance sheet credit exposures as a result of the adoption of FASB ASC Topic 326. During the first quarter of 2020, Trustmark completed a voluntary early retirement program which resulted in non-routine transaction expenses of $4.4 million ($4.3 million of salaries and employee benefits expense and $102 thousand of other expense). The increase in noninterest expense for 2019 was principally due to increases in salaries and employee benefits, services and fees, other real estate expense, net and charitable contributions related to the Mississippi Children’s Promise Act. For more information on these noninterest expense items, please see the analysis included in the section captioned “Noninterest Expense.”
Wealth Management
During 2020, net income for the Wealth Management Segment decreased $832 thousand, or 13.0%, compared to an increase of $2.0 million, or 44.8%, during 2019. The decrease in net income for the Wealth Management Segment during 2020 was principally due to an increase in noninterest expense as well as a decline in net interest income, partially offset by an increase in noninterest income. Net interest income for the Wealth Management Segment decreased $668 thousand, or 9.9%, during 2020 compared to an increase of $11 thousand, or 0.2%, during 2019. Noninterest income for the Wealth Management Segment, which includes income related to investment management, trust and brokerage services, increased $774 thousand, or 2.5%, during 2020, principally due to an increase in fees from brokerage services. Noninterest income for the Wealth Management Segment increased $440 thousand, or 1.5%, during 2019. The slight increase in noninterest income for the Wealth Management Segment during 2019 was primarily attributable to an increase in trust management fees. Noninterest expense increased $1.4 million, or 5.0%, during 2019 compared to a decrease of $2.5 million, or 8.0%, during 2019. The increase in noninterest expense for the Wealth Management Segment for 2020 was principally due to the comparison impact of insurance settlement proceeds received during 2019 related to a legal case settled in 2018, which was partially offset by declines in outside services and fees and salary and employee benefit expense. The decrease in noninterest expense for the Wealth Management Segment during 2019 was principally due to a decrease in professional service fees, as well as insurance settlement proceeds received during 2019 related to a legal case settled in 2018.
At December 31, 2020 and 2019, Trustmark held assets under management and administration of $11.463 billion and $11.782 billion and brokerage assets of $2.148 billion and $1.993 billion, respectively.
Insurance
Net income for the Insurance Segment during 2020 increased $575 thousand, or 7.2%, compared to an increase of $583 thousand, or 7.9%, during 2019. Noninterest income for the Insurance Segment, which predominately consists of insurance commissions, increased $2.8 million, or 6.7%, during 2020, compared to an increase of $1.9 million, or 4.8%, during 2019. The increase in noninterest income for the Insurance Segment during 2020 was primarily due to new business commission volume in the property and casualty business and increases in other commission income. The increase in noninterest income for the Insurance Segment during 2019 was primarily due to new insurance commission volume across all lines of business.
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Noninterest expense for the Insurance Segment increased $2.0 million, or 6.3%, during 2020 and $1.3 million, or 4.2%, during 2019.The increase in noninterest expense for the Insurance Segment for 2020 was principally due to higher salaries expense resulting from modest general merit increases and higher commission expense due to improvements in business volumes and associates added as a result of an insurance agency acquired during the period, as well as increases in outside services and fees and other miscellaneous expense. The increases in noninterest expense for the Insurance Segment during 2019was primarily due to higher commission expense due to improvements in business volumes and higher salaries expense resulting from modest general merit increases.
Trustmark performed an annual impairment test of the book value of goodwill held in the Insurance Segment as of October 1, 2020, 2019, and 2018. Based on this analysis, Trustmark concluded that no impairment charge was required. A renewed period of falling prices and suppressed demand for the products of the Insurance Segment could result in impairment of goodwill in the future. FBBI’s ability to maintain the current income trend is dependent on the success of the subsidiary’s continued initiatives to attract new business through cross referrals between practice units and bank relationships and seeking new business in other markets.
FBBI acquired Boyles Moak Insurance Services (Boyles), a Mississippi based insurance agency, for $5.0 million on May 1, 2020. The acquisition was accounted for in accordance with FASB ASC Topic 805, “Business Combinations.” Accordingly, the assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The excess of the consideration paid over the estimated fair value of the net assets acquired was $3.6 million, which was recorded as goodwill under FASB ASC Topic 805. The identifiable intangible assets acquired represented insurance customer relationships and trade name and totaled $2.1 million, the estimated fair value at the acquisition date.
Income Taxes
For the year ended December 31, 2020, Trustmark’s combined effective tax rate was 15.7% compared to 13.4% in 2019 and 13.0% in 2018. Trustmark’s effective tax rate continues to be less than the statutory rate primarily due to various tax-exempt income items and its utilization of income tax credit programs. Trustmark invests in partnerships that provide income tax credits on a Federal and/or State basis (i.e., new market tax credits, low income housing tax credits or historical tax credits). The income tax credits related to these partnerships are utilized as specifically allowed by income tax law and are recorded as a reduction in income tax expense.
Financial Condition
Earning assets serve as the primary revenue streams for Trustmark and are comprised of securities, loans, federal funds sold, securities purchased under reverse repurchase agreements and other earning assets. Average earning assets totaled $13.740 billion, or 90.3% of total average assets, at December 31, 2020, compared with $12.131 billion, or 89.9% of total average assets, at December 31, 2019, an increase of $1.609 billion, or 13.3%.
Securities
The securities portfolio is utilized by Management to manage interest rate risk, generate interest income, provide liquidity and use as collateral for public and wholesale funding. Risk and return can be adjusted by altering duration, composition and/or balance of the portfolio. The weighted-average life of the portfolio at December 31, 2020 and 2019 was 2.9 and 3.5 years, respectively.
When compared with December 31, 2019, total investment securities increased by $189.4 million, or 8.1%, during 2020. This increase resulted primarily from purchases of available for sale securities partially offset by calls, maturities and pay-downs of the underlying loans of GSE guaranteed securities. Trustmark sold no securities during 2020 or 2019.
During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale as securities held to maturity to mitigate the potential adverse impact of a rising interest rate environment on the fair value of the available for sale securities and the related impact on tangible common equity. The resulting net unrealized holding loss is being amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. At December 31, 2020, the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive income (loss), net of tax, (AOCI) in the accompanying consolidated balance sheets totaled $8.9 million ($6.7 million net of tax) compared to $12.1 million ($9.1 million net of tax) at December 31, 2019.
Available for sale securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in AOCI, a separate component of shareholders’ equity. At December 31, 2020, available for sale securities totaled $1.992 billion, which represented 78.7% of the securities portfolio, compared to $1.602 billion, or 68.5%, at December 31, 2019. At December 31, 2020, unrealized gains, net on available for sale securities totaled $32.0 million compared to unrealized gains, net of $1.4 million at December 31, 2019. At December 31, 2020, available for sale securities consisted of obligations of states and political subdivisions, GSE guaranteed mortgage-related securities and direct obligations of government agencies and GSEs.
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Held to maturity securities are carried at amortized cost and represent those securities that Trustmark both intends and has the ability to hold to maturity. At December 31, 2020, held to maturity securities totaled $538.1million and represented 21.3% of the total securities portfolio, compared with $738.1million, or 31.5%, at December 31, 2019.
The table below indicates the amortized cost of securities available for sale and held to maturity by type at December 31, 2020, 2019 and 2018 ($ in thousands):
December 31,
Securities available for sale
Mortgage-backed securities
Residential mortgage pass-through securities
Other residential mortgage-backed securities
Commercial mortgage-backed securities
Securities held to maturity
U.S. Government agency obligations $ — $ 3,781 $ 3,736
Mortgage-backed securities
Residential mortgage pass-through securities
Other residential mortgage-backed securities
Commercial mortgage-backed securities
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The following table details the maturities of securities available for sale and held to maturity using the amortized cost at December 31, 2020, and the weighted-average yield for each range of maturities (tax equivalent basis) ($ in thousands):
Maturing
Securities available for sale
Mortgage-backed securities
Residential mortgage pass-through securities
Other residential mortgage-backed securities
Commercial mortgage-backed securities
Securities held to maturity
Mortgage-backed securities
Residential mortgage pass-through securities
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC, or GNMA — — — — — — 360,361 1.88 % 360,361
Commercial mortgage-backed securities
Mortgage-backed securities and collateralized mortgage obligations are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of approximately 98.7% of the portfolio in GSE-backed obligations and other Aaa-rated securities as determined by Moody’s Investors Services (Moody’s). None of the securities owned by Trustmark are collateralized by assets which are considered sub-prime. Furthermore, outside of stock ownership in the FHLB of Dallas, FHLB of Atlanta and Federal Reserve Bank of Atlanta, Trustmark does not hold any other equity investment in a GSE.
As of December 31, 2020, Trustmark did not hold securities of any one issuer with a carrying value exceeding ten percent of total shareholders’ equity, other than certain GSEs which are exempt from inclusion. Management continues to closely monitor the credit quality as well as the ratings of the debt and mortgage-backed securities issued by the GSEs and held in Trustmark’s securities portfolio.
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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, 2020 ($ in thousands):
Amortized Cost Estimated Fair Value
Amount % Amount %
Securities Available for Sale
Securities Held to Maturity
The table above presenting the credit rating of Trustmark’s securities is formatted to show the securities according to the credit rating category, and not by category of the underlying security. At December 31, 2020, approximately 99.7% of the available for sale securities, measured at the estimated fair value, and 95.1% of the held to maturity securities, measured at amortized cost, were rated Aaa.
LHFS
At December 31, 2020, LHFS totaled $447.0 million, consisting of $305.8 million of residential real estate mortgage loans in the process of being sold to third parties and $141.2 million of Government National Mortgage Association (GNMA) optional repurchase loans. At December 31, 2019, LHFS totaled $226.3 million, consisting of $169.3 million of residential real estate mortgage loans in the process of being sold to third parties and $57.1 million of GNMA optional repurchase loans. Please refer to the nonperforming assets table that follows for information on GNMA loans eligible for repurchase which are past due 90 days or more.
Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during 2020 or 2019.
For additional information regarding the GNMA optional repurchase loans, please see the section captioned “Past Due LHFS” included in Note 4 – LHFI and Allowance for Credit Losses, LHFI of Part II. Item 8. – Financial Statements and Supplementary Data of this report.
LHFI
The full impact of the COVID-19 pandemic is unknown and rapidly evolving. It has caused substantial disruption in international and the United States economies, markets and employment. The outbreak may have a significant adverse impact on certain industries Trustmark serves, including the restaurant and food services, hotel, retail and energy industries. See the section captioned “COVID-19 Update” for further information and discussion regarding the current and anticipated impact of the COVID-19 pandemic.
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The table below provides the carrying value of the LHFI portfolio by loan class for each year of the five-year period ended
December 31, 2020 ($ in thousands):
December 31,
Amount % Amount % Amount % Amount % Amount %
Loans secured by real estate:
Other loans secured by real estate: (2)
Other construction 794,983 8.1 % — — — — — — — —
Secured by 1-4 family residential properties 1,216,400 12.4 % — — — — — — — —
LHFI at December 31, 2020 increased $488.9 million, or 5.2%, compared to December 31, 2019. On January 1, 2020, Trustmark transferred $72.6 million, the remaining balance of the loans acquired in the BancTrust merger, from acquired impaired loans to LHFI as PCD loans as part of its adoption of FASB ASC Topic 326. For additional information regarding the acquired loans transferred to LHFI, see the section captioned “Acquired Loans.” Excluding the transferred acquired loans, LHFI increased $416.3 million, or 4.4%, compared to December 31, 2019. The increase in LHFI during 2020, excluding the transferred acquired loans, was primarily due to net growth in LHFI secured by real estate in the Texas, Alabama, Mississippi and Tennessee market regions, partially offset by declines in commercial and industrial LHFI in the Mississippi, Tennessee and Alabama market regions. The following discussion of changes in LHFI excludes the acquired loans transferred on January 1, 2020.
LHFI secured by real estate increased $542.3 million, or 8.6%, during 2020 primarily due to net growth in other real estate secured loans, NFNR LHFI and other construction loans partially offset by loans secured by 1-4 family residential properties. LHFI secured by other real estate increased $337.5 million, or 46.3%, during 2020, primarily due to other construction loans that moved to LHFI secured by multi-family residential properties in the Texas, Alabama, Mississippi and Florida market regions. NFNR LHFI increased $195.6 million, or 7.8%, during 2020, principally due to movement from the other construction loans category. Excluding other construction loan reclassifications, the NFNR LHFI portfolio decreased $48.0 million, or 1.9%, during 2020 primarily due to declines in nonowner-occupied loans in the Texas, Mississippi, Florida and Alabama market regions, which were partially offset by growth in owner-occupied loans in the Texas, Tennessee, Florida and Alabama market regions. Other construction loans increased $116.8 million, or 17.2%, during 2020 primarily due to new construction loans across all five market regions, partially offset by other construction loans moved to other loan categories upon the completion of the related construction project. During 2020, $873.7 million loans were moved from other construction to other loan categories, including $629.5 million to multi-family residential loans, $169.6 million to nonowner-occupied loans and $74.3 million to owner-occupied loans. Excluding all reclassifications between loan categories, growth in other construction loans across all five market regions totaled $963.3 million during 2020. LHFI secured by 1-4 family residential properties declined $132.3 million, or 7.1%, during 2020 across all five market regions, primarily due to increases in mortgage loan refinance and secondary marketing activities due to lower interest rates.