Trustmark Corp: Form 10-Q for the period ended Jun 30, 2024

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

Description of Business

Trustmark, a Mississippi business corporation incorporated in 1968, is a bank holding company headquartered in Jackson, Mississippi. Trustmark’s principal subsidiary is Trustmark National Bank (TNB), initially chartered by the State of Mississippi in 1889. At June 30, 2024, TNB had total assets of $18.450 billion, which represented approximately 99.99% of the consolidated assets of Trustmark.

Through TNB and its other subsidiaries, Trustmark operates as a financial services organization providing banking and other financial solutions through offices and 2,515 full-time equivalent associates (measured at June 30, 2024) located in the states of Alabama (including the Georgia Loan Production Office (LPO), which are collectively referred to herein as Trustmark's Alabama market region), Florida (primarily in the northwest or “Panhandle” region of that state, which is referred to herein as Trustmark’s Florida market), Mississippi, Tennessee (in the Memphis and Northern Mississippi regions, which are collectively referred to herein as Trustmark’s Tennessee market), and Texas (primarily in Houston, which is referred to herein as Trustmark’s Texas market). Trustmark’s operations are managed along two operating segments: General Banking Segment and Wealth Management Segment. For a complete overview of Trustmark’s business, see the section captioned “The Corporation” included in Part I. Item 1. – Business of Trustmark’s Annual Report on Form 10-K for its fiscal year ended December 31, 2023 (2023 Annual Report).

Executive Overview

Trustmark completed the following significant non-routine transactions during the second quarter of 2024:

• On May 31, 2024, TNB closed the sale of its wholly owned subsidiary, Fisher Brown Bottrell Insurance, Inc., (FBBI) to Marsh & McLennan Agency LLC, consistent with the terms as previously announced on April 23, 2024. Trustmark recognized a net gain on the sale of $228.3 million ($171.2 million, net of taxes) in income from discontinued operations. The operations of FBBI prior to the sale are included in income from discontinued operations for the current and prior periods.
• Trustmark restructured its investment securities portfolio by selling $1.561 billion of available for sale securities with an average yield of 1.36%, which generated a loss of $182.8 million ($137.1 million, net of taxes) and was recorded to noninterest income (loss) in security gains (losses), net. Trustmark also purchased $1.378 billion of available for sale securities with an average yield of 4.85%.
• Trustmark sold a portfolio of 1-4 family mortgage loans that were at least three payments delinquent and/or nonaccrual at the time of selection totaling $56.2 million, which resulted in a loss of $13.4 million ($10.1 million, net of taxes). The portion of the loss related to credit totaled $8.6 million ($6.5 million, net of taxes) and was recorded as adjustments to charge-offs and the provision for credit losses (PCL). The noncredit-related portion of the loss totaled $4.8 million ($3.6 million, net of taxes) and was recorded to noninterest income (loss) in other, net.
• On April 8, 2024, Visa commenced an initial exchange offer expiring on May 3, 2024, for any and all outstanding shares of Visa Class B-1 common stock (Visa B-1 shares). Holders participating in the exchange offer would receive a combination of Visa Class B-2 common stock (Visa B-2 shares) and Visa Class C common stock (Visa C shares) in exchange for Visa B-1 shares that were validly tendered and accepted for exchange by Visa. TNB tendered its 38.7 thousand Visa B-1 shares, which were accepted by Visa. In exchange for each Visa B-1 share that was validly tendered and accepted for exchange by Visa, TNB received 50.0% of a newly issued Visa B-2 share and newly issued Visa C shares equivalent in value to 50.0% of a Visa B-1 share. The Visa C shares that were received by TNB were recognized at fair value, which resulted in a gain of $8.1 million ($6.0 million, net of taxes) and was recorded to noninterest income (loss) in other, net during the second quarter of 2024. The Visa B-2 shares were recorded at their nominal carrying value.

In addition to these significant non-routine transactions, Trustmark's financial results for the three and six months ended June 30, 2024 reflected continued growth in loans held for investment (LHFI), an increase in noninterest income and disciplined expense management. Trustmark's capital position remained solid, reflecting the consistent profitability of its diversified financial services businesses. Trustmark remains well-positioned and committed to meeting the banking and financial needs of its customers and the communities it serves, and remains focused on providing support, advice and solutions to meet its customers’ unique needs. Trustmark is committed to managing the franchise for the long term, supporting investments to promote profitable revenue growth, realigning delivery channels to support changing customer preferences as well as reengineering and efficiency opportunities to enhance long-term shareholder value. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable September 15, 2024, to shareholders of record on September 1, 2024.

Recent Economic and Industry Developments

Economic activity improved slightly during the first six months of 2024; however, economic concerns remain as a result of the cumulative weight of uncertainty regarding the potential economic impact of geopolitical developments, such as the conflicts in Ukraine and the Middle East, inflation, other economic and industry volatility, the 2024 election cycle in the United States, higher energy prices and broader price pressures. Doubts surrounding the near-term direction of global markets and the potential impact 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 economic conditions, and thus may have an impact upon Trustmark's financial condition or results of operations.

Market interest rates began to rise during 2022 after an extended period at historical lows. Starting in March 2022, the FRB began raising the target federal funds rate for the first time in three years and continued with multiple increases throughout 2022 and the first half of 2023. The FRB has maintained the target federal funds rate at a range of 5.25% to 5.50% since July 2023. In addition, the FRB increased the interest that it pays on reserves multiple times during 2022 and the first half of 2023 from 0.10% to 5.40% as of July 2023. The FRB has maintained the rate it pays on reserves at 5.40% since July 2023. These higher interest rates have increased the competitive pressures on the deposit cost of funds. It is not possible to predict the pace and magnitude of changes in interest rates, or the impact rate changes will have on Trustmark's results of operations.

In the July 2024 “Summary of Commentary on Current Economic Conditions by Federal Reserve District,” the twelve Federal Reserve Districts’ reports suggested that during the reporting period (covering the period from May 21, 2024 through July 8, 2024) economic activity maintained a slight to modest growth. Reports by the twelve Federal Reserve Districts (Districts) noted the following during the reporting period:

• Household spending was little changed in most Districts. Auto sales varied across Districts; however, some Districts noted that sales were lower due in part to a cyberattack on dealerships and high interest rates. Travel and tourism grew steadily, in line with seasonal expectations. Agricultural conditions varied in tandem with sporadic droughts across the nation. Manufacturing activity varied widely across Districts, ranging from brisk downturn to moderate growth. Retail restocking spurred slight growth in transportation activity, while tight capacity in ocean shipping led to a surge in spot rates.
• Most Districts saw soft demand for consumer and business loans. Reports on residential and commercial real estate markets varied.
• Expectations for the future of the economy were for slower growth over the next six months due to uncertainty around the upcoming election, domestic policy, geopolitical conflict and inflation.
• Employment rose at a slight pace overall. Most Districts reported employment was flat or up slightly. Several Districts reported declines in employment in the manufacturing sector due to slowdowns in new orders. Skilled-worker availability remained a challenge across all Districts; however, several Districts reported some improvement in labor supply conditions. Labor turnover was lower, which reduced demand to find new workers. Contacts in several Districts expect to be more selective on who they hire going forward and not backfill all open positions. Wages grew at a modest pace. Several Districts reported some slowing in wage growth due to increased worker availability and less competition for workers.
• Prices increased at a modest pace overall. While consumer spending was generally reported as showing little to no change, almost every District mentioned retailers discounting items or price-sensitive consumers only purchasing essentials, trading down in quality, buying fewer items or shopping around for the best deals. Input costs were beginning to stabilize; however, the Federal Reserve’s Sixth District, Atlanta specifically noted products like copper and electrical supplies have seen a notable increase.

Reports by the Federal Reserve’s Sixth District, Atlanta (which includes Trustmark’s Alabama, Florida and Mississippi market regions), Eighth District, St. Louis (which includes Trustmark’s Tennessee market region), and Eleventh District, Dallas (which includes Trustmark’s Texas market region), noted similar findings for the reporting period as those discussed above. The Federal Reserve’s Sixth District also noted lending remained relatively flat, high deposit and borrowing costs continued to weigh on bank earnings with some financial institutions selling securities in order to reinvest proceeds into higher-yielding assets, elevated interest rates adversely impacted bank customers as businesses and consumers refinanced debt at higher rates and increased delinquencies were observed as credit conditions continued to normalize. The Federal Reserve’s Eleventh District reported that credit standards continued to tighten, though at a slower pace, for all loan types except for consumer loans, loan volumes grew at a faster pace as loan demand increased despite credit standards continuing to tighten, loan price increases moderated and bankers anticipate credit tightening for commercial real estate loans to accelerate over the next three months. The Federal Reserve’s Eleventh District also noted close to half of bankers reported an increase in deposits and slightly more expect deposits to rise in the near term, loan nonperformance continued to rise, particularly for consumer and commercial and industrial loans, and bankers’ outlooks remained mixed as they expect an increase in loan demand in the near term but a deterioration in loan performance and business activity.

Financial Highlights

Trustmark reported net income of $73.8 million, or basic and diluted earnings per share (EPS) of $1.21 and $1.20, respectively, in the second quarter of 2024, compared to $45.0 million, or basic and diluted EPS of $0.74, in the second quarter of 2023. Trustmark’s reported performance during the quarter ended June 30, 2024 produced a return on average tangible equity of 21.91%, a return on average assets of 1.58%, an average equity to average assets ratio of 9.20% and a dividend payout ratio of 19.01%, compared to a return on average tangible equity of 15.18%, a return on average assets of 0.96%, an average equity to average assets ratio of 8.42% and a dividend payout ratio of 31.08% during the quarter ended June 30, 2023.

Trustmark reported net income of $115.4 million, or basic and diluted EPS of $1.89 and $1.88, respectively, for the six months ended June 30, 2024, compared to $95.3 million, or basic and diluted EPS of $1.56 for the same time period in 2023. Trustmark's reported performance during the first six months of 2024 produced a return on average tangible equity of 17.56%, a return on average assets of 1.24%, an average equity to average assets ratio of 9.09% and a dividend payout ratio of 24.34%, compared to return on average tangible equity of 16.56%, a return on average assets of 1.03%, an average equity to average assets ratio of 8.33% and a dividend payout ratio of 29.49% for the first six months of 2023.

Trustmark completed the sale of FBBI during the second quarter of 2024. As such, financial results for the three and six months ended June 30, 2024 consist of both continuing and discontinued operations. The discontinued operations include the financial results of FBBI prior to the sale as well as the net gain on the sale in the second quarter. Trustmark reported a net loss from continuing operations for the three and six months ended June 30, 2024 of $100.6 million and $62.4 million, respectively, compared to net income from continuing operations of $41.2 million and $88.8 million, respectively, for the same time periods in 2023. Trustmark's reported performance from continuing operations for the three and six month ended June 30, 2024 produced a return on average tangible equity of -29.05% and -9.18%, respectively, and a return on average assets of -2.16% and -0.67%, respectively, compared to a return on average tangible equity of 13.28% and 14.75%, respectively, and a return on average assets of 0.88% and 0.97%, respectively, for the same time periods in 2023. The net loss from continuing operations for the three and six months ended June 30, 2024 was principally due to the loss on the sale of available for sale securities during the second quarter of 2024.

Total revenue, which is defined as net interest income plus noninterest income (loss), for the three months ended June 30, 2024 was a negative $257 thousand, a decrease of $178.0 million when compared to the same time period in 2023, principally due to the $182.8 million loss on the sale of available for sale securities and the $4.8 million noncredit-related loss on the sale of 1-4 family mortgage loans partially offset by the $8.1 million fair value adjustment for the Visa C shares and an increase in net interest income. Total revenue for the six months ended June 30, 2024 was $171.9 million, a decrease of $180.5 million, or 51.2%, when compared to the same time period in 2023, principally due to the loss on the sale of available for sale securities, the noncredit-related loss on the sale of 1-4 family mortgage loans and a decrease in net interest income partially offset by the fair value adjustment for the Visa C shares.

Net interest income for the three and six months ended June 30, 2024 totaled $141.0 million and $273.9 million, respectively, an increase of $1.1 million, or 0.8%, and a decrease of $3.6 million, or 1.3%, respectively, when compared to the same time periods in 2023, principally attributable to an increase in interest and fees on loans held for sale (LHFS) and LHFI, an increase in interest on deposits and a decline in other interest expense. Interest income totaled $239.2 million and $469.0 million for the three and six months ended June 30, 2024, respectively, an increase of $20.6 million, or 9.4%, and $51.6 million, or 12.4%, respectively, when compared to the same time periods in 2023, principally due to an increase in interest and fees on LHFS and LHFI primarily as a result of the higher interest rate environment and loan growth. Interest expense totaled $98.1 million and $195.1 million for the three and six months ended June 30, 2024, an increase of $19.5 million, or 24.8%, and $55.2 million, or 39.5%, respectively, when compared to the same time periods in 2023. The increase in interest expense when the three and six months ended June 30, 2024 are compared to the same time periods in 2023 was principally due to an increase in interest on deposits primarily due to rising interest rates, increased competition for deposits and higher average balances, partially offset by a decrease in other interest expense primarily due to a decrease in short-term Federal Home Loan Bank (FHLB) advances.

Noninterest income (loss) for the three and six months ended June 30, 2024 totaled a negative $141.3 million and a negative $101.9 million, respectively, a decrease of $179.1 million and $176.8 million, respectively, when compared to the same time periods in 2023, primarily due to the loss on the sale of the available for sale securities and a decline in mortgage banking, net, partially offset by an increase in other, net. Other, net totaled $7.5 million and $10.6 million for the three and six months ended June 30, 2024, respectively, an increase of $4.7 million and $5.3 million, respectively, when compared to the same time periods in 2023, principally due to the $8.1 million Visa C shares fair value adjustment as well as increases in cash management service fees and net gains on the sale of premises and equipment, partially offset by the $4.8 million noncredit-related loss on the sale of 1-4 family mortgage loans. Mortgage banking, net totaled $4.2 million and $13.1 million for the three and six months ended June 30, 2024, respectively, a decrease of $2.4 million, or 36.3%, and $1.1 million, or 7.9%, respectively, when compared to the same time period in 2023, principally due to increases in the net negative hedge ineffectiveness and the run-off of the MSR, partially offset by an increase in the gain on sales of loans, net.

Noninterest expense for the three and six months ended June 30, 2024 totaled $118.3 million and $238.0 million, respectively, a decrease of $3.3 million, or 2.7%, and $1.2 million, or 0.5%, respectively, when compared to the same time periods in 2023. The decrease in noninterest expense for the three and six months ended June 30, 2024 was principally due to declines in services and fees and salaries and employee benefits partially offset by an increase in other expense. Services and fees for the three and six months ended June 30, 2024 totaled $24.7 million and $49.2 million, respectively, a decrease of $3.1 million, or 11.1%, and $3.7 million, or 7.0%, respectively, when compared to the same time periods in 2023, principally due to declines in outside services and fees, primarily related to other services and fees and legal expense, communication expense, primarily related to telephone expense, and advertising expense, partially offset by an increase in data processing expenses related to software. Salaries and employee benefits totaled $64.8 million and $130.3 million for the three and six months ended June 30, 2024, respectively, a decrease of $2.0 million, or 2.9%, and $1.2 million, or 0.9%, respectively. The decrease in salaries and employee benefits when the three months ended June 30, 2024 is compared to the same time period in 2023 was principally due to declines in commissions related to mortgage production, annual retail management incentive compensation and various other salaries expenses, partially offset by increases in annual general incentive compensation and broker commissions. The decrease in salaries and employee benefits when the six months ended June 30, 2024 is compared to the same time period in 2023 was principally due to declines in commission expense related to mortgage production, miscellaneous other salaries expenses, annual retail management incentive compensation and medical insurance expense, partially offset by increases in salaries expense, primarily due to general merit increases, broker commissions and annual general incentive compensation. Other expense totaled $15.2 million and $31.4 million for the three and six months ended June 30, 2024, respectively, an increase of $1.5 million, or 10.7%, and $3.5 million, or 12.3%, respectively, when compared to the same time periods in 2023. The increase in other expense when the three months ended June 30, 2024 is compared to the same time period in 2023 was principally due to an increase in FDIC assessment expense, primarily due to an increase in the assessment rate, partially offset by declines in various other miscellaneous expenses, including sponsorships and contributions, operational losses and franchise taxes. The increase in other expense when the first six months of 2024 is compared to the same time period in 2023 was principally due to increases in FDIC assessment expense and other real estate expense, primarily due to an increase in the net loss on the sale of other real estate properties, partially offset by declines in various other miscellaneous expenses, including stationery and supplies expense, sponsorships and contributions, travel and entertainment expense and franchise taxes.

Trustmark’s total PCL on LHFI for the three and six months ended June 30, 2024 totaled $23.3 million and $31.0 million, respectively, and included a $8.6 million PCL, LHFI sale of 1-4 family mortgage loans for the credit-related portion of the loss on the sale of the 1-4 family mortgage loans. The PCL, LHFI, excluding the PCL, LHFI sale of 1-4 family mortgage loans, totaled $14.7 million and $22.4 million for the three and six months ended June 30, 2024, respectively, compared to $8.2 million and $11.5 million, respectively, for the same time periods in 2023. The PCL on LHFI, excluding the PCL, LHFI 1-4 family mortgage loans, for the three and six months ended June 30, 2024 primarily reflected an increase in required reserves as a result of net adjustments to the qualitative factors due to credit migrations and loan growth and net changes in the macroeconomic forecast associated with specific loss driver models as a result of loss driver updates. The PCL on off-balance sheet credit exposures totaled a negative $3.6 million and a negative $3.8 million for the three and six months ended June 30, 2024, respectively, compared to $245 thousand and a negative $2.0 million, respectively, for the same time periods in 2023. The release in PCL on off-balance sheet credit exposures for the three and six months ended June 30, 2024, primarily reflected a decrease in required reserves as a result of a decrease in unfunded commitments and changes in the total reserve rate, partially offset by an increase in required reserves as a result of implementing the performance trend qualitative reserve factor. Please see the section captioned “Provision for Credit Losses” for additional information regarding the PCL on LHFI and off-balance sheet credit exposures.

At June 30, 2024, nonperforming assets totaled $50.9 million, a decrease of $56.0 million, or 52.4%, compared to December 31, 2023, reflecting declines in both nonaccrual LHFI and other real estate. Nonaccrual LHFI totaled $44.3 million at June 30, 2024, a decrease of $55.7 million, or 55.7%, relative to December 31, 2023, primarily as a result of the sale of 1-4 family mortgage loans during the second quarter of 2024 as well as the resolution of one large nonaccrual commercial credit in the Texas market region and a significant reduction of one large nonaccrual commercial credit in the Alabama market region, partially offset by one large commercial credit placed on nonaccrual in the Alabama market region. Other real estate, net totaled $6.6 million at June 30, 2024, a decrease of $281 thousand, or 4.1%, when compared to December 31, 2023, principally due to properties sold in the Mississippi and Alabama market regions largely offset by properties foreclosed in the Mississippi market region.

LHFI totaled $13.155 billion at June 30, 2024, an increase of $204.9 million, or 1.6%, compared to December 31, 2023. The increase in LHFI during the first six months of 2024 was primarily due to net growth in LHFI secured by real estate and other commercial loans and leases partially offset by declines in commercial and industrial LHFI and state and other political subdivision LHFI. For additional information regarding changes in LHFI and comparative balances by loan category, see the section captioned “LHFI.”

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

Total deposits were $15.463 billion at June 30, 2024, a decrease of $106.9 million, or 0.7%, compared to December 31, 2023. During the first six months of 2024, noninterest-bearing deposits decreased $44.1 million, or 1.4%, principally due to declines in commercial noninterest-bearing demand deposit accounts. Interest-bearing deposits decreased $62.8 million, or 0.5%, during the first six months of 2024, primarily due to declines in public and consumer interest checking accounts and consumer savings accounts, partially offset by growth in commercial interest checking accounts, business and consumer money market deposit accounts (MMDA) and all categories of certificates of deposits (CDs).

Federal funds purchased and securities sold under repurchase agreements totaled $314.1 million at June 30, 2024, a decrease of $91.6 million, or 22.6%, compared to December 31, 2023, principally due to a decrease in upstream federal funds purchased. Other borrowings totaled $336.7 million at June 30, 2024, a decrease of $146.5 million, or 30.3%, compared to December 31, 2023, principally due to a decline in outstanding short-term FHLB advances with the FHLB of Dallas.

Recent Legislative and Regulatory Developments

There have been no material changes to the regulatory developments included in Trustmark’s 2023 Annual Report. For additional information regarding legislation and regulation applicable to Trustmark, see the section captioned “Supervision and Regulation” included in Part I. Item 1. – Business of Trustmark’s 2023 Annual Report.

Selected Financial Data

The following tables present financial data derived from Trustmark’s consolidated financial statements as of and for the periods presented ($ in thousands, except per share data):

(1) Consistent with Trustmark’s audited annual financial statements, total revenue is defined as net interest income plus noninterest income (loss).

(2) Due to rounding, EPS from continuing operations and discontinued operations may not sum to EPS from net income.

Non-GAAP Financial Measures

In addition to capital ratios defined by U.S. generally accepted accounting principles (GAAP) and banking regulators, Trustmark utilizes various tangible common equity measures when evaluating capital utilization and adequacy. Tangible common equity, as defined by Trustmark, represents common equity less goodwill and identifiable intangible assets. Trustmark's common equity Tier 1 capital includes common stock, capital surplus and retained earnings, and is reduced by goodwill and other intangible assets, net of associated net deferred tax liabilities as well as disallowed deferred tax assets and threshold deductions as applicable.

Trustmark believes these measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of Trustmark’s capitalization to other organizations. These ratios differ from capital measures defined by banking regulators principally in that the numerator excludes shareholders’ equity associated with preferred securities, the nature and extent of which varies across organizations. In Management’s experience, many stock analysts use tangible common equity measures in conjunction with more traditional bank capital ratios to compare capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions.

These calculations are intended to complement the capital ratios defined by GAAP and banking regulators. Because GAAP does not include these capital ratio measures, Trustmark believes there are no comparable GAAP financial measures to these tangible common equity ratios. Despite the importance of these measures to Trustmark, there are no standardized definitions for them and, as a result, Trustmark’s calculation methods may not be comparable with those of other organizations. Also, there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its consolidated financial statements and the notes related thereto in their entirety and not to rely on any single financial measure.

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):

(1) Calculated using annualized net income (loss) from continuing operations adjusted for intangible amortization divided by total average tangible equity.

(2) Includes other intangible assets, net of DTLs, disallowed deferred tax assets and threshold deductions, as applicable.

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 these as measures of its core operating business, which exclude the impact of the items detailed below, as these items are generally not operational in nature. These non-GAAP financial measures also provide another basis for comparing period-to-period results as presented in the accompanying selected financial data table and the 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 consolidated financial statements and the notes related thereto in their entirety, and not to rely on any single financial measure.

The following table presents adjustments to net income and selected 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):

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 tables show 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 were immaterial.

Net interest income-FTE for the three months ended June 30, 2024, increased $1.0 million, or 0.7%, when compared to the same time period in 2023 principally due to an increase in interest and fees on LHFS and LHFI-FTE and a decline in other interest expense, partially offset by an increase in interest on deposits. Net interest income-FTE for the six months ended June 30, 2024 decreased $3.8 million, or 1.3%, when compared with the same time period in 2023 principally due to an increase in interest on deposits partially offset by an increase in interest and fees on LHFS and LHFI-FTE and a decrease in other interest expense. The net interest margin-FTE for the three months ended June 30, 2024 increased 5 basis points to 3.38% when compared to the same time period in 2023. The increase in the net interest margin for the three months ended June 30, 2024 when compared to the same time period in 2023, was principally due to increases in the yields on the LHFS and LHFI portfolios and the securities portfolio, primarily due to the restructuring of the available for sale securities portfolio during the second quarter of 2024, partially offset by an increase in the cost of interest-bearing deposits. The net interest margin-FTE for the six months ended June 30, 2024 decreased 7 basis points to 3.29% when compared to the same time period in 2023. The decrease in the net interest margin for the six months ended June 30, 2024 when compared to the same time period in 2023, was principally due to an increase in the cost of interest-bearing deposits partially offset by the increase in the yield on the LHFS and LHFI portfolios.

Average interest-earning assets for the three months ended June 30, 2024 was $17.189 billion compared to $17.248 billion for the same time period in 2023, a decline of $59.0 million, or 0.3%, principally due to a decline in average total securities and average other earning assets partially offset by an increase in average loans (LHFS and LHFI). Average interest-earning assets for the six months ended June 30, 2024 was $17.139 billion compared to $17.058 billion for the same time period in 2023, an increase of $80.5 million, or 0.5%, principally due to an increase in average loans (LHFS and LHFI) partially offset by a decline in average total securities and average other earning assets. Average loans (LHFS and LHFI) increased $577.1 million, or 4.5%, and $607.7 million, or 4.8%, when the three and six months ended June 30, 2024, respectively, are compared to the same time periods in 2023, principally due to an increase in the average balance of the LHFI portfolio of $571.8 million, or 4.6%, and $587.2 million, or 4.7%, respectively. The increase in the LHFI portfolio when the balances at June 30, 2024 are compared to June 30, 2023 was principally due to net growth in LHFI secured by real estate and other commercial loans and leases. Average total securities declined $322.5 million, or 8.9%, and $325.7 million, or 8.9%, when the three and six months ended June 30, 2024 are compared to the same time periods in 2023, principally due to available for sale securities sold net of available for sale securities purchased as part of the restructuring of the available for sale securities portfolio during the second quarter of 2024 as well as calls, maturities and pay-downs of the loans underlying GSE guaranteed securities. Average other earning assets decreased $310.4 million, or 34.4%, and $198.7 million, or 25.5%, respectively, when the three and six months ended June 30, 2024 are compared to the same time periods in 2023, primarily due to decreases in reserves held at the FRBA and investments in FHLB stock.

Interest income-FTE for the three and six months ended June 30, 2024 totaled $242.5 million and $475.7 million, respectively, an increase of $20.5 million, or 9.3%, and $51.4 million, or 12.1%, respectively, while the yield on total earning assets increased to 5.67% and 5.58%, respectively, compared to 5.16% and 5.02%, respectively, for the same time periods in 2023. The increase in interest income-FTE for the three and six months ended June 30, 2024 was primarily due to an increase in interest and fees on LHFS and LHFI-FTE. During the three and six months ended June 30, 2024, interest and fees on LHFS and LHFI-FTE increased $23.5 million, or 12.2%, and $53.9 million, or 14.5%, respectively, while the yield on LHFS and LHFI increased 46 basis points to 6.54% and 53 basis points to 6.47%, respectively, when compared to the same time periods in 2023, primarily due to the higher interest rate environment as well as the increase in the average balance of LHFI.

Average interest-bearing liabilities for both the three and six months ended June 30, 2024 totaled $13.377 billion compared to $13.047 billion and $12.817 billion, respectively, for the same time periods in 2023, an increase of $330.2 million, or 2.5%, and $559.6 million, or 4.4%, respectively. The increase in average interest-bearing liabilities when the three and six months ended June 30, 2024 are compared to the same time periods in 2023 was primarily the result of an increase in average interest-bearing deposits partially offset by a decline in average other borrowings. Average interest-bearing deposits for the three and six months ended June 30, 2024 increased $1.081 billion, or 9.7%, and $1.263 billion, or 11.5%, respectively, when compared to the same time periods in 2023, reflecting growth in average time deposits and average interest-bearing demand deposits, partially offset by declines in average savings deposits. Average other borrowings for the three and six months ended June 30, 2024 decreased $795.4 million, or 52.5%, and $721.9 million, or 51.3%, respectively, when compared to the same time periods in 2023, principally due to the decrease in outstanding short-term FHLB advances with the FHLB of Dallas as a result of changes in funding needs.

Interest expense for the three and six months ended June 30, 2024 totaled $98.1 million and $195.1 million, respectively, an increase of $19.5 million, or 24.8%, and $55.2 million, or 39.5%, respectively, when compared with the same time periods in 2023, while the rate on total interest-bearing liabilities increased 53 basis points to 2.95% and 73 basis points to 2.93%, respectively, principally due to an increase in interest on deposits partially offset by a decline in other interest expense. Interest on deposits for the three and six months ended June 30, 2024 increased $29.3 million, or 53.8%, and $72.1 million, or 75.6%, respectively, while the rate on interest-bearing deposits increased 79 basis points to 2.75% and 100 basis points to 2.75%, respectively, when compared to the same time periods in 2023, primarily due to higher interest rates, reflecting the increased competitive pressures on deposits, and increases in average balances of time deposits and MMDA accounts. Other interest expense for the three and six months ended June 30, 2024 decreased $10.6 million, or 54.6%, and $18.4 million, or 52.8%, respectively, while the rate on other borrowings decreased 21 basis points to 4.91% and 17 basis points to 4.84%, respectively, when compared to the same time periods in 2023, primarily due to the decrease in outstanding short-term FHLB advances with the FHLB of Dallas.

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):

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Provision for Credit Losses

The PCL, LHFI is the amount necessary to maintain the ACL for LHFI at the amount of expected credit losses inherent within the LHFI portfolio. The amount of PCL and the related ACL for LHFI are based on Trustmark’s ACL methodology. The PCL, LHFI, excluding the PCL, LHFI sale of 1-4 family mortgage loans, totaled $14.7 million and $22.4 million for the three and six months ended June 30, 2024, respectively, compared to $8.2 million and $11.5 million, respectively, for the same time periods in 2023. The PCL on LHFI, excluding the PCL, LHFI sale of 1-4 family mortgage loans, for the three and six months ended June 30, 2024 primarily reflected an increase in required reserves as a result of net adjustments to the qualitative factors due to credit migrations and loan growth and net changes in the macroeconomic forecast associated with specific loss driver models as a result of loss driver updates.

FASB ASC Topic 326 requires Trustmark to estimate expected credit losses for off-balance sheet credit exposures which are not unconditionally cancellable by Trustmark. Trustmark maintains a separate ACL for off-balance sheet credit exposures, including unfunded commitments and letters of credit. Adjustments to the ACL on off-balance sheet credit exposures are recorded to the PCL, off-balance sheet credit exposures. The PCL, off-balance sheet credit exposures totaled a negative $3.6 million and a negative $3.8 million for the three and six months ended June 30, 2024, respectively, compared to $245 thousand and a negative $2.0 million, respectively, for the same time periods in 2023. The release in PCL on off-balance sheet credit exposures for the three and six months ended June 30, 2024, primarily reflected a decrease in required reserves as a result of a decrease in unfunded commitments and changes in the total reserve rate, partially offset by an increase in required reserves as a result of implementing the performance trend qualitative reserve factor.

See the section captioned “Allowance for Credit Losses” for information regarding Trustmark’s ACL methodology as well as further analysis of the PCL.

Noninterest Income (Loss)

The following table provides the comparative components of noninterest income (loss) for the periods presented ($ in thousands):

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

Changes in various components of noninterest income (loss) are discussed in further detail below. For analysis of Trustmark’s wealth management income, please see the section captioned “Results of Segment Operations.”

Mortgage Banking, Net

The following table illustrates the components of mortgage banking, net included in noninterest income (loss) for the periods presented ($ in thousands):

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

The decreases in mortgage banking, net for the three and six months ended June 30, 2024 when compared to the same time periods in 2023 were principally due to increases in the net negative hedge ineffectiveness and the run-off of the MSR, partially offset by an increase in the gain on sales of loans, net. Mortgage loan production for the three and six months ended June 30, 2024 was $379.5 million and $653.5 million, respectively, a decrease of $51.8 million, or 12.0%, and $138.9 million, or 17.5%, respectively, when compared to the same time periods in 2023. Loans serviced for others totaled $8.628 billion at June 30, 2024, compared with $8.260 billion at June 30, 2023, an increase of $367.7 million, or 4.5%.

Representing a significant component of mortgage banking income is the gain on sales of loans, net. The increase in the gain on sales of loans, net when the three months ended June 30, 2024 is compared to the same time period in 2023, was primarily the result of higher profit margins in secondary marketing activities. The increase in the gain on sales of loans, net when the six months ended June 30, 2024 is compared to the same time period in 2023, was primarily the result of higher profit margins in secondary marketing activities partially offset by a decline in the mortgage fair value adjustment. Loan sales totaled $296.8 million and $555.1 million for the three and six months ended June 30, 2024, respectively, a decrease of $38.7 million, or 11.5%, and an increase of $5.8 million, or 1.1%, respectively, when compared with the same time periods in 2023.

Other, Net

The following table illustrates the components of other, net included in noninterest income (loss) for the periods presented ($ in thousands):

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

The increases in other, net for the three and six months ended June 30, 2024, when compared to the same time periods in 2023 were principally due to the gain on the fair value adjustment for the Visa C shares as well as increases in cash management service fees and net gains on the sale of premises and equipment partially offset by the noncredit-related loss on the sale of the 1-4 family mortgage loans.

Noninterest Expense

The following table illustrates the comparative components of noninterest expense for the periods presented ($ in thousands):

Changes in the various components of noninterest expense 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

The decrease in salaries and employee benefits when the three months ended June 30, 2024 is compared to the same time period in 2023 was principally due to declines in commissions related to mortgage production, annual retail management incentive compensation and various other salaries expenses, partially offset by increases in annual general incentive compensation and broker commissions. The decrease in salaries and employee benefits when the six months ended June 30, 2024 is compared to the same time period in 2023 was principally due to declines in commission expense related to mortgage production, miscellaneous other salaries expenses, annual retail management incentive compensation and medical insurance expense, partially offset by increases in salaries expense, primarily due to general merit increases, broker commissions and annual general incentive compensation.

Services and Fees

The decreases in services and fees when the three and six months ended June 30, 2024 are compared to the same time periods in 2023 were principally due to declines in outside services and fees, primarily related to other services and fees and legal expense, communication expense, primarily related to telephone expense, and advertising expense, partially offset by an increase in data processing expense related to software.

Other Expense

The following table illustrates the comparative components of other noninterest expense for the periods presented ($ in thousands):

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

The increase in other expense when the three months ended June 30, 2024 is compared to the same time period in 2023 was principally due to an increase in FDIC assessment expense, primarily due to an increase in the assessment rate, partially offset by declines in various other miscellaneous expenses, including sponsorships and contributions, operational losses and franchise taxes. The increase in other expense when the first six months of 2024 is compared to the same time period in 2023 was principally due to increases in FDIC assessment expense and other real estate expense, primarily due to an increase in the net loss on the sale of other real estate properties, partially offset by declines in various other miscellaneous expenses, including stationery and supplies expense, sponsorships and contributions, travel and entertainment expense and franchise taxes. The increase in FDIC assessment rate was principally due to increases in the overall assessment rate and the 2 basis point increase in the initial base assessment rate by the FDIC during the second quarter of 2023 as part of the FDIC's final rule to restore the DIF to required levels. During the three and six months ended June 30, 2024, Trustmark sold other real estate properties totaling $3.7 million and $4.7 million, respectively, generating net losses of $907 thousand and $962 thousand, respectively. During the second quarter of 2024, $2.1 million of the other real estate properties sold were part of the sale of 1-4 family mortgage loans, which generated a net loss of $781 thousand.

Results of Segment Operations

For a description of the methodologies used to measure financial performance and financial information by reportable segment, please see Note 19 – Segment Information included in Part I. Item 1. – Financial Statements of this report. The Insurance Segment is included in discontinued operations for all periods presented in the accompanying consolidated balance sheets and the consolidated statements of income (loss). For additional information about discontinued operations, please see Note 2 - Discontinued Operations included in Part I. Item 1. – Financial Statements of this report. The following discusses changes in the results of operations of each reportable segment for the six months ended June 30, 2024 and 2023.

General Banking

Net interest income for the General Banking Segment decreased $3.5 million, or 1.3%, when the six months ended June 30, 2024 is compared with the same time period in 2023. The decrease in net interest income was principally due to an increase in interest on deposits and a decline in other interest income related to interest earned on the balance held at the FRBA, partially offset by an increase in interest and fees on LHFS and LHFI and a decline in other interest expense related to interest on FHLB advances. The PCL (LHFI and off-balance sheet credit exposures) for the General Banking Segment for the six months ended June 30, 2024 totaled $27.1 million compared to a PCL of $9.4 million for the same period in 2023, an increase of $17.7 million. Excluding the $8.6 million PCL, LHFI sale of 1-4 family mortgage loans, the PCL for the General Banking Segment totaled $18.4 million for the first six months of 2024, an increase of $9.1 million, or 96.9%. For more information on these net interest income and PCL items, please see the sections captioned “Financial Highlights” and “Results of Operations.”

Noninterest income (loss) for the General Banking Segment decreased $178.0 million when the first six months of 2024 is compared to the same time period in 2023, primarily due to the net loss on the sale of available for sale securities, the noncredit-related loss on the sale of 1-4 family mortgage loans and a decrease in mortgage banking, net, partially offset by the gain on the conversion of Visa Class B-1 shares to Visa Class C shares. Noninterest income (loss) for the General Banking Segment includes service charges on deposit accounts; wealth management; bank card and other fees; mortgage banking, net; other, net and security gains (losses), net. For more information on these noninterest income items, please see the analysis included in the section captioned “Noninterest Income (Loss).”

Noninterest expense for the General Banking Segment decreased $1.5 million, or 0.7%, when the first six months of 2024 is compared with the same time period in 2023, principally due to declines in outside services and fees, salaries and employee benefits, advertising expenses and communications expense, partially offset by increases in FDIC assessment expense and data processing charges related to software. For more information on these noninterest expense items, please see the analysis included in the section captioned “Noninterest Expense.”

Wealth Management

Net income for the Wealth Management Segment for the first six months of 2024 increased $430 thousand, or 12.9%, when compared to the same time period in 2023, primarily due to an increase in noninterest income partially offset by an increase in noninterest expense and a decline in net interest income. Net interest income for the Wealth Management Segment decreased $156 thousand, or 5.3%, when the first six months of 2024 is compared to the same time period in 2023, principally due to a decline in interest and fees on loans as well as an increase in interest expense on deposits generated by the Private Banking Department. The PCL for the six months ended June 30, 2024 totaled $165 thousand compared to a PCL of $89 thousand for the same period in 2023. Noninterest income for the Wealth Management Segment, which primarily includes income related to investment management, trust and brokerage services, increased $1.1 million, or 6.3%, when the first six months of 2024 is compared to the same time period in 2023, primarily due to an increase in income from brokerage and investment services partially offset by a decrease in income from trust management services. Noninterest expense for the Wealth Management Segment increased $317 thousand, or 2.0%, when the first six months of 2024 is compared to the same time period in 2023, principally due to an increase in salaries and employee benefits expense, primarily related to broker commissions and trust incentives partially offset by a decrease in business process outsourcing expense.

At June 30, 2024 and 2023, Trustmark held assets under management and administration of $9.036 billion and $18.203 billion, respectively, and brokerage assets of $2.848 billion and $2.442 billion, respectively.

Income Taxes

For the three and six months ended June 30, 2024, Trustmark’s combined effective tax rate from continuing operations was 27.3% and 33.1%, respectively, compared to 13.5% and 14.4%, respectively, for the same time periods in 2023. The increase in the effective tax rate from continuing operations for the three and six months ended June 30, 2024 was principally due to the significant non-routine transactions that occurred during the second quarter of 2024. Excluding the significant non-routine transactions, Trustmark’s combined effective tax rate from continuing operations for the three and six months ended June 30, 2024 was 18.7% and 17.0%, respectively. 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 sold under reverse repurchase agreements and other earning assets. Average earning assets totaled $17.139 billion, or 91.5% of total average assets, for the six months ended June 30, 2024, compared to $17.058 billion, or 91.5% of total average assets, for the six months ended June 30, 2023, an increase of $80.5 million, or 0.5%.

Securities

The securities portfolio is utilized by Management to manage interest rate risk, generate interest income, provide liquidity and use as collateral for public deposits 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 was 5.0 years at June 30, 2024 compared to 4.5 years at December 31, 2023. The increase in the weighted-average life of the portfolio was principally due to the restructuring of the available for sale securities portfolio during the second quarter of 2024.

When compared to December 31, 2023, total investment securities decreased by $187.0 million, or 5.9%, during the first six months of 2024. This decrease resulted primarily from available for sale securities sold net of available for sale securities purchased as part of the restructuring of the available for sale securities portfolio during the second quarter of 2024 as well as calls, maturities and pay-downs of the loans underlying GSE guaranteed securities. Trustmark sold $1.561 billion of available for sale securities generating a loss of $182.8 million during the first six months of 2024, compared to no securities sold during the first six months of 2023.

During 2022, Trustmark reclassified approximately $766.0 million of securities available for sale to 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. At the date of these transfers, the net unrealized holding loss on the available for sale securities totaled approximately $91.9 million ($68.9 million net of tax). The resulting net unrealized holding losses are 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 June 30, 2024, the net unamortized, unrealized loss on all transferred securities included in accumulated other comprehensive income (loss) (AOCI) in the accompanying consolidated balance sheets totaled $52.1 million compared to $57.6 million at December 31, 2023.

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 June 30, 2024, available for sale securities totaled $1.622 billion, which represented 54.0% of the securities portfolio, compared to $1.763 billion, or 55.3% of total securities, at December 31, 2023. At June 30, 2024, unrealized losses, net on available for sale securities totaled $21.7 million compared to unrealized losses, net of $196.1 million at December 31, 2023. At June 30, 2024, available for sale securities consisted of U.S. Treasury securities and GSE guaranteed mortgage-related securities.

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 June 30, 2024, held to maturity securities totaled $1.380 billion, which represented 46.0% of the total securities portfolio, compared to $1.426 billion, or 44.7% of total securities, at December 31, 2023.

Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of 100.0% of the portfolio in U.S. Treasury securities, 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 and FRBA, Trustmark does not hold any other equity investment in a GSE or other governmental entity.

As of June 30, 2024, Trustmark did not hold securities of any one issuer with a carrying value exceeding 10% 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.

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 June 30, 2024 and December 31, 2023 ($ in thousands):

(1) Not rated securities primarily consist of Mississippi municipal general obligations.

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

LHFS

At June 30, 2024, LHFS totaled $185.7 million, consisting of $103.1 million of residential real estate mortgage loans in the process of being sold to third parties and $82.6 million of GNMA optional repurchase loans. At December 31, 2023, LHFS totaled $184.8 million, consisting of $106.0 million of residential real estate mortgage loans in the process of being sold to third parties and $78.8 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 the first six months of 2024 or 2023.

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 I. Item 1. – Financial Statements of this report.

LHFI

At June 30, 2024 and December 31, 2023, LHFI consisted of the following ($ in thousands):

LHFI increased $204.9 million, or 1.6%, compared to December 31, 2023. The increase in LHFI during the first six months of 2024 was primarily due to net growth in LHFI secured by real estate and other commercial loans and leases partially offset by declines in commercial and industrial LHFI and state and other political subdivision LHFI.

LHFI secured by real estate increased $243.5 million, or 2.6%, during the first six months of 2024, reflecting net growth in other construction LHFI, LHFI secured by nonfarm, nonresidential properties (NFNR), other real estate secured LHFI, and other LHFI secured by 1-4 family residential properties, partially offset by net declines in construction, land development and other land LHFI and LHFI secured by 1-4 family residential properties. Other construction loans increased $154.7 million, or 17.8%, during the first six months of 2024 primarily due to new construction loans in the Alabama, Mississippi and Texas market regions partially offset by other construction loans moved to other loan categories upon the completion of the related construction project. During the first six months of 2024, $414.1 million loans were moved from other construction to other loan categories, including $118.8 million to multi-family residential loans, $277.3 million to nonowner-occupied loans and $18.0 million to owner-occupied loans. Excluding all reclassifications between loan categories, growth in other construction loans across all five market regions totaled $545.7 million, or 62.9%, during the first six months of 2024. NFNR LHFI increased $109.2 million, or 3.1%, during the first six months of 2024 principally due to other construction loans that moved to NFNR LHFI in the Mississippi, Alabama, and Texas market regions. Excluding other construction loan reclassifications, NFNR LHFI decreased $186.1 million, or 5.3%, during the first six months of 2024 principally due to declines in nonowner-occupied loans in the Mississippi, Texas and Tennessee market regions and owner-occupied loans in the Mississippi and Tennessee market regions, partially offset by an increase in owner-occupied loans in the Alabama market region. Other real estate secured LHFI increased $32.4 million, or 2.5%, during the first six months of 2024, primarily due to other construction loans that moved to LHFI secured by multi-family residential properties in the Alabama, Texas and Mississippi market regions. Excluding other construction loan reclassifications, other real estate secured LHFI decreased $86.4 million, or 6.6%, during the first six months of 2024 principally due to declines in LHFI secured by multi-family residential properties in the Alabama and Mississippi market regions, partially offset by growth in LHFI secured by multi-family residential properties in the Texas market region. Other LHFI secured by 1-4 family residential properties increased $20.4 million, or 3.3%, during the first six months of 2024, principally due to growth in the Mississippi, Florida and Texas market regions. LHFI secured by construction, land development and other land decreased $26.4 million, or 4.1%, during the first six months of 2024 primarily due to declines in land development loans in the Alabama and Mississippi market regions. LHFI secured by 1-4 family residential properties decreased $46.8 million, or 2.1%, during the first six months of 2024 primarily in the Mississippi market region as a result of the sale of 1-4 family mortgage loans during the second quarter of 2024. Trustmark's LHFI secured by 1-4 family residential properties are primarily included in the Mississippi market region because these loans are centrally analyzed and approved as part of the mortgage line of business which is located in Jackson, Mississippi.

Other commercial loans and leases increased $48.2 million, or 8.7%, during the first six months of 2024, principally due to an increase in equipment finance leases. Commercial and industrial LHFI decline $42.3 million, or 2.2%, during the first six months of 2024 reflecting declines in the Tennessee, Texas and Florida market regions, partially offset by growth in the Mississippi and Alabama market regions. State and other political subdivision LHFI declined $35.5 million, or 3.3%, during the first six months of 2024, reflecting declines in the Mississippi, Texas, Tennessee and Florida market regions.

The following table provides information regarding Trustmark’s home equity loans and home equity lines of credit which are included in the LHFI secured by 1-4 family residential properties for the periods presented ($ in thousands):

Due to the increased risk associated with second liens, loan terms and underwriting guidelines differ from those used for products secured by first liens. Loan amounts and loan-to-value ratios are limited and are lower for second liens than first liens. Also, interest rates and maximum amortization periods are adjusted accordingly. In addition, regardless of lien position, the passing credit score for approval of all home equity lines of credit is generally higher than that of term loans. The ACL on LHFI is also reflective of the increased risk related to second liens through application of a greater loss factor to this portion of the portfolio.

Trustmark’s variable rate LHFI are based primarily on various prime and SOFR interest rate bases. The following tables provide information regarding the interest rate terms of Trustmark’s LHFI as of June 30, 2024 and December 31, 2023 ($ in thousands):

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In the following tables, LHFI reported by region (along with related nonperforming assets and net charge-offs) are associated with location of origination except for loans secured by 1-4 family residential properties (representing traditional mortgages) and credit cards. These loans are included in the Mississippi Region because they are centrally analyzed and approved as part of a specific line of business located at Trustmark’s headquarters in Jackson, Mississippi.

The following table presents the LHFI composition by region at June 30, 2024 and reflects each region’s diversified mix of loans ($ in thousands):

Allowance for Credit Losses

LHFI

Trustmark’s ACL methodology for LHFI is based upon guidance within FASB ASC Subtopic 326-20, “Financial Instruments – Credit Losses – Measured at Amortized Cost,” as well as applicable regulatory guidance from its primary regulator. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the LHFI portfolio is continuously monitored by Management and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within Trustmark’s existing LHFI portfolio. The ACL on LHFI is adjusted through the PCL, LHFI and reduced by the charge off of loan amounts, net of recoveries.

The loan loss estimation process involves procedures to appropriately consider the unique characteristics of Trustmark’s LHFI portfolio segments. These segments are further disaggregated into loan classes, the level at which credit risk is estimated. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Evaluations of the portfolio and individual credits are inherently subjective, as they require estimates, assumptions and judgments as to the facts and circumstances of particular situations.

During the second quarter of 2024, Trustmark executed a sale on a portfolio of 1-4 family mortgage loans that were at least three payments delinquent and/or nonaccrual at the time of selection. As a result of this sale, a credit mark was established for a sub-pool of the loans in the sale. Due to the lack of historical experience and the use of industry data for this sub-pool, management elected to use the credit mark for reserving purposes on a go forward basis for this sub-pool that meet the same credit criteria of being three payments delinquent and/or nonaccrual. All loans of the sub-pool that meet the above credit criteria will be removed from the 1-4 family residential properties pool and placed into a separate pool with the credit mark reserve applied to the total balance.

The econometric models currently in production reflect segment or pool level sensitivities of probability of default (PD) to changes in macroeconomic variables. By measuring the relationship between defaults and changes in the economy, the quantitative reserve incorporates reasonable and supportable forecasts of future conditions that will affect the value of Trustmark's assets, as required by FASB ASC Topic 326. Under stable forecasts, these linear regressions will reasonably predict a pool’s PD. However, due to the COVID-19 pandemic, the macroeconomic variables used for reasonable and supportable forecasting changed rapidly. At the macroeconomic levels experienced during the COVID-19 pandemic, it was not clear that the models in production would produce reasonably representative results since the models were originally estimated using data beginning in 2004 through 2019. During this period, a traditional, albeit severe, economic recession occurred. Thus, econometric models are sensitive to similar future levels of PD.

In order to prevent the econometric models from extrapolating beyond reasonable boundaries of their input variables, Trustmark chose to establish an upper and lower limit process when applying the periodic forecasts. In this way, Management will not rely upon unobserved and untested relationships in the setting of the quantitative reserve. This approach applies to all input variables, including: Southern Unemployment, National Unemployment, National Gross Domestic Product (GDP), National Home Price Index (HPI), National Commercial Real Estate (CRE) Price Index and the BBB 7-10 Year US Corporate Bond Index. The upper and lower limits are based on the distribution of the macroeconomic variable by selecting extreme percentiles at the upper and lower limits of the distribution, the 1st and 99th percentiles, respectively. These upper and lower limits are then used to calculate the PD for the forecast time period in which the forecasted values are outside of the upper and lower limit range. Due to multiple periods having a PD or loss given default (LGD) at or near zero as a result of the improving macroeconomic forecasts, Management implemented PD and LGD floors to account for the risk associated with each portfolio. The PD and LGD floors are based on Trustmark's historical loss experience and applied at a portfolio level.

The external factors qualitative factor is Management’s best judgment on the loan or pool level impact of all factors that affect the portfolio that are not accounted for using any other part of the ACL methodology (i.e., natural disasters, changes in legislation, impacts due to technology and pandemics). Trustmark's External Factor – Pandemic ensured reserve adequacy for collectively evaluated loans most likely to be impacted by the unique economic and behavioral conditions created by the COVID-19 pandemic. Additional qualitative reserves are derived based on two principles. The first is the disconnect of economic factors to Trustmark’s modeled PD (derived from the econometric models underpinning the quantitative pooled reserves). During the pandemic, extraordinary measures by the federal government were made available to consumers and businesses, including COVID-19 loan payment concessions, direct transfer payments to households, tax deferrals and reduced interest rates, among others. These government interventions may have extended the lag between economic conditions and default, relative to what was captured in the model development data. Because Trustmark’s econometric PD models rely on the observed relationship from the economic downturn from 2007 to 2009 in both timing and severity, Management did not expect the models to reflect these conditions. For example, while the models would predict contemporaneous unemployment peaks and loan defaults, this might not have occurred when borrowers could request payment deferrals. Thus, for the affected population, economic conditions were not fully considered as a part of Trustmark’s quantitative reserve. The second principle is the change in risk that is identified by rating changes. As a part of Trustmark’s credit review process, loans in the affected population were given more frequent screening to ensure accurate ratings were maintained through this dynamic period. Trustmark’s quantitative reserve did not directly address changes in ratings; thus, a migration qualitative factor was designed to work in concert with the quantitative reserve.

As discussed above, the disconnect of economic factors means that changes in rating caused by deteriorating and weak economic conditions as a result of the pandemic were not being captured in the quantitative reserve. During 2020, due to unforeseen pandemic conditions that varied from Management’s expectations, additional reserves were further dimensioned in order to appropriately reflect the risk within the portfolio related to the COVID-19 pandemic. In an effort to ensure the External Factor – Pandemic qualitative factor was reasonable and supportable, historical Trustmark loss data was leveraged to construct a framework that was quantitative in nature. To dimension the additional reserve, Management used the sensitivity of the quantitative commercial loan reserve to changes in macroeconomic conditions to apply to loans rated acceptable or better (risk rates 1-4). In addition, to account for the known changes in risk, a weighted average of the commercial loan portfolio loss rate, derived from the performance trends qualitative factor, was used to dimension additional reserves for downgraded credits. Loans rated acceptable with risk (risk rate 5) or watch (risk rate 6) received the additional reserves based on the average of the macroeconomic conditions and weighted average of the commercial loan portfolio loss rate while the loans rated special mention (risk rate 7) and substandard (risk rate 8) received additional reserves based on the weighted-average described above. During 2022, Management noted that all pass rate loans (risk rate 5 and 6) related to the External Factor - Pandemic qualitative factor either did not experience significant stress related to the pandemic or had since recovered and did not expect future stresses attributed to the pandemic that could affect these loans. As a result, Management decided to accelerate the release of the additional pandemic reserves on all pass rate loans as a result of pandemic conditions resolving. During the fourth quarter of 2023, Management decided to resolve the External Factor-Pandemic qualitative factor as a result of the remaining loan balances that were identified as COVID affected loans being immaterial from both a reserve and balance perspective. The remaining loans were incorporated back into the performance qualitative factor as a result of this resolution. Further, due to this resolution there is no longer any active External Factor as of December 31, 2023.

During 2022, Management elected to activate the nature and volume of the portfolio qualitative factor as a result of a sub-pool of the secured by 1-4 family residential properties growing to a significant size along with the underlying nature being different as well. The nature and volume of the portfolio qualitative factor utilizes a WARM methodology that uses industry data for the assumptions to support the qualitative adjustment. The industry data is used to compile a PD based on credit score ranges along with using the industry data to compile an LGD. The sub-pool of credits are then aggregated into the appropriate credit score bands in which a weighted-average loss rate is calculated based on the PD and LGD for each credit score range. This weighted-average loss rate is then applied to the expected balance for the sub-segment of credits. This total is then used as the qualitative reserve adjustment.

Trustmark's current quantitative methodologies do not completely incorporate changes in credit quality. As a result, Trustmark utilizes the performance trends qualitative factor. This factor is based on migration analyses, that allocates additional ACL to non-pass/delinquent loans within each pool. In this way, Management believes the ACL will directly reflect changes in risk, based on the performance of the loans within a pool, whether declining or improving.

The performance trends qualitative factor is estimated by properly segmenting loan pools into risk levels by risk rating for commercial credits and delinquency status for consumer credits. A migration analysis is then performed quarterly using a third-party software and the results for each risk level are compiled to calculate the historical PD average for each loan portfolio based on risk levels. This average historical PD rate is updated annually. For the mortgage portfolio, Trustmark uses an internal report to incorporate a roll rate method for the calculation of the PD rate. In addition to the PD rate for each portfolio, Management incorporates the quantitative rate and the k value derived from the Frye-Jacobs method to calculate a loss estimate that includes both PD and LGD. The quantitative rate is used to eliminate any additional reserve that the quantitative reserve already includes. Finally, the loss estimate rate is then applied to the total balances for each risk level for each portfolio to calculate a qualitative reserve.

Determining the appropriateness of the allowance is complex and requires judgment by Management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall LHFI portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense.

For a complete description of Trustmark’s ACL methodology and the quantitative and qualitative factors included in the calculation, please see Note 4 – LHFI and Allowance for Credit Losses, LHFI included in Part I. Item 1. – Financial Statements of this report.

At June 30, 2024, the ACL on LHFI was $154.7 million, an increase of $15.3 million, or 11.0%, when compared with December 31, 2023. The increase in the ACL during the first six months of 2024 was principally due to net adjustments to the qualitative factors due to credit migrations and loan growth and net changes in the macroeconomic forecast associated with specific loss driver models as a result of loss driver updates. Allocation of Trustmark’s $154.7 million ACL on LHFI, represented 1.05% of commercial LHFI and 1.59% of consumer and home mortgage LHFI, resulting in an ACL to total LHFI of 1.18% as of June 30, 2024. This compares with an ACL to total LHFI of 1.08% at December 31, 2023, which was allocated to commercial LHFI at 0.85% and to consumer and mortgage LHFI at 1.81%.

The following table presents changes in the ACL on LHFI for the periods presented ($ in thousands):

The increase in net charge-offs when the three and six months ended June 30, 2024, are compared to the same time periods in 2023 was principally due to the charge-offs related to the sale of 1-4 family mortgage loans during the second quarter of 2024 and an increase in gross charge-offs in the Texas market region primarily related to two large nonaccrual commercial credits.

The following table presents the net (charge-offs) recoveries by geographic market region for the periods presented ($ in thousands):

The PCL, LHFI, excluding the PCL, LHFI 1-4 family mortgage loans, for the three and six months ended June 30, 2024 totaled 0.44% and 0.34%, respectively, of average loans (LHFS and LHFI) compared to 0.26% and 0.18%, respectively, of average loans (LHFS and LHFI) for the same time periods in 2023. The PCL on LHFI, excluding the PCL, LHFI sale of 1-4 family mortgage loans, for the three and six months ended June 30, 2024 primarily reflected an increase in required reserves as a result of net adjustments to the qualitative factors due to credit migrations and loan growth and net changes in the macroeconomic forecast associated with specific loss driver models as a result of loss driver updates.

Off-Balance Sheet Credit Exposures

Trustmark maintains a separate ACL on off-balance sheet credit exposures, including unfunded loan commitments and letters of credit, which is included on the accompanying consolidated balance sheets. Expected credit losses for off-balance sheet credit exposures are estimated by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by Trustmark. Trustmark calculates a loan pool level unfunded amount for the period. Trustmark calculates an expected funding rate each period which is applied to each pool’s unfunded commitment balances to ensure that reserves will be applied to each pool based upon balances expected to be funded based upon historical levels. Additionally, a reserve rate is applied to the unfunded commitment balance, which incorporates both quantitative and a majority of the qualitative aspects of the current period’s expected credit loss rate. The reserve rate that is applied excludes the reserve impact of the performance trends qualitative factor. During the first quarter of 2024, Management decided to implement a performance trends qualitative factor for unfunded commitments. The same assumptions are applied in this calculation that the funded balances utilize with the addition of using the funding rates on the unfunded commitments. The performance trends qualitative factor reserve is then added to the other calculated reserve to get a total reserve for off-balance sheet credit exposures. See the section captioned “ACL on Off-Balance Sheet Credit Exposures” in Note 13 – Contingencies included in Part I. Item 1. – Financial Statements of this report for complete description of Trustmark’s ACL methodology on off-balance sheet credit exposures.

Adjustments to the ACL on off-balance sheet credit exposures are recorded to the PCL, off-balance sheet credit exposures. At June 30, 2024, the ACL on off-balance sheet credit exposures totaled $30.3 million compared to $34.1 million at December 31, 2023, a decrease of $3.8 million, or 11.1%. The PCL, off-balance sheet credit exposures totaled a negative $3.6 million and a negative $3.8 million for the three and six months ended June 30, 2024, respectively, compared to $245 thousand and a negative $2.0 million, respectively, for the same time periods in 2023. The release in PCL on off-balance sheet credit exposures for the three and six months ended June 30, 2024, primarily reflected a decrease in required reserves as a result of a decrease in unfunded commitments and changes in the total reserve rate, partially offset by an increase in required reserves as a result of implementing the performance trend qualitative reserve factor.

Nonperforming Assets

The table below provides the components of nonperforming assets by geographic market region at June 30, 2024 and December 31, 2023 ($ in thousands):

(1) No obligation to repurchase.

See the previous discussion of LHFS for more information on Trustmark’s serviced GNMA loans eligible for repurchase and the impact of Trustmark’s repurchases of delinquent mortgage loans under the GNMA optional repurchase program.

Nonaccrual LHFI

At June 30, 2024, nonaccrual LHFI totaled $44.3 million, or 0.33% of total LHFS and LHFI, reflecting a decrease of $55.7 million, or 55.7%, relative to December 31, 2023. The decrease in nonaccrual LHFI during the first six months of 2024 was primarily a result of the sale of 1-4 family mortgage loans during the second quarter of 2024 as well as the resolution of one large nonaccrual commercial credit in the Texas market region and a significant reduction of one large nonaccrual commercial credit in the Alabama market region, partially offset by one large commercial credit placed on nonaccrual in the Alabama market region.

For additional information regarding nonaccrual LHFI, see the section captioned “Nonaccrual and Past Due LHFI” included in Note 4 – LHFI and Allowance for Credit Losses, LHFI in Part I. Item 1. – Financial Statements of this report.

Other Real Estate

Other real estate at June 30, 2024 decreased $281 thousand, or 4.1%, when compared with December 31, 2023. The decrease in other real estate was principally due to properties sold in the Mississippi and Alabama market regions largely offset by properties foreclosed in the Mississippi market region. During the first six months of 2024, Trustmark foreclosed and subsequently sold properties totaling $2.7 million in the Mississippi market region, $2.1 million of which was sold as part of the sale of 1-4 family mortgage loans during the second quarter of 2024.

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

Other real estate is revalued on an annual basis or more often if market conditions necessitate. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged against the reserve for other real estate write-downs or net income in other real estate expense, if a reserve does not exist. Write-downs of other real estate decreased $439 thousand when the first six months of 2024 is compared to the same time period in 2023, primarily due to an increase in recoveries on other real estate properties foreclosed in the Mississippi and Alabama market regions.

For additional information regarding other real estate, please see Note 6 – Other Real Estate included in Part I. Item 1. – Financial Statements of this report.

Deposits

Trustmark’s deposits are its primary source of funding and primarily consist of core deposits from the communities Trustmark serves. Deposits include interest-bearing and noninterest-bearing demand accounts, savings, MMDA, CDs and individual retirement accounts. Total deposits were $15.463 billion at June 30, 2024 compared to $15.570 billion at December 31, 2023, a decrease of $106.9 million, or 0.7%. During the first six months of 2024, noninterest-bearing deposits decreased $44.1 million, or 1.4%, principally due to declines in commercial noninterest-bearing demand deposit accounts. Interest-bearing deposits decreased $62.8 million, or 0.5%, during the first six months of 2024, primarily due to declines in public and consumer interest checking accounts and consumer savings accounts, partially offset by growth in commercial interest checking accounts, business and consumer MMDA and all categories of CDs.

At June 30, 2024, Trustmark's total uninsured deposits were $5.552 billion, or 35.9% of total deposits, compared to $5.601 billion, or 36.0% of total deposits, at December 31, 2023.

Borrowings

Trustmark uses short-term borrowings, such as federal funds purchased, securities sold under repurchase agreements and short-term FHLB advances, to fund growth of earning assets in excess of deposit growth. See the section captioned “Liquidity” for further discussion of the components of Trustmark’s excess funding capacity.

Federal funds purchased and securities sold under repurchase agreements totaled $314.1 million at June 30, 2024 compared to $405.7 million at December 31, 2023, a decrease of $91.6 million, or 22.6%, principally due to a decrease in upstream federal funds purchased. At June 30, 2024 and December 31, 2023, $29.1 million and $35.7 million, respectively, represented customer related transactions, such as commercial sweep repurchase balances. Trustmark had $285.0 million of upstream federal funds purchased at June 30, 2024 compared to $370.0 million at December 31, 2023.

Other borrowings totaled $336.7 million at June 30, 2024, a decrease of $146.5 million, or 30.3%, when compared with $483.2 million at December 31, 2023, principally due to a decline in outstanding short-term FHLB advances with the FHLB of Dallas.

Legal Environment

Information required in this section is set forth under the heading “Legal Proceedings” of Note 13 – Contingencies included in Part I. Item 1. – Financial Statements of this report.

Off-Balance Sheet Arrangements

Information required in this section is set forth under the heading “Lending Related” of Note 13 – Contingencies included in Part I. Item 1. – Financial Statements of this report.

Capital Resources and Liquidity

Trustmark places a significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms and enhances Trustmark’s ability to capitalize on business growth and acquisition opportunities. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. Trustmark manages capital based upon risks and growth opportunities as well as regulatory requirements. Trustmark utilizes a capital model in order to provide Management with a monthly tool for analyzing changes in its strategic capital ratios. This allows Management to hold sufficient capital to provide for growth opportunities and protect the balance sheet against sudden adverse market conditions, while maintaining an attractive return on equity to shareholders.

At June 30, 2024, Trustmark’s total shareholders’ equity was $1.879 billion, an increase of $217.3 million, or 13.1%, when compared to December 31, 2023. During the first six months of 2024, shareholders’ equity increased primarily as a result of the net change in the fair market value of securities available for sale, principally due to the restructuring of the available for sale securities portfolio during the second quarter of 2024, as well as net income of $115.4 million, partially offset by common stock dividends of $28.4 million.

Regulatory Capital

Trustmark and TNB are subject to minimum risk-based capital and leverage capital requirements, as described in the section captioned “Capital Adequacy” included in Part I. Item 1. – Business of Trustmark’s 2023 Annual Report, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Trustmark’s and TNB’s minimum risk-based capital requirements include a capital conservation buffer of 2.5%. AOCI is not included in computing regulatory capital. Trustmark elected the five-year phase-in transition period (through December 31, 2024) related to adopting FASB ASU 2016-13 for regulatory capital purposes. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of Trustmark and TNB and limit Trustmark’s and TNB’s ability to pay dividends. At June 30, 2024, Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered well-capitalized at June 30, 2024. To be categorized in this manner, Trustmark and TNB maintained minimum common equity Tier 1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and Tier 1 leverage ratios, and were not subject to any written agreement, order or capital directive, or prompt corrective action directive issued by their primary federal regulators to meet and maintain a specific capital level for any capital measures. There are no significant conditions or events that have occurred since June 30, 2024 which Management believes have affected Trustmark’s or TNB’s present classification.

In 2020, Trustmark enhanced its capital structure with the issuance of $125.0 million of subordinated notes. At June 30, 2024, the carrying amount of the subordinated notes was $123.6 million compared to $123.5 million at December 31, 2023. The subordinated notes mature December 1, 2030 and are redeemable at Trustmark’s option under certain circumstances. For regulatory capital purposes, the subordinated notes qualified as Tier 2 capital for Trustmark at June 30, 2024 and December 31, 2023. Trustmark may utilize the full carrying value of the subordinated notes as Tier 2 capital until December 1, 2025 (five years prior to maturity). Beginning December 1, 2025, the subordinated notes will phase out of Tier 2 capital 20.0% each year until maturity.

In 2006, Trustmark enhanced its capital structure with the issuance of trust preferred securities. For regulatory capital purposes, the trust preferred securities qualified as Tier 1 capital at June 30, 2024 and December 31, 2023. Trustmark intends to continue to utilize $60.0 million in trust preferred securities issued by Trustmark Preferred Capital Trust I (the Trust) as Tier 1 capital up to the regulatory limit, as permitted by the grandfather provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III Final Rule.

Refer to the section captioned “Regulatory Capital” included in Note 16 – Shareholders’ Equity in Part I. Item 1. – Financial Statements of this report for an illustration of Trustmark’s and TNB’s actual regulatory capital amounts and ratios under regulatory capital standards in effect at June 30, 2024 and December 31, 2023.

Dividends on Common Stock

Dividends per common share for the six months ended June 30, 2024 and 2023 were $0.46. Trustmark’s indicated dividend for 2024 is $0.92 per common share, which is the same as dividends per common share declared in 2023.

Stock Repurchase Program

From time to time, Trustmark's Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow Trustmark to proactively manage its capital position and return excess capital to shareholders. Shares purchased also provide Trustmark with shares of common stock necessary to satisfy obligations related to stock compensation awards.

On December 6, 2022, the Board of Directors of Trustmark authorized a stock repurchase program, effective January 1, 2023, under which $50.0 million of Trustmark's outstanding common stock could be acquired through December 31, 2023. No shares were repurchased under this authority.

On December 5, 2023, the Board of Directors of Trustmark authorized a new stock repurchase program, effective January 1, 2024, under which $50.0 million of Trustmark's outstanding common stock may be acquired through December 31, 2024. The repurchase program, which is subject to market conditions and management discretion, will be implemented through open market repurchases or privately negotiated transactions. No shares have been repurchased under this authority.

Liquidity

Liquidity is the ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs and other corporate purposes. Consistent cash flows from operations and adequate capital provide internally generated liquidity. Furthermore, Management maintains funding capacity from a variety of external sources to meet daily funding needs, such as those required to meet deposit withdrawals, loan disbursements and security settlements. Liquidity strategy also includes the use of wholesale funding sources to provide for the seasonal fluctuations of deposit and loan demand and the cyclical fluctuations of the economy that impact the availability of funds. Management keeps excess funding capacity available to meet potential demands associated with adverse circumstances.

The asset side of the balance sheet provides liquidity primarily through maturities and cash flows from loans and securities as well as the ability to pledge or sell certain loans and securities. The liability portion of the balance sheet provides liquidity primarily through noninterest and interest-bearing deposits. Trustmark utilizes federal funds purchased, FHLB advances, securities sold under repurchase agreements, the Federal Reserve Discount Window (Discount Window) and brokered deposits to provide additional liquidity. Access to these additional sources represents Trustmark’s incremental borrowing capacity.

Trustmark's liquidity position is continuously monitored and adjustments are made to manage the balance as deemed appropriate. Liquidity risk management is an important element to Trustmark's asset/liability management process. Trustmark regularly models liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions or other significant occurrences as deemed appropriate by Management. These scenarios are incorporated into Trustmark's contingency funding plan, which provides the basis for the identification of its liquidity needs.

Deposit accounts represent Trustmark’s largest funding source. Average deposits totaled $15.413 billion for the first six months of 2024 and represented approximately 82.3% of average liabilities and shareholders’ equity, compared to average deposits of $14.702 billion, which represented 78.9% of average liabilities and shareholders’ equity for the first six months of 2023. For more information on average interest-bearing deposits, please see the analysis included in the section captioned “Net Interest Income.”

Trustmark had $539.4 million held in an interest-bearing account at the FRBA at June 30, 2024, compared to $712.0 million held at December 31, 2023.

Trustmark utilizes brokered deposits to supplement other wholesale funding sources. At June 30, 2024, brokered sweep MMDA deposits totaled $10.3 million compared to $10.6 million at December 31, 2023. In addition, Trustmark had $599.8 million of brokered CDs at June 30, 2024 compared to $578.8 million at December 31, 2023.

At June 30, 2024, Trustmark had $285.0 million of upstream federal funds purchased compared to $370.0 million of upstream federal funds purchased at December 31, 2023. Trustmark maintains adequate federal funds lines to provide sufficient short-term liquidity.

Trustmark maintains a relationship with the FHLB of Dallas, which provided $250.0 million of outstanding short-term and no long-term advances at June 30, 2024, compared to $400.0 million of outstanding short-term and no long-term advances at December 31, 2023. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances or letters of credit with the FHLB of Dallas by $4.177 billion at June 30, 2024.

In addition, at June 30, 2024, Trustmark had no short-term or long-term FHLB advances outstanding with the FHLB of Atlanta compared to no short-term and $58 thousand in long-term FHLB advances at December 31, 2023, which were acquired in the BancTrust merger in 2013. Trustmark had non-member status and thus no additional borrowing capacity with the FHLB of Atlanta.

Additionally, Trustmark has the ability to leverage its unencumbered investment securities as collateral. At June 30, 2024, Trustmark had approximately $726.0 million available in unencumbered agency securities compared to $842.0 million in unencumbered Treasury and agency securities at December 31, 2023.

Another borrowing source is the Discount Window. At June 30, 2024, Trustmark had approximately $1.247 billion available in collateral capacity at the Discount Window primarily from pledges of commercial and industrial LHFI, compared with $1.374 billion at December 31, 2023.

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

During 2020, Trustmark issued $125.0 million aggregate principal amount of its 3.625% fixed-to-floating rate subordinated notes. At June 30, 2024, the carrying amount of the subordinated notes was $123.6 million compared to $123.5 million at December 31, 2023. The subordinated notes mature December 1, 2030 and are redeemable at Trustmark’s option under certain circumstances. The subordinated notes are unsecured obligations and are subordinated in right of payment to all of Trustmark’s existing and future senior indebtedness, whether secured or unsecured. The subordinated notes are obligations of Trustmark only and are not obligations of, and are not guaranteed by, any of its subsidiaries, including TNB.

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

The Board of Directors of Trustmark currently has the authority to issue up to 20.0 million preferred shares with no par value. The ability to issue preferred shares in the future will provide Trustmark with additional financial and management flexibility for general corporate and acquisition purposes. At June 30, 2024, Trustmark had no shares of preferred stock issued and outstanding.

Management believes that Trustmark has sufficient liquidity and capital resources to meet presently known cash flow requirements arising from ongoing business transactions. As of June 30, 2024, Management is not aware of any events that are reasonably likely to have a material adverse effect on Trustmark's liquidity, capital resources or operations. In addition, Management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on Trustmark.

In the ordinary course of business, Trustmark has entered into contractual obligations and has made other commitments to make future payments. Please refer to the accompanying notes to the consolidated financial statements included in Part I. Item 1. – Financial Statements of this report and Trustmark's 2023 Annual Report for the expected timing of such payments as of June 30, 2024 and December 31, 2023. There have been no material changes in Trustmark's contractual obligations since year-end.

Asset/Liability Management

Overview

Market risk reflects the potential risk of loss arising from adverse changes in interest rates and market prices. Trustmark has risk management policies to monitor and limit exposure to market risk. Trustmark’s primary market risk is interest rate risk created by core banking activities. Interest rate risk is the potential variability of the income generated by Trustmark’s financial products or services, which results from changes in various market interest rates. Market rate changes may take the form of absolute shifts, variances in the relationships between different rates and changes in the shape or slope of the interest rate term structure.

Following the LIBOR cessation date of June 30, 2023, the nationwide process for replacing LIBOR in financial contracts that mature thereafter and that do not provide for an effective means to replace LIBOR upon its cessation took effect pursuant to the Adjustable Interest Rate (LIBOR) Act. For contracts in which a party has the discretion to identify a replacement rate, the Adjustable Interest Rate (LIBOR) Act also provides a safe harbor to parties if they choose the SOFR-based benchmark replacement rate to be identified by the FRB. Trustmark had a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that were either directly or indirectly dependent on LIBOR. As of June 30, 2024, all of Trustmark’s LIBOR exposure was remediated or in the process of being remediated. The transition from LIBOR could create costs and additional risk. Trustmark cannot predict what the ultimate impact of the transition from LIBOR will be; however, Trustmark has implemented various measures to manage the transition and mitigate risks. For additional information regarding the transition from LIBOR and Trustmark’s management of this transition, please see the respective risk factor included in Part I. Item 1A. – Risk Factors, of Trustmark’s 2023 Annual Report.

Management continually develops and applies cost-effective strategies to manage these risks. Management’s Asset/Liability Committee sets the day-to-day operating guidelines, approves strategies affecting net interest income and coordinates activities within policy limits established by the Board of Directors of Trustmark. A key objective of the asset/liability management program is to quantify, monitor and manage interest rate risk and to assist Management in maintaining stability in the net interest margin under varying interest rate environments.

Derivatives

Trustmark uses financial derivatives for management of interest rate risk. Management’s Asset/Liability Committee, in its oversight role for the management of interest rate risk, approves the use of derivatives in balance sheet hedging strategies. The most common derivatives employed by Trustmark are interest rate lock commitments, forward contracts (both futures contracts and options on futures contracts), interest rate swaps, interest rate caps and interest rate floors. As a general matter, the values of these instruments are designed to be inversely related to the values of the assets that they hedge (i.e., if the value of the hedged asset falls, the value of the related hedge rises). In addition, Trustmark has entered into derivatives contracts as counterparty to one or more customers in connection with loans extended to those customers. These transactions are designed to hedge interest rate exposure of the customers and are not entered into by Trustmark for speculative purposes. Increased federal regulation of the derivatives markets may increase the cost to Trustmark to administer derivatives programs.

Derivatives Designated as Hedging Instruments

Trustmark engages in a cash flow hedging program to add stability to interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Trustmark making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate floor spreads designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates fall below the purchased floor strike rate on the contract and payments of variable rate amounts if interest rates fall below the sold floor strike rate on the contract. Trustmark uses such derivatives to hedge the variable cash flows associated with existing and anticipated variable-rate loan assets. At June 30, 2024, the aggregate notional value of Trustmark's interest rate swaps and floor spreads designated as cash flow hedges totaled $1.315 billion compared to $1.125 billion at December 31, 2023.

Trustmark records any gains or losses on these cash flow hedges in AOCI. Gains and losses on derivatives representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with Trustmark’s accounting policy election. The earnings recognition of excluded components included in interest and fees on LHFS and LHFI totaled $124 thousand and $209 thousand of amortization expense for the three and six months ended June 30, 2024, respectively, compared to $13 thousand and $22 thousand of amortization expense for the three and six months ended June 30, 2023, respectively. As interest payments are received on Trustmark's variable-rate assets, amounts reported in AOCI are reclassified into interest and fees on LHFS and LHFI in the accompanying consolidated statements of income during the same period. For the three and six months ended June 30, 2024, Trustmark reclassified a loss, net of tax, of $3.7 million and $7.3 million, respectively, into interest and fees on LHFS and LHFI, compared to $3.0 million and $5.2 million for the same time periods in 2023, respectively. During the next twelve months, Trustmark estimates that $15.6 million will be reclassified as a reduction to interest and fees on LHFS and LHFI. This amount could differ due to changes in interest rates, hedge de-designations or the addition of other hedges.

Derivatives Not Designated as Hedging Instruments

As part of Trustmark’s risk management strategy in the mortgage banking business, various derivative instruments such as interest rate lock commitments and forward sales contracts are utilized. Rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified period of time. Trustmark’s obligations under forward contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. The gross notional amount of Trustmark’s off-balance sheet obligations under these derivative instruments totaled $214.5 million at June 30, 2024, with a positive valuation adjustment of $809 thousand, compared to $171.4 million, with a negative valuation adjustment of $150 thousand at December 31, 2023.

Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting under GAAP. The total notional amount of these derivative instruments was $301.5 million at June 30, 2024 compared to $285.0 million at December 31, 2023. These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value recorded as noninterest income (loss) in mortgage banking, net and are offset by the changes in the fair value of the MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net negative ineffectiveness of $4.5 million and $1.3 million for the three months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024 and 2023, the impact was a net negative ineffectiveness of $5.6 million and $3.1 million, respectively.

Trustmark offers certain interest rate derivatives products directly to qualified commercial lending clients seeking to manage their interest rate risk under loans they have entered into with TNB. Trustmark economically hedges interest rate swap transactions executed with commercial lending clients by entering into offsetting interest rate swap transactions with institutional derivatives market participants. Derivatives transactions executed as part of this program are not designated as qualifying hedging relationships under GAAP and are, therefore, carried on Trustmark’s financial statements at fair value with the change in fair value recorded as noninterest income in bank card and other fees. Because these derivatives have mirror-image contractual terms, in addition to collateral provisions which mitigate the impact of non-performance risk, the changes in fair value are expected to substantially offset. The Chicago Mercantile Exchange rules legally characterize variation margin collateral payments made or received for centrally cleared interest rate swaps as settlements rather than collateral. As a result, centrally cleared interest rate swaps included in other assets and other liabilities are presented on a net basis in the accompanying consolidated balance sheets. As of June 30, 2024, Trustmark had interest rate swaps with an aggregate notional amount of $1.640 billion related to this program, compared to $1.500 billion as of December 31, 2023.

Credit-Risk-Related Contingent Features

Trustmark has agreements with its financial institution counterparties that contain provisions where if Trustmark defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Trustmark could also be deemed to be in default on its derivatives obligations.

At June 30, 2024, there was no termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements compared to $1.4 million at December 31, 2023. At June 30, 2024 and December 31, 2023, Trustmark had posted collateral of $40 thousand and $2.0 million, respectively, against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at June 30, 2024, it could have been required to settle its obligations under the agreements at the termination value (which is expected to approximate fair market value).

Credit risk participation agreements arise when Trustmark contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third-party default on the underlying swap. At June 30, 2024, Trustmark had entered into eight risk participation agreements as a beneficiary with an aggregate notional amount of $53.4 million compared to six risk participation agreements as a beneficiary with an aggregate notional amount of $40.1 million at December 31, 2023. At June 30, 2024, Trustmark had entered into thirty-seven risk participation agreements as a guarantor with an aggregate notional amount of $304.9 million compared to thirty-five risk participation agreements as a guarantor with an aggregate notional amount of $304.7 million at December 31, 2023. The aggregate fair values of these risk participation agreements were immaterial at both June 30, 2024 and December 31, 2023.

Trustmark’s participation in the derivatives markets is subject to increased federal regulation of these markets. Trustmark believes that it may continue to use financial derivatives to manage interest rate risk and also to offer derivatives products to certain qualified commercial lending clients in compliance with the Volcker Rule. However, the increased federal regulation of the derivatives markets has increased the cost to Trustmark of administering its derivatives programs. Some of these costs (particularly compliance costs related to the Volcker Rule and other federal regulations) are expected to recur in the future.

Market/Interest Rate Risk Management

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

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

Based on the results of the simulation models using static balances, the table below summarizes the effect various one-year interest rate shift scenarios would have on net interest income compared to a base case, flat scenario at June 30, 2024 and 2023.

Management cannot provide any assurance about the actual effect of changes in interest rates on net interest income. The estimates provided do not include the effects of possible strategic changes in the balances of various assets and liabilities throughout 2024 or additional actions Trustmark could undertake in response to changes in interest rates. Management will continue to prudently manage the balance sheet in an effort to control interest rate risk and maintain profitability over the long term.

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

The following table summarizes the effect that various interest rate shifts would have on net portfolio value at June 30, 2024 and 2023.

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

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

At June 30, 2024, the MSR fair value was $136.7 million, compared to $134.4 million at June 30, 2023. The impact on the MSR fair value of a 10% adverse change in prepayment speed or a 100 basis point increase in discount rate at June 30, 2024, would be a decline in fair value of approximately $4.9 million and $5.5 million, respectively, compared to a decline in fair value of approximately $4.7 million and $5.5 million, respectively, at June 30, 2023. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts.

Critical Accounting Policies

For an overview of Trustmark’s critical accounting policies, see the section captioned “Critical Accounting Policies” included in Part II. Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations, of Trustmark’s 2023 Annual Report. There have been no significant changes in Trustmark’s critical accounting policies during the first six months of 2024.

For additional information regarding Trustmark’s basis of presentation and accounting policies, see Note 1 – Business, Basis of Financial Statement Presentation and Principles of Consolidation included in Part I. Item 1. – Financial Statements of this report.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

For a complete list of recently adopted and pending accounting policies and the impact on Trustmark, see Note 20 – Accounting Policies Recently Adopted and Pending Accounting Pronouncements included in Part I. Item 1. – Financial Statements of this report.

The information required by this item is included in the discussion of Market/Interest Rate Risk Management found in Management’s Discussion and Analysis.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by Trustmark’s Management, with the participation of its Chief Executive Officer and Treasurer and Principal Financial Officer (Principal Financial Officer), of the effectiveness of Trustmark’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and the Principal Financial Officer concluded that Trustmark’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There has been no change in Trustmark’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Trustmark’s internal control over financial reporting.