TRUSTMARK CORP - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-03683

Trustmark Corporation

(Exact name of registrant as specified in its charter)

Mississippi		64-0471500
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

248 East Capitol Street, Jackson, Mississippi		39201
(Address of principal executive offices)		(Zip Code)

(601) 208-5111

(Registrant’s telephone number, including area code)

Securities registered Pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	TRMK	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 31, 2019, there were 64,401,348 shares outstanding of the registrant’s common stock (no par value).

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future” or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements include, but are not limited to, statements relating to anticipated future operating and financial performance measures, including net interest margin, credit quality, business initiatives, growth opportunities and growth rates, among other things, and encompass any estimate, prediction, expectation, projection, opinion, anticipation, outlook or statement of belief included therein as well as the management assumptions underlying these forward-looking statements. You should be aware that the occurrence of the events described under the caption “Risk Factors” in Trustmark’s filings with the Securities and Exchange Commission could have an adverse effect on our business, results of operations and financial condition. Should one or more of these risks materialize, or should any such underlying assumptions prove to be significantly different, actual results may vary significantly from those anticipated, estimated, projected or expected.

Risks that could cause actual results to differ materially from current expectations of Management include, but are not limited to, changes in the level of nonperforming assets and charge-offs, local, state and national economic and market conditions, including potential market impacts of efforts by the Board of Governors of the Federal Reserve System (FRB) to reduce the size of its balance sheet, conditions in the housing and real estate markets in the regions in which Trustmark operates and the extent and duration of the current volatility in the credit and financial markets as well as crude oil prices, changes in our ability to measure the fair value of assets in our portfolio, material changes in the level and/or volatility of market interest rates, the performance and demand for the products and services we offer, including the level and timing of withdrawals from our deposit accounts, the costs and effects of litigation and of unexpected or adverse outcomes in such litigation, our ability to attract noninterest-bearing deposits and other low-cost funds, competition in loan and deposit pricing, as well as the entry of new competitors into our markets through de novo expansion and acquisitions, economic conditions, including the potential impact of issues relating to the European financial system and monetary and other governmental actions designed to address credit, securities, and/or commodity markets, the enactment of legislation and changes in existing regulations or enforcement practices or the adoption of new regulations, changes in accounting standards and practices, including changes in the interpretation of existing standards, that affect our consolidated financial statements, changes in consumer spending, borrowings and savings habits, technological changes, changes in the financial performance or condition of our borrowers, changes in our ability to control expenses, greater than expected costs or difficulties related to the integration of acquisitions or new products and lines of business, cyber-attacks and other breaches which could affect our information system security, natural disasters, environmental disasters, acts of war or terrorism, and other risks described in our filings with the Securities and Exchange Commission.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Except as required by law, we undertake no obligation to update or revise any of this information, whether as the result of new information, future events or developments or otherwise.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Trustmark Corporation and Subsidiaries

Consolidated Balance Sheets

($ in thousands)

	(Unaudited)
	June 30, 2019			December 31, 2018
Assets
Cash and due from banks (noninterest-bearing)	$	404,413		$	349,561
Federal funds sold and securities purchased under reverse repurchase agreements		75,499			830
Securities available for sale (at fair value)		1,643,725			1,811,813
Securities held to maturity (fair value: $832,361-2019; $889,733-2018)		825,536			909,643
Loans held for sale (LHFS)		240,380			153,799
Loans held for investment (LHFI)		9,116,759			8,835,868
Less allowance for loan losses, LHFI		80,399			79,290
Net LHFI		9,036,360			8,756,578
Acquired loans		87,884			106,932
Less allowance for loan losses, acquired loans		1,398			1,231
Net acquired loans		86,486			105,701
Net LHFI and acquired loans		9,122,846			8,862,279
Premises and equipment, net		189,820			178,668
Mortgage servicing rights		79,283			95,596
Goodwill		379,627			379,627
Identifiable intangible assets, net		9,101			11,112
Other real estate		31,243			34,668
Operating lease right-of-use assets		32,762			—
Other assets		514,723			498,864
Total Assets	$	13,548,958		$	13,286,460

Liabilities
Deposits:
Noninterest-bearing	$	2,909,141		$	2,937,594
Interest-bearing		8,657,488			8,426,817
Total deposits		11,566,629			11,364,411
Federal funds purchased and securities sold under repurchase agreements		51,800			50,471
Other borrowings		79,012			79,885
Junior subordinated debt securities		61,856			61,856
Operating lease liabilities		33,878			—
Other liabilities		137,233			138,384
Total Liabilities		11,930,408			11,695,007

Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares Issued and outstanding: 64,398,846 shares - 2019; 65,834,395 shares - 2018		13,418			13,717
Capital surplus		260,619			309,545
Retained earnings		1,369,329			1,323,870
Accumulated other comprehensive loss, net of tax		(24,816	)		(55,679	)
Total Shareholders' Equity		1,618,550			1,591,453
Total Liabilities and Shareholders' Equity	$	13,548,958		$	13,286,460

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Income

($ in thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
Interest Income
Interest and fees on LHFS & LHFI	$	111,740	$	96,712		$	218,535	$	188,382
Interest and fees on acquired loans		2,010		5,022			3,926		9,899
Interest on securities:
Taxable		13,916		16,894			28,581		34,400
Tax exempt		436		579			946		1,230
Interest on federal funds sold and securities purchased under reverse repurchase agreements		214		5			216		7
Other interest income		1,820		1,054			3,423		1,988
Total Interest Income		130,136		120,266			255,627		235,906
Interest Expense
Interest on deposits		21,500		12,139			41,070		21,630
Interest on federal funds purchased and securities sold under repurchase agreements		81		1,250			369		1,912
Other interest expense		831		1,713			1,656		5,107
Total Interest Expense		22,412		15,102			43,095		28,649
Net Interest Income		107,724		105,164			212,532		207,257
Provision for loan losses, LHFI		2,486		3,167			4,097		7,128
Provision for loan losses, acquired loans		106		(441	)		184		(291	)
Net Interest Income After Provision for Loan Losses		105,132		102,438			208,251		200,420
Noninterest Income
Service charges on deposit accounts		10,379		10,647			20,644		21,504
Bank card and other fees		8,004		7,070			15,195		13,696
Mortgage banking, net		10,295		9,046			13,737		20,311
Insurance commissions		11,089		10,735			21,960		20,154
Wealth management		7,742		7,478			15,225		15,045
Other, net		2,130		2,415			4,369		3,474
Security gains (losses), net		—		—			—		—
Total Noninterest Income		49,639		47,391			91,130		94,184
Noninterest Expense
Salaries and employee benefits		61,949		59,975			122,903		118,450
Services and fees		18,009		16,322			34,977		32,068
Net occupancy - premises		6,403		6,550			12,857		13,052
Equipment expense		5,958		6,202			11,882		12,301
Other real estate expense, net		132		(93	)		1,884		773
FDIC assessment expense		1,836		2,538			3,594		5,533
Other expense		11,814		12,306			24,025		24,088
Total Noninterest Expense		106,101		103,800			212,122		206,265
Income Before Income Taxes		48,670		46,029			87,259		88,339
Income taxes		6,530		6,216			11,780		11,696
Net Income	$	42,140	$	39,813		$	75,479	$	76,643

Earnings Per Share
Basic	$	0.65	$	0.59		$	1.16	$	1.13
Diluted	$	0.65	$	0.59		$	1.16	$	1.13

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

($ in thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income per consolidated statements of income	$	42,140		$	39,813		$	75,479		$	76,643
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on available for sale securities and transferred securities:
Net unrealized holding gains (losses) arising during the period		15,059			(6,955	)		29,177			(27,985	)
Change in net unrealized holding loss on securities transferred to held to maturity		942			728			1,502			1,452
Pension and other postretirement benefit plans:
Reclassification adjustments for changes realized in net income:
Net change in prior service costs		47			46			94			93
Recognized net loss due to lump sum settlement		47			30			71			61
Change in net actuarial loss		186			272			376			548
Derivatives:
Change in the accumulated gain (loss) on effective cash flow hedge derivatives		(76	)		99			(123	)		419
Reclassification adjustment for (gain) loss realized in net income		(106	)		(73	)		(234	)		(78	)
Other comprehensive income (loss), net of tax		16,099			(5,853	)		30,863			(25,490	)
Comprehensive income	$	58,239		$	33,960		$	106,342		$	51,153

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

($ in thousands, except per share data)

(Unaudited)

													Accumulated
													Other
	Common Stock												Comprehensive
	Shares						Capital			Retained			Income
	Outstanding			Amount			Surplus			Earnings			(Loss)			Total
Balance, January 1, 2019		65,834,395		$	13,717		$	309,545		$	1,323,870		$	(55,679	)	$	1,591,453
Net income per consolidated statements of income		—			—			—			33,339			—			33,339
Other comprehensive income (loss), net of tax		—			—			—			—			14,764			14,764
Common stock dividends paid ($0.23 per share)		—			—			—			(15,033	)		—			(15,033	)
Shares withheld to pay taxes, long-term incentive plan		123,821			25			(1,629	)		—			—			(1,604	)
Repurchase and retirement of common stock		(1,168,273	)		(243	)		(36,650	)		—			—			(36,893	)
Compensation expense, long-term incentive plan		—			—			1,002			—			—			1,002
Balance, March 31, 2019		64,789,943			13,499			272,268			1,342,176			(40,915	)		1,587,028
Net income per consolidated statements of income		—			—			—			42,140			—			42,140
Other comprehensive income (loss), net of tax		—			—			—			—			16,099			16,099
Common stock dividends paid ($0.23 per share)		—			—			—			(14,987	)		—			(14,987	)
Shares withheld to pay taxes, long-term incentive plan		7,087			2			(3	)		—			—			(1	)
Repurchase and retirement of common stock		(398,184	)		(83	)		(12,925	)		—			—			(13,008	)
Compensation expense, long-term incentive plan		—			—			1,279			—			—			1,279
Balance, June 30, 2019		64,398,846		$	13,418		$	260,619		$	1,369,329		$	(24,816	)	$	1,618,550

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity (continued)

($ in thousands, except per share data)

(Unaudited)

													Accumulated
													Other
	Common Stock												Comprehensive
	Shares						Capital			Retained			Income
	Outstanding			Amount			Surplus			Earnings			(Loss)			Total
Balance, January 1, 2018		67,746,094		$	14,115		$	369,124		$	1,228,187		$	(39,725	)	$	1,571,701
Accumulated other comprehensive loss adjustment, Tax Cuts and Jobs Act of 2017 (Tax Reform Act)		—			—			—			8,524			(8,524	)		—
Net income per consolidated statements of income		—			—			—			36,830			—			36,830
Other comprehensive income (loss), net of tax		—			—			—			—			(19,637	)		(19,637	)
Common stock dividends paid ($0.23 per share)		—			—			—			(15,660	)		—			(15,660	)
Shares withheld to pay taxes, long-term incentive plan		109,558			23			(1,403	)		—			—			(1,380	)
Repurchase and retirement of common stock		(80,584	)		(17	)		(2,485	)		—			—			(2,502	)
Compensation expense, long-term incentive plan		—			—			785			—			—			785
Balance, March 31, 2018		67,775,068			14,121			366,021			1,257,881			(67,886	)		1,570,137
Net income per consolidated statements of income		—			—			—			39,813			—			39,813
Other comprehensive income (loss), net of tax		—			—			—			—			(5,853	)		(5,853	)
Common stock dividends paid ($0.23 per share)		—			—			—			(15,687	)		—			(15,687	)
Shares withheld to pay taxes, long-term incentive plan		8,292			1			(43	)		—			—			(42	)
Repurchase and retirement of common stock		(162,249	)		(33	)		(5,342	)		—			—			(5,375	)
Compensation expense, long-term incentive plan		—			—			1,079			—			—			1,079
Balance, June 30, 2018		67,621,111		$	14,089		$	361,715		$	1,282,007		$	(73,739	)	$	1,584,072

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited)

	Six Months Ended June 30,
	2019			2018
Operating Activities
Net income per consolidated statements of income	$	75,479		$	76,643
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, net		4,281			6,837
Depreciation and amortization		19,123			19,534
Net amortization of securities		3,918			5,086
Gains on sales of loans, net		(9,098	)		(9,999	)
Compensation expense, long-term incentive plan		2,281			1,864
Deferred income tax provision		(4,400	)		4,000
Proceeds from sales of loans held for sale		497,187			525,611
Purchases and originations of loans held for sale		(586,444	)		(534,903	)
Originations of mortgage servicing rights		(6,075	)		(7,719	)
Earnings on bank-owned life insurance		(2,715	)		(2,639	)
Net change in other assets		(14,988	)		7,087
Net change in other liabilities		(417	)		(2,658	)
Other operating activities, net		18,498			(11,342	)
Net cash from operating activities		(3,370	)		77,402

Investing Activities
Proceeds from maturities, prepayments and calls of securities held to maturity		85,007			71,817
Proceeds from maturities, prepayments and calls of securities available for sale		213,479			226,479
Purchases of securities available for sale		(9,303	)		(4,159	)
Net proceeds from bank-owned life insurance		2,013			1,586
Net change in federal funds sold and securities purchased under reverse repurchase agreements		(74,669	)		615
Net change in member bank stock		(173	)		27,114
Net change in loans		(266,949	)		(28,727	)
Purchases of premises and equipment		(8,372	)		(6,224	)
Proceeds from sales of premises and equipment		2,373			651
Proceeds from sales of other real estate		4,105			10,681
Purchases of software		(6,861	)		(7,359	)
Investments in tax credit and other partnerships		(3,426	)		(17	)
Purchase of insurance book of business		(81	)		—
Net cash from investing activities		(62,857	)		292,457

Financing Activities
Net change in deposits		202,218			494,923
Net change in federal funds purchased and securities sold under repurchase agreements		1,329			8,064
Net change in short-term borrowings		127			(780,816	)
Payments on long-term FHLB advances		(34	)		(33	)
Payments under finance lease obligations		(1,035	)		—
Common stock dividends		(30,020	)		(31,347	)
Repurchase and retirement of common stock		(49,901	)		(7,877	)
Shares withheld to pay taxes, long-term incentive plan		(1,605	)		(1,422	)
Net cash from financing activities		121,079			(318,508	)

Net change in cash and cash equivalents		54,852			51,351
Cash and cash equivalents at beginning of period		349,561			335,768
Cash and cash equivalents at end of period	$	404,413		$	387,119

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Business, Basis of Financial Statement Presentation and Principles of Consolidation

Trustmark Corporation (Trustmark) is a bank holding company headquartered in Jackson, Mississippi. Through its subsidiaries, Trustmark operates as a financial services organization providing banking and financial solutions to corporate institutions and individual customers through 193 offices at June 30, 2019 in Alabama, Florida, Mississippi, Tennessee and Texas.

The consolidated financial statements include the accounts of Trustmark and all other entities in which Trustmark has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements, and notes thereto, included in Trustmark’s 2018 Annual Report on Form 10-K.

Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of these consolidated financial statements have been included. The preparation of financial statements in conformity with these accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expense during the reporting periods and the related disclosures. Although Management’s estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that in 2019 actual conditions could vary from those anticipated, which could affect Trustmark’s financial condition and results of operations. Actual results could differ from those estimates.

Note 2 – Securities Available for Sale and Held to Maturity

The following tables are a summary of the amortized cost and estimated fair value of securities available for sale and held to maturity at June 30, 2019 and December 31, 2018 ($ in thousands):

	Securities Available for Sale									Securities Held to Maturity
June 30, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government agency obligations	$	27,334	$	102	$	(790	)	$	26,646	$	3,758	$	242	$	—		$	4,000
Obligations of states and political subdivisions		38,203		495		—			38,698		32,860		478		(88	)		33,250
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		66,041		314		(639	)		65,716		11,184		189		(69	)		11,304
Issued by FNMA and FHLMC		628,799		941		(5,376	)		624,364		106,755		379		(430	)		106,704
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		750,605		3,484		(2,718	)		751,371		536,166		6,505		(1,338	)		541,333
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		136,556		683		(309	)		136,930		134,813		1,154		(197	)		135,770
Total	$	1,647,538	$	6,019	$	(9,832	)	$	1,643,725	$	825,536	$	8,947	$	(2,122	)	$	832,361


December 31, 2018
U.S. Government agency obligations	$	31,235	$	109	$	(1,009	)	$	30,335	$	3,736	$	78	$	—		$	3,814
Obligations of states and political subdivisions		50,503		200		(27	)		50,676		35,783		255		(139	)		35,899
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		69,648		147		(2,301	)		67,494		12,090		45		(257	)		11,878
Issued by FNMA and FHLMC		685,520		127		(18,963	)		666,684		115,133		43		(2,887	)		112,289
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		830,129		67		(18,595	)		811,601		578,827		189		(15,441	)		563,575
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		187,494		191		(2,662	)		185,023		164,074		299		(2,095	)		162,278
Total	$	1,854,529	$	841	$	(43,557	)	$	1,811,813	$	909,643	$	909	$	(20,819	)	$	889,733

During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale to securities held to maturity. The securities were transferred at fair value, which became the cost basis for the securities held to maturity. At the date of transfer, the net unrealized holding loss on the available for sale securities totaled approximately $46.6 million ($28.8 million, net of tax). The net unrealized holding loss is 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. There were no gains or losses recognized as a result of the transfer. At June 30, 2019, the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive loss in the accompanying balance sheet totaled approximately $13.7 million ($10.3 million, net of tax) compared to approximately $15.7 million ($11.8 million, net of tax) at December 31, 2018.

Temporarily Impaired Securities

The tables below include securities with gross unrealized losses segregated by length of impairment at June 30, 2019 and December 31, 2018 ($ in thousands):

	Less than 12 Months					12 Months or More					Total
June 30, 2019	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
U.S. Government agency obligations	$	645	$	(1	)	$	22,179	$	(789	)	$	22,824	$	(790	)
Obligations of states and political subdivisions		—		—			8,020		(88	)		8,020		(88	)
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		299		(3	)		45,194		(705	)		45,493		(708	)
Issued by FNMA and FHLMC		2,817		(10	)		555,445		(5,796	)		558,262		(5,806	)
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		9,392		(75	)		403,393		(3,981	)		412,785		(4,056	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		31,522		(130	)		58,497		(376	)		90,019		(506	)
Total	$	44,675	$	(219	)	$	1,092,728	$	(11,735	)	$	1,137,403	$	(11,954	)


December 31, 2018
U.S. Government agency obligations	$	—	$	—		$	25,045	$	(1,009	)	$	25,045	$	(1,009	)
Obligations of states and political subdivisions		4,954		(9	)		12,802		(157	)		17,756		(166	)
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		9,163		(54	)		61,141		(2,504	)		70,304		(2,558	)
Issued by FNMA and FHLMC		31,931		(172	)		731,749		(21,678	)		763,680		(21,850	)
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		46,643		(110	)		1,296,221		(33,926	)		1,342,864		(34,036	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		5,497		(37	)		272,789		(4,720	)		278,286		(4,757	)
Total	$	98,188	$	(382	)	$	2,399,747	$	(63,994	)	$	2,497,935	$	(64,376	)

The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. Because Trustmark does not intend to sell these securities and it is more likely than not that Trustmark will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Trustmark does not consider these investments to be other-than-temporarily impaired at June 30, 2019. There were no other-than-temporary impairments for the six months ended June 30, 2019 and 2018.

Security Gains and Losses

During the six months ended June 30, 2019 and 2018, there were no gross realized gains or losses as a result of calls and dispositions of securities. Realized gains and losses are determined using the specific identification method and are included in noninterest income as security gains (losses), net.

Securities Pledged

Securities with a carrying value of $2.113 billion and $2.144 billion at June 30, 2019 and December 31, 2018, respectively, were pledged to collateralize public deposits and securities sold under repurchase agreements and for other purposes as permitted by law. At both June 30, 2019 and December 31, 2018, none of these securities were pledged under the Federal Reserve Discount Window program to provide additional contingency funding capacity.

Contractual Maturities

The amortized cost and estimated fair value of securities available for sale and held to maturity at June 30, 2019, by contractual maturity, are shown below ($ in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	29,808	$	29,944	$	180	$	181
Due after one year through five years		8,541		8,646		32,580		32,968
Due after five years through ten years		2,680		2,631		3,858		4,101
Due after ten years		24,508		24,123		—		—
		65,537		65,344		36,618		37,250
Mortgage-backed securities		1,582,001		1,578,381		788,918		795,111
Total	$	1,647,538	$	1,643,725	$	825,536	$	832,361

Note 3 – LHFI and Allowance for Loan Losses, LHFI

At June 30, 2019 and December 31, 2018, LHFI consisted of the following ($ in thousands):

	June 30, 2019		December 31, 2018
Loans secured by real estate:
Construction, land development and other land	$	1,111,297	$	1,056,601
Secured by 1-4 family residential properties		1,818,126		1,825,492
Secured by nonfarm, nonresidential properties		2,326,312		2,220,914
Other real estate secured		635,839		543,820
Commercial and industrial loans		1,533,318		1,538,715
Consumer loans		176,133		182,448
State and other political subdivision loans		982,187		973,818
Other loans		533,547		494,060
LHFI		9,116,759		8,835,868
Less allowance for loan losses, LHFI		80,399		79,290
Net LHFI	$	9,036,360	$	8,756,578

Loan Concentrations

Trustmark does not have any loan concentrations other than those reflected in the preceding table, which exceed 10% of total LHFI. At June 30, 2019, Trustmark’s geographic loan distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. Accordingly, the ultimate collectability of a substantial portion of these loans is susceptible to changes in market conditions in these areas.

Nonaccrual and Past Due LHFI

At June 30, 2019 and December 31, 2018, the carrying amounts of nonaccrual LHFI were $52.9 million and $61.6 million, respectively. Included in these amounts were $21.4 million and $16.7 million, respectively, of nonaccrual LHFI classified as troubled debt restructurings (TDRs). No material interest income was recognized in the income statement on nonaccrual LHFI for each of the periods ended June 30, 2019 and 2018.

The following tables provide an aging analysis of past due and nonaccrual LHFI by loan type at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019
	Past Due
	30-59 Days		60-89 Days		90 Days or More (1)		Total		Nonaccrual		Current Loans		Total LHFI
Loans secured by real estate:
Construction, land development and other land	$	639	$	—	$	—	$	639	$	1,263	$	1,109,395	$	1,111,297
Secured by 1-4 family residential properties		3,600		927		999		5,526		17,591		1,795,009		1,818,126
Secured by nonfarm, nonresidential properties		1,600		75		43		1,718		7,870		2,316,724		2,326,312
Other real estate secured		11		1		—		12		739		635,088		635,839
Commercial and industrial loans		2,429		890		—		3,319		15,708		1,514,291		1,533,318
Consumer loans		1,534		183		203		1,920		152		174,061		176,133
State and other political subdivision loans		—		—		—		—		8,303		973,884		982,187
Other loans		335		—		—		335		1,262		531,950		533,547
Total	$	10,148	$	2,076	$	1,245	$	13,469	$	52,888	$	9,050,402	$	9,116,759

(1)	Past due 90 days or more but still accruing interest.

	December 31, 2018
	Past Due
	30-59 Days		60-89 Days		90 Days or More (1)		Total		Nonaccrual		Current Loans		Total LHFI
Loans secured by real estate:
Construction, land development and other land	$	284	$	—	$	—	$	284	$	2,218	$	1,054,099	$	1,056,601
Secured by 1-4 family residential properties		8,600		1,700		569		10,869		14,718		1,799,905		1,825,492
Secured by nonfarm, nonresidential properties		1,887		—		—		1,887		9,621		2,209,406		2,220,914
Other real estate secured		197		99		—		296		927		542,597		543,820
Commercial and industrial loans		1,346		300		—		1,646		23,938		1,513,131		1,538,715
Consumer loans		1,800		353		287		2,440		205		179,803		182,448
State and other political subdivision loans		186		—		—		186		8,595		965,037		973,818
Other loans		83		—		—		83		1,402		492,575		494,060
Total	$	14,383	$	2,452	$	856	$	17,691	$	61,624	$	8,756,553	$	8,835,868

(1)	Past due 90 days or more but still accruing interest.

Impaired LHFI

Trustmark’s individually evaluated impaired LHFI include all commercial nonaccrual relationships of $500 thousand or more, which are specifically reviewed for impairment and deemed impaired, and all LHFI classified as TDRs in accordance with FASB ASC Topic 310-10-50-20 “Impaired Loans”, and are primarily collateral dependent loans. Fair value estimates for collateral dependent loans are derived from appraised values based on the current market value or as is value of the collateral, normally from recently received and reviewed appraisals. Current appraisals are ordered on an annual basis based on the inspection date or more often if market conditions necessitate. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Trustmark’s Appraisal Review Department to ensure they are acceptable, and values are adjusted down for costs associated with asset disposal. Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated. At the time a LHFI that has been specifically reviewed for impairment is deemed to be impaired, the full difference between book value and the most likely estimate of the collateral’s net realizable value is charged off or a specific reserve is established. As subsequent events dictate and estimated net realizable values change, further adjustments may be necessary.

No material interest income was recognized in the income statement on impaired LHFI for each of the periods ended June 30, 2019 and 2018.

At June 30, 2019 and December 31, 2018, individually evaluated impaired LHFI consisted of the following ($ in thousands):

	June 30, 2019
	LHFI
	Unpaid Principal Balance		With No Related Allowance Recorded		With an Allowance Recorded		Total Recorded Investment		Related Allowance		Average Recorded Investment
Loans secured by real estate:
Construction, land development and other land	$	945	$	652	$	20	$	672	$	—	$	1,112
Secured by 1-4 family residential properties		5,652		1,688		3,010		4,698		30		4,330
Secured by nonfarm, nonresidential properties		7,088		6,518		255		6,773		191		8,124
Other real estate secured		—		—		—		—		—		124
Commercial and industrial loans		31,463		12,192		17,197		29,389		3,139		30,053
Consumer loans		30		—		30		30		—		16
State and other political subdivision loans		8,533		8,303		—		8,303		—		8,449
Other loans		1,378		230		974		1,204		974		1,244
Total	$	55,089	$	29,583	$	21,486	$	51,069	$	4,334	$	53,452

	December 31, 2018
	LHFI
	Unpaid Principal Balance		With No Related Allowance Recorded		With an Allowance Recorded		Total Recorded Investment		Related Allowance		Average Recorded Investment
Loans secured by real estate:
Construction, land development and other land	$	1,794	$	1,528	$	24	$	1,552	$	—	$	1,738
Secured by 1-4 family residential properties		4,951		95		3,868		3,963		39		4,328
Secured by nonfarm, nonresidential properties		8,282		6,728		2,748		9,476		413		8,898
Other real estate secured		—		—		248		248		—		124
Commercial and industrial loans		37,786		12,893		17,824		30,717		4,334		26,725
Consumer loans		2		—		2		2		—		6
State and other political subdivision loans		8,688		4,079		4,516		8,595		516		4,297
Other loans		1,418		230		1,052		1,282		1,052		804
Total	$	62,921	$	25,553	$	30,282	$	55,835	$	6,354	$	46,920

Troubled Debt Restructurings

At June 30, 2019 and 2018, LHFI classified as TDRs totaled $36.3 million and $34.5 million, respectively, and were primarily comprised of both credits with interest-only payments for an extended period of time and credits renewed at a rate that was not commensurate with that of new debt with similar risk and totaled $25.7 million and $21.8 million, respectively. The remaining TDRs at June 30, 2019 and 2018 resulted from bankruptcies or from payment or maturity extensions. Trustmark had $2.3 million of unused commitments on TDRs at June 30, 2019 compared to no material unused commitments on TDRs at June 30, 2018.

For TDRs, Trustmark had a related loan loss allowance of $2.9 million and $9.1 million at June 30, 2019 and 2018, respectively. LHFI classified as TDRs are charged down to the most likely fair value estimate less an estimated cost to sell for collateral dependent loans, which would approximate net realizable value. Specific charge-offs related to TDRs totaled $117 thousand for the six months ended June 30, 2019 compared to $300 thousand for the six months ended June 30, 2018.

The following tables illustrate the impact of modifications classified as TDRs for the periods presented ($ in thousands):

	Three Months Ended June 30,
	2019						2018
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Loans secured by real estate:
Construction, land development and other land		—	$	—	$	—		1	$	22	$	22
Secured by 1-4 family residential properties		5		793		792		12		1,634		1,193
Secured by nonfarm, nonresidential properties		1		5,055		5,055		—		—		—
Commercial and industrial loans		2		113		—		5		9,275		9,258
Consumer loans		—		—		—		3		4		4
Total		8	$	5,961	$	5,847		21	$	10,935	$	10,477

	Six Months Ended June 30,
	2019						2018
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Loans secured by real estate:
Construction, land development and other land		—	$	—	$	—		1	$	22	$	22
Secured by 1-4 family residential properties		7		879		878		16		1,752		1,311
Secured by nonfarm, nonresidential properties		1		5,055		5,055		—		—		—
Commercial and industrial loans		8		9,167		9,054		6		11,746		11,729
Consumer loans		2		30		30		3		4		4
Total		18	$	15,131	$	15,017		26	$	13,524	$	13,066

The table below includes the balances at default for TDRs modified within the last 12 months for which there was a payment default during the periods presented ($ in thousands):

	Six Months Ended June 30,
	2019				2018
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Loans secured by real estate:
Construction, land development and other land		—	$	—		1	$	22
Secured by 1-4 family residential properties		1		46		2		30
Commercial and industrial loans		10		7,957		3		7,414
Consumer loans		1		27		—		—
Total		12	$	8,030		6	$	7,466

Trustmark’s TDRs have resulted primarily from allowing the borrower to pay interest-only for an extended period of time and credits renewed at a rate that was not commensurate with that of new debt with similar risk rather than from forgiveness. Accordingly, as shown above, these TDRs have a similar recorded investment for both the pre-modification and post-modification disclosure. Trustmark has utilized loans 90 days or more past due to define payment default in determining TDRs that have subsequently defaulted.

The following tables detail LHFI classified as TDRs by loan type at June 30, 2019 and 2018 ($ in thousands):

	June 30, 2019
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	20	$	20
Secured by 1-4 family residential properties		50		3,563		3,613
Secured by nonfarm, nonresidential properties		—		5,311		5,311
Commercial and industrial loans		14,897		11,965		26,862
Consumer loans		—		30		30
Other loans		—		510		510
Total TDRs	$	14,947	$	21,399	$	36,346

	June 30, 2018
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	208	$	208
Secured by 1-4 family residential properties		501		3,407		3,908
Secured by nonfarm, nonresidential properties		—		370		370
Commercial and industrial loans		733		28,673		29,406
Consumer loans		—		4		4
Other loans		—		556		556
Total TDRs	$	1,234	$	33,218	$	34,452

Credit Quality Indicators

Trustmark’s loan portfolio credit quality indicators focus on six key quality ratios that are compared against bank tolerances. The loan indicators are total classified outstanding, total criticized outstanding, nonperforming loans, nonperforming assets, delinquencies and net loan losses. Due to the homogenous nature of consumer loans, Trustmark does not assign a formal internal risk rating to each credit and therefore the criticized and classified measures are primarily composed of commercial loans.

In addition to monitoring portfolio credit quality indicators, Trustmark also measures how effectively the lending process is being managed and risks are being identified. As part of an ongoing monitoring process, Trustmark grades the commercial portfolio as it relates to credit file completion and financial statement exceptions, underwriting, collateral documentation and compliance with law as shown below:

•

Credit File Completeness and Financial Statement Exceptions – evaluates the quality and condition of credit files in terms of content and completeness and focuses on efforts to obtain and document sufficient information to determine the quality and status of credits. Also included is an evaluation of the systems/procedures used to insure compliance with policy.

•

Underwriting – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within loan policy requirements. A properly approved credit is approved by adequate authority in a timely manner with all conditions of approval fulfilled. Total policy exceptions measure the level of underwriting and other policy exceptions within a loan portfolio.

•

Collateral Documentation – focuses on the adequacy of documentation to perfect Trustmark’s collateral position and substantiate collateral value. Collateral exceptions measure the level of documentation exceptions within a loan portfolio. Collateral exceptions occur when certain collateral documentation is either not present or not current.

•

Compliance with Law – focuses on underwriting, documentation, approval and reporting in compliance with banking laws and regulations. Primary emphasis is directed to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Regulation O requirements and regulations governing appraisals.

Commercial Credits

Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to delineate the level of risk across the ten unique credit risk grades. Credit risk grade definitions are as follows:

•

Risk Rate (RR) 1 through RR 6 – Grades one through six represent groups of loans that are not subject to criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risk measured by using a variety of credit risk criteria such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.

•

Other Assets Especially Mentioned (Special Mention) (RR 7) – a loan that has a potential weakness that if not corrected will lead to a more severe rating. This rating is for credits that are currently protected but potentially weak because of an adverse feature or condition that if not corrected will lead to a further downgrade.

•

Substandard (RR 8) – a loan that has at least one identified weakness that is well defined. This rating is for credits where the primary sources of repayment are not viable at the time of evaluation or where either the capital or collateral is not adequate to support the loan and the secondary means of repayment do not provide a sufficient level of support to offset the identified weakness. Loss potential exists in the aggregate amount of substandard loans but does not necessarily exist in individual loans.

•

Doubtful (RR 9) – a loan with an identified weakness that does not have a valid secondary source of repayment. Generally these credits have an impaired primary source of repayment and secondary sources are not sufficient to prevent a loss in the credit. The exact amount of the loss has not been determined at this time.

•

Loss (RR 10) – a loan or a portion of a loan that is deemed to be uncollectible.

By definition, credit risk grades special mention (RR 7), substandard (RR 8), doubtful (RR 9) and loss (RR 10) are criticized loans while substandard (RR 8), doubtful (RR 9) and loss (RR 10) are classified loans. These definitions are standardized by all bank regulatory agencies and are generally equally applied to each individual lending institution. The remaining credit risk grades are considered pass credits and are solely defined by Trustmark.

Each commercial loan is assigned a credit risk grade that is an indication for the likelihood of default and is not a direct indication of loss at default. The loss at default aspect of the subject risk ratings is neither uniform across the nine primary commercial loan groups or constant between the geographic areas. To account for the variance in the loss at default aspects of the risk rating system, the loss expectations for each risk rating are integrated into the allowance for loan loss methodology where the calculated loss at default is allotted for each individual risk rating with respect to the individual loan group and unique geographic area. The loss at default aspect of the reserve methodology is calculated each quarter as a component of the overall reserve factor for each risk grade by loan group and geographic area.

To enhance this process, commercial nonaccrual relationships of $500 thousand or more are routinely reviewed to establish an expectation of loss, if any, and if such examination indicates that the level of reserve is not adequate to cover the expectation of loss, a special reserve or impairment is generally applied.

The distribution of the losses is accomplished by means of a loss distribution model that assigns a loss factor to each risk rating (1 to 9) in each commercial loan pool. A factor is not applied to risk rate 10 as loans classified as losses are charged off within the period that the loss is determined and are not carried on Trustmark’s books over quarter-end.

The expected loss distribution is spread across the various risk ratings by the perceived level of risk for loss. The nine grade scale described above ranges from a negligible risk of loss to an identified loss across its breadth. The loss distribution factors are graduated through the scale on a basis proportional to the degree of risk that appears manifest in each individual rating and assumes that migration through the loan grading system will occur.

Each loan officer assesses the appropriateness of the internal risk rating assigned to their credits on an ongoing basis. Trustmark’s Asset Review area conducts independent credit quality reviews of the majority of Trustmark’s commercial loan portfolio both on the underlying credit quality of each individual loan portfolio as well as the adherence to Trustmark’s loan policy and the loan administration process. In general, Asset Review conducts reviews of each lending area within a six to eighteen month window depending on the overall credit quality results of the individual area.

In addition to the ongoing internal risk rate monitoring described above, Trustmark’s Credit Quality Review Committee meets monthly and performs a review of all loans of $100 thousand or more that are either delinquent thirty days or more or on nonaccrual. This review includes recommendations regarding risk ratings, accrual status, charge-offs and appropriate servicing officer as well as evaluation of problem credits for determination of TDRs. Quarterly, the Credit Quality Review Committee reviews and modifies continuous action plans for all credits risk rated seven or worse for relationships of $100 thousand or more.

In addition, a semi-annual review of significant development, commercial construction, multi-family and non-owner occupied projects is performed. The review assesses each particular project with respect to location, project valuations, progress of completion, leasing status, current financial information, rents, operating expenses, cash flow, adherence to budget and projections and other information as applicable. Summary results are reviewed by Senior and Regional Credit Officers in addition to the Chief Credit Officer with a determination as to the appropriateness of existing risk ratings and accrual status.

Consumer Credits

Consumer LHFI that do not meet a minimum custom credit score are reviewed quarterly by Management. The Retail Credit Review Committee reviews the volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer to ensure that Trustmark continues to originate quality loans.

Trustmark monitors the levels and severity of past due consumer LHFI on a daily basis through its collection activities. A detailed assessment of consumer LHFI delinquencies is performed monthly at both a product and market level by delivery channel, which incorporates the perceived level of risk at time of underwriting.

The tables below present LHFI by loan type and credit quality indicator at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019
		Commercial LHFI
		Pass - Categories 1-6		Special Mention - Category 7		Substandard - Category 8		Doubtful - Category 9		Subtotal
Loans secured by real estate:
Construction, land development and other land		$	1,030,648	$	70	$	3,992	$	193	$	1,034,903
Secured by 1-4 family residential properties			118,173		313		2,618		48		121,152
Secured by nonfarm, nonresidential properties			2,276,103		—		49,803		362		2,326,268
Other real estate secured			630,205		—		4,849		—		635,054
Commercial and industrial loans			1,452,571		15,575		64,412		760		1,533,318
Consumer loans			—		—		—		—		—
State and other political subdivision loans			967,718		4,650		9,819		—		982,187
Other loans			508,013		3,986		17,615		35		529,649
Total		$	6,983,431	$	24,594	$	153,108	$	1,398	$	7,162,531

	Consumer LHFI
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual		Subtotal		Total LHFI
Loans secured by real estate:
Construction, land development and other land	$	75,579	$	529	$	—	$	286	$	76,394	$	1,111,297
Secured by 1-4 family residential properties		1,675,107		4,240		999		16,628		1,696,974		1,818,126
Secured by nonfarm, nonresidential properties		44		—		—		—		44		2,326,312
Other real estate secured		784		1		—		—		785		635,839
Commercial and industrial loans		—		—		—		—		—		1,533,318
Consumer loans		174,061		1,717		203		152		176,133		176,133
State and other political subdivision loans		—		—		—		—		—		982,187
Other loans		3,898		—		—		—		3,898		533,547
Total	$	1,929,473	$	6,487	$	1,202	$	17,066	$	1,954,228	$	9,116,759

	December 31, 2018
		Commercial LHFI
		Pass - Categories 1-6		Special Mention - Category 7		Substandard - Category 8		Doubtful - Category 9		Subtotal
Loans secured by real estate:
Construction, land development and other land		$	982,305	$	75	$	5,645	$	203	$	988,228
Secured by 1-4 family residential properties			123,191		216		2,731		229		126,367
Secured by nonfarm, nonresidential properties			2,182,106		1,250		37,025		473		2,220,854
Other real estate secured			537,958		323		4,610		—		542,891
Commercial and industrial loans			1,468,262		12,431		55,943		2,079		1,538,715
Consumer loans			—		—		—		—		—
State and other political subdivision loans			958,214		5,250		10,354		—		973,818
Other loans			460,568		17,842		10,323		49		488,782
Total		$	6,712,604	$	37,387	$	126,631	$	3,033	$	6,879,655

	Consumer LHFI
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual		Subtotal		Total LHFI
Loans secured by real estate:
Construction, land development and other land	$	67,913	$	124	$	—	$	336	$	68,373	$	1,056,601
Secured by 1-4 family residential properties		1,675,455		9,872		569		13,229		1,699,125		1,825,492
Secured by nonfarm, nonresidential properties		60		—		—		—		60		2,220,914
Other real estate secured		929		—		—		—		929		543,820
Commercial and industrial loans		—		—		—		—		—		1,538,715
Consumer loans		179,802		2,153		288		205		182,448		182,448
State and other political subdivision loans		—		—		—		—		—		973,818
Other loans		5,278		—		—		—		5,278		494,060
Total	$	1,929,437	$	12,149	$	857	$	13,770	$	1,956,213	$	8,835,868

Past Due LHFS

LHFS past due 90 days or more totaled $38.4 million and $37.4 million at June 30, 2019 and December 31, 2018, respectively. LHFS past due 90 days or more are serviced loans eligible for repurchase, which are fully guaranteed by the Government National Mortgage Association (GNMA). GNMA optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer’s option and without GNMA’s prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When Trustmark is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether Trustmark intends to exercise the buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings.

Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first six months of 2019 or 2018.

Allowance for Loan Losses, LHFI

Trustmark’s allowance for loan loss methodology for commercial LHFI is based upon regulatory guidance from its primary regulator and GAAP. The methodology segregates the commercial purpose and commercial construction LHFI portfolios into nine separate loan types (or pools) which have similar characteristics such as repayment, collateral and risk profiles. The nine basic loan pools are further segregated into Trustmark’s five key market regions, Alabama, Florida, Mississippi, Tennessee and Texas, to take into consideration the uniqueness of each market. A 10-point risk rating system is utilized for each separate loan pool to apply a reserve factor consisting of quantitative and qualitative components to determine the needed allowance by each loan type. As a result, there are 450 risk rate factors for commercial loan types. The nine separate pools are shown below:

Commercial Purpose LHFI

•

Real Estate – Owner-Occupied

•

Real Estate – Non-Owner Occupied

•

Working Capital

•

Non-Working Capital

•

Land

•

Lots and Development

•

Political Subdivisions

Commercial Construction LHFI

•

1 to 4 Family

•

Non-1 to 4 Family

The quantitative factors of the allowance methodology reflect a twelve-quarter rolling average of net charge-offs by loan type within each key market region. This allows for a greater sensitivity to current trends, such as economic changes, as well as current loss profiles and creates a more accurate depiction of historical losses.

Qualitative factors used in the allowance methodology include the following:

•

National and regional economic trends and conditions

•

Impact of recent performance trends

•

Experience, ability and effectiveness of management

•

Adherence to Trustmark’s loan policies, procedures and internal controls

•

Collateral, financial and underwriting exception trends

•

Credit concentrations

•

Loan facility risk

•

Acquisitions

•

Catastrophe

Each qualitative factor is converted to a scale ranging from 0 (No risk) to 100 (High Risk), other than the last two factors, which are applied on a dollar-for-dollar basis to ensure that the combination of such factors is proportional. The resulting ratings from the individual factors are weighted and summed to establish the weighted-average qualitative factor within each key market region.

The allowance for loan loss methodology segregates the consumer LHFI portfolio into homogeneous pools of loans that contain similar structure, repayment, collateral and risk profiles. These homogeneous pools of loans are shown below:

•

Residential Mortgage

•

Direct Consumer

•

Junior Lien on 1-4 Family Residential Properties

•

Credit Cards

•

Overdrafts

The historical loss experience for these pools is determined by calculating a 12-quarter rolling average of net charge-offs, which is applied to each pool to establish the quantitative aspect of the methodology. Where, in Management’s estimation, the calculated loss experience does not fully cover the anticipated loss for a pool, an estimate is also applied to each pool to establish the qualitative aspect of the methodology, which represents the perceived risks across the loan portfolio at the current point in time. This qualitative methodology utilizes five separate factors made up of unique components that when weighted and combined produce an estimated level of reserve for each of the loan pools. The five qualitative factors include the following:

•

Economic indicators

•

Performance trends

•

Management experience

•

Credit concentrations

•

Loan policy exceptions

The risk measure for each factor is converted to a scale ranging from 0 (No risk) to 100 (High Risk) to ensure that the combination of such factors is proportional. The resulting ratings from the individual factors are weighted and summed to establish the weighted-average qualitative factor of a specific loan portfolio. This weighted-average qualitative factor is then applied over the five loan pools.

Trustmark’s loan policy dictates the guidelines to be followed in determining when a loan is charged off. Commercial purpose loans are charged off when a determination is made that the loan is uncollectible and continuance as a bankable asset is not warranted or an impairment evaluation indicates that a value adjustment is necessary. Consumer loans secured by 1-4 family residential real estate are generally charged off or written down when the credit becomes severely delinquent and the balance exceeds the fair value of the property less costs to sell. Non-real estate consumer purpose loans, both secured and unsecured, are generally charged off in full during the month in which the loan becomes 120 days past due. Credit card loans are generally charged off in full when the loan becomes 180 days past due.

The following tables detail the balance in the allowance for loan losses, LHFI allocated to each loan type segmented by the impairment evaluation methodology used at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	6,931	$	6,931
Secured by 1-4 family residential properties		30		8,329		8,359
Secured by nonfarm, nonresidential properties		191		24,057		24,248
Other real estate secured		—		3,721		3,721
Commercial and industrial loans		3,139		24,479		27,618
Consumer loans		—		3,248		3,248
State and other political subdivision loans		—		438		438
Other loans		974		4,862		5,836
Total allowance for loan losses, LHFI	$	4,334	$	76,065	$	80,399

	December 31, 2018
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	7,390	$	7,390
Secured by 1-4 family residential properties		39		8,602		8,641
Secured by nonfarm, nonresidential properties		413		21,963		22,376
Other real estate secured		—		3,450		3,450
Commercial and industrial loans		4,334		23,025		27,359
Consumer loans		—		2,890		2,890
State and other political subdivision loans		516		474		990
Other loans		1,052		5,142		6,194
Total allowance for loan losses, LHFI	$	6,354	$	72,936	$	79,290

The following tables detail LHFI by loan type related to each balance in the allowance for loan losses, LHFI segregated by the impairment evaluation methodology used at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019
	LHFI Evaluated for Impairment
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	672	$	1,110,625	$	1,111,297
Secured by 1-4 family residential properties		4,698		1,813,428		1,818,126
Secured by nonfarm, nonresidential properties		6,773		2,319,539		2,326,312
Other real estate secured		—		635,839		635,839
Commercial and industrial loans		29,389		1,503,929		1,533,318
Consumer loans		30		176,103		176,133
State and other political subdivision loans		8,303		973,884		982,187
Other loans		1,204		532,343		533,547
Total	$	51,069	$	9,065,690	$	9,116,759

	December 31, 2018
	LHFI Evaluated for Impairment
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	1,552	$	1,055,049	$	1,056,601
Secured by 1-4 family residential properties		3,963		1,821,529		1,825,492
Secured by nonfarm, nonresidential properties		9,476		2,211,438		2,220,914
Other real estate secured		248		543,572		543,820
Commercial and industrial loans		30,717		1,507,998		1,538,715
Consumer loans		2		182,446		182,448
State and other political subdivision loans		8,595		965,223		973,818
Other loans		1,282		492,778		494,060
Total	$	55,835	$	8,780,033	$	8,835,868

Changes in the allowance for loan losses, LHFI were as follows for the periods presented ($ in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Balance at beginning of period	$	79,005		$	81,235		$	79,290		$	76,733
Transfers (1)		—			782			—			782
Loans charged-off		(2,937	)		(3,421	)		(6,970	)		(5,963	)
Recoveries		1,845			1,803			3,982			4,886
Net (charge-offs) recoveries		(1,092	)		(1,618	)		(2,988	)		(1,077	)
Provision for loan losses, LHFI		2,486			3,167			4,097			7,128
Balance at end of period	$	80,399		$	83,566		$	80,399		$	83,566

(1)	The allowance for loan losses balance related to the remaining loans acquired in the Bay Bank merger, which were transferred from acquired loans to LHFI during the second quarter of 2018.

The following tables detail changes in the allowance for loan losses, LHFI by loan type for the periods ended June 30, 2019 and 2018 ($ in thousands):

	2019
	Balance January 1,		Charge-offs			Recoveries		Provision for Loan Losses			Balance June 30,
Loans secured by real estate:
Construction, land development and other land	$	7,390	$	(35	)	$	577	$	(1,001	)	$	6,931
Secured by 1-4 family residential properties		8,641		(281	)		336		(337	)		8,359
Secured by nonfarm, nonresidential properties		22,376		(34	)		30		1,876			24,248
Other real estate secured		3,450		—			16		255			3,721
Commercial and industrial loans		27,359		(2,831	)		329		2,761			27,618
Consumer loans		2,890		(1,269	)		954		673			3,248
State and other political subdivision loans		990		—			—		(552	)		438
Other loans		6,194		(2,520	)		1,740		422			5,836
Total allowance for loan losses, LHFI	$	79,290	$	(6,970	)	$	3,982	$	4,097		$	80,399

	2018
	Balance January 1,		Transfers (1)			Charge-offs			Recoveries		Provision for Loan Losses			Balance June 30,
Loans secured by real estate:
Construction, land development and other land loans	$	7,865	$	573		$	(2	)	$	536	$	(1,082	)	$	7,890
Secured by 1-4 family residential properties		10,874		127			(1,302	)		342		(379	)		9,662
Secured by nonfarm, nonresidential properties		23,428		103			(1,117	)		36		1,552			24,002
Other real estate secured		2,790		(68	)		—			12		(355	)		2,379
Commercial and industrial loans		22,851		2			(178	)		1,347		7,506			31,528
Consumer loans		3,470		45			(1,007	)		1,037		(571	)		2,974
State and other political subdivision loans		789		—			—			—		(24	)		765
Other loans		4,666		—			(2,357	)		1,576		481			4,366
Total allowance for loan losses, LHFI	$	76,733	$	782		$	(5,963	)	$	4,886	$	7,128		$	83,566

(1)	The allowance for loan losses balance related to the remaining loans acquired in the Bay Bank merger, which were transferred from acquired loans to LHFI during the second quarter of 2018.

Note 4 – Acquired Loans

Trustmark’s loss-share agreement with the Federal Deposit Insurance Corporation (FDIC) covering the acquired covered loans secured by 1-4 family residential properties will expire in 2021.

At June 30, 2019 and December 31, 2018, acquired loans consisted of the following ($ in thousands):

	June 30, 2019		December 31, 2018
Loans secured by real estate:
Construction, land development and other land	$	5,705	$	5,878
Secured by 1-4 family residential properties		19,967		22,556
Secured by nonfarm, nonresidential properties		43,444		47,979
Other real estate secured		7,416		8,253
Commercial and industrial loans		6,193		15,267
Consumer loans		852		1,356
Other loans		4,307		5,643
Acquired loans		87,884		106,932
Less allowance for loan losses, acquired loans		1,398		1,231
Net acquired loans	$	86,486	$	105,701

The following table presents changes in the net carrying value of the acquired loans for the periods presented ($ in thousands):

	Acquired Impaired			Acquired Not ASC 310-30 (1)
Carrying value, net at January 1, 2018	$	179,570		$	77,868
Transfers (2)(3)		(26,497	)		(59,916	)
Accretion to interest income		9,514			1,019
Payments received, net		(62,519	)		(16,234	)
Other (4)		(26	)		74
Change in allowance for loan losses, acquired loans		2,848			—
Carrying value, net at December 31, 2018		102,890			2,811
Transfers (3)		—			(2,926	)
Accretion to interest income		2,983			115
Payments received, net		(19,667	)		—
Other (4)		447			—
Change in allowance for loan losses, acquired loans		(167	)		—
Carrying value, net at June 30, 2019	$	86,486		$	—

(1)	“Acquired Not ASC 310-30” loans consist of loans that are not in scope for FASB ASC Topic 310-30.

(2)	During 2018, Trustmark transferred the remaining loans acquired in the Bay Bank, Heritage and Reliance acquisitions from acquired impaired loans to LHFI.

(3)	“Acquired Not ASC 310-30” loans transferred to LHFI due to the discount on these loans being fully amortized.

(4)	Includes miscellaneous timing adjustments as well as acquired loan terminations through foreclosure, charge-off and other terminations.

Under FASB ASC Topic 310-30, the accretable yield is the excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans and is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. The following table presents changes in the accretable yield for the periods presented ($ in thousands):

	Six Months Ended June 30,
	2019			2018
Accretable yield at beginning of period	$	(17,722	)	$	(31,426	)
Accretion to interest income		2,983			5,927
Disposals, net		1,114			1,463
Transfers (1)		—			3,685
Reclassification from nonaccretable difference (2)		(2,280	)		(2,547	)
Accretable yield at end of period	$	(15,905	)	$	(22,898	)

(1)	During the second quarter of 2018, Trustmark transferred the remaining loans acquired in the Bay Bank merger from acquired impaired loans to LHFI.

(2)	Reclassifications from nonaccretable difference are due to lower loss expectations and improvements in expected cash flows.

The following table presents the components of the allowance for loan losses on acquired loans for the periods presented ($ in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Balance at beginning of period	$	1,297		$	4,294		$	1,231		$	4,079
Transfers (1)		—			(782	)		—			(782	)
Net (charge-offs) recoveries		(5	)		(25	)		(17	)		40
Provision for loan losses, acquired loans		106			(441	)		184			(291	)
Balance at end of period	$	1,398		$	3,046		$	1,398		$	3,046

(1)	The allowance for loan losses balance related to the remaining loans acquired in the Bay Bank merger, which were transferred from acquired loans to LHFI during the second quarter of 2018.

As discussed in Note 3 - LHFI and Allowance for Loan Losses, LHFI, Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to segregate the level of risk across the ten unique risk ratings. These credit quality measures are unique to commercial loans. Credit quality for consumer loans is based on individual credit scores, aging status of the loan and payment activity.

The tables below present the acquired loans by loan type and credit quality indicator at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019
			Commercial Loans
			Pass - Categories 1-6		Special Mention - Category 7		Substandard - Category 8		Doubtful - Category 9		Subtotal
Loans secured by real estate:
Construction, land development and other land			$	4,781	$	27	$	235	$	—	$	5,043
Secured by 1-4 family residential properties				3,681		43		556		444		4,724
Secured by nonfarm, nonresidential properties				31,840		—		11,193		411		43,444
Other real estate secured				7,150		—		70		196		7,416
Commercial and industrial loans				4,348		—		149		1,696		6,193
Consumer loans				—		—		—		—		—
Other loans				2,946		—		1,361		—		4,307
Total acquired loans			$	54,746	$	70	$	13,564	$	2,747	$	71,127

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual (1)		Subtotal		Total Acquired Loans
Loans secured by real estate:
Construction, land development and other land	$	658	$	—	$	4	$	—	$	662	$	5,705
Secured by 1-4 family residential properties		14,287		858		98		—		15,243		19,967
Secured by nonfarm, nonresidential properties		—		—		—		—		—		43,444
Other real estate secured		—		—		—		—		—		7,416
Commercial and industrial loans		—		—		—		—		—		6,193
Consumer loans		844		8		—		—		852		852
Other loans		—		—		—		—		—		4,307
Total acquired loans	$	15,789	$	866	$	102	$	—	$	16,757	$	87,884

(1)	Acquired loans not accounted for under FASB ASC Topic 310-30.

	December 31, 2018
			Commercial Loans
			Pass - Categories 1-6		Special Mention - Category 7		Substandard - Category 8		Doubtful - Category 9		Subtotal
Loans secured by real estate:
Construction, land development and other land			$	4,923	$	26	$	278	$	—	$	5,227
Secured by 1-4 family residential properties				4,341		45		534		451		5,371
Secured by nonfarm, nonresidential properties				34,933		—		12,614		432		47,979
Other real estate secured				7,653		—		190		410		8,253
Commercial and industrial loans				6,560		—		6,942		1,765		15,267
Consumer loans				—		—		—		—		—
Other loans				4,027		—		1,616		—		5,643
Total acquired loans			$	62,437	$	71	$	22,174	$	3,058	$	87,740

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual (1)		Subtotal		Total Acquired Loans
Loans secured by real estate:
Construction, land development and other land	$	642	$	5	$	4	$	—	$	651	$	5,878
Secured by 1-4 family residential properties		16,133		571		481		—		17,185		22,556
Secured by nonfarm, nonresidential properties		—		—		—		—		—		47,979
Other real estate secured		—		—		—		—		—		8,253
Commercial and industrial loans		—		—		—		—		—		15,267
Consumer loans		1,346		10		—		—		1,356		1,356
Other loans		—		—		—		—		—		5,643
Total acquired loans	$	18,121	$	586	$	485	$	—	$	19,192	$	106,932

(1)	Acquired loans not accounted for under FASB ASC Topic 310-30.

The following tables provide an aging analysis of contractually past due and nonaccrual acquired loans by loan type at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019
	Past Due
	30-59 Days		60-89 Days		90 Days or More (1)		Total		Nonaccrual (2)		Current Loans		Total Acquired Loans
Loans secured by real estate:
Construction, land development and other land	$	—	$	—	$	100	$	100	$	—	$	5,605	$	5,705
Secured by 1-4 family residential properties		723		244		132		1,099		—		18,868		19,967
Secured by nonfarm, nonresidential properties		—		69		734		803		—		42,641		43,444
Other real estate secured		—		—		—		—		—		7,416		7,416
Commercial and industrial loans		—		—		—		—		—		6,193		6,193
Consumer loans		—		8		—		8		—		844		852
Other loans		—		—		1,352		1,352		—		2,955		4,307
Total acquired loans	$	723	$	321	$	2,318	$	3,362	$	—	$	84,522	$	87,884

(1)	Past due 90 days or more but still accruing interest.

(2)	Acquired loans not accounted for under FASB ASC Topic 310-30.

	December 31, 2018
	Past Due
	30-59 Days		60-89 Days		90 Days or More (1)		Total		Nonaccrual (2)		Current Loans		Total Acquired Loans
Loans secured by real estate:
Construction, land development and other land	$	5	$	—	$	87	$	92	$	—	$	5,786	$	5,878
Secured by 1-4 family residential properties		664		108		481		1,253		—		21,303		22,556
Secured by nonfarm, nonresidential properties		206		—		978		1,184		—		46,795		47,979
Other real estate secured		2		14		—		16		—		8,237		8,253
Commercial and industrial loans		—		—		—		—		—		15,267		15,267
Consumer loans		1		9		—		10		—		1,346		1,356
Other loans		—		—		—		—		—		5,643		5,643
Total acquired loans	$	878	$	131	$	1,546	$	2,555	$	—	$	104,377	$	106,932

(1)	Past due 90 days or more but still accruing interest.

(2)	Acquired loans not accounted for under FASB ASC Topic 310-30.

Note 5 – Mortgage Banking

Mortgage Servicing Rights

The activity in the mortgage servicing rights (MSR) is detailed in the table below for the periods presented ($ in thousands):

	Six Months Ended June 30,
	2019			2018
Balance at beginning of period	$	95,596		$	84,269
Origination of servicing assets		6,075			7,719
Change in fair value:
Due to market changes		(17,072	)		11,264
Due to run-off		(5,316	)		(5,841	)
Balance at end of period	$	79,283		$	97,411

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. Trustmark considers the conditional prepayment rate (CPR), which is an estimated loan prepayment rate that uses historical prepayment rates for previous loans similar to the loans being evaluated, and the discount rate in determining the fair value of the MSR. An increase in either the CPR 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. At June 30, 2019, the fair value of the MSR included an assumed average prepayment speed of 12 CPR and an average discount rate of 10.04% compared to an assumed average prepayment speed of 7 CPR and an average discount rate of 10.28% at June 30, 2018.

Mortgage Loans Serviced/Sold

During the first six months of 2019 and 2018, Trustmark sold $488.1 million and $515.6 million, respectively, of residential mortgage loans. Gains on these sales were recorded as noninterest income in mortgage banking, net and totaled $9.1 million for the first six months of 2019 compared to $10.0 million for the first six months of 2018. The table below details the mortgage loans sold and serviced for others at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019		December 31, 2018
Federal National Mortgage Association	$	4,218,612	$	4,204,336
Government National Mortgage Association		2,579,636		2,537,238
Federal Home Loan Mortgage Corporation		78,261		71,343
Other		20,545		21,957
Total mortgage loans sold and serviced for others	$	6,897,054	$	6,834,874

Trustmark is subject to losses in its loan servicing portfolio due to loan foreclosures. Trustmark has obligations to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loan sold was in violation of representations or warranties made by Trustmark at the time of the sale, herein referred to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that had missing or insufficient file documentation, loans that do not meet investor guidelines, loans in which the appraisal does not support the value and/or loans obtained through fraud by the borrowers or other third parties. Generally, putback requests may be made until the loan is paid in full. However, mortgage loans delivered to Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) on or after January 1, 2013 are subject to the Lending and Selling Representations and Warranties Framework updated in May 2014, which provides certain instances in which FNMA and FHLMC will not exercise their remedies, including a putback request, for breaches of certain selling representations and warranties, such as payment history and quality control review.

When a putback request is received, Trustmark evaluates the request and takes appropriate actions based on the nature of the request. Trustmark is required by FNMA and FHLMC to provide a response to putback requests within 60 days of the date of receipt. The total mortgage loan servicing putback expenses are included in other expense.

Changes in the reserve for mortgage loan servicing putback expense for mortgage loans were as follows for the periods presented ($ in thousands):

	Six Months Ended June 30,
	2019			2018
Balance at beginning of period	$	1,000		$	1,000
Provision for putback expenses		—			—
Other (1)		(298	)		—
Balance at end of period	$	702		$	1,000

(1)	Includes fair value adjustments for loans transferred due to underwriting issues as well as adjustments based on Trustmark’s mortgage loan servicing putback reserve analysis.

There is inherent uncertainty in reasonably estimating the requirement for reserves against potential future mortgage loan servicing putback expenses. Future putback expenses are dependent on many subjective factors, including the review procedures of the purchasers and the potential refinance activity on loans sold with servicing released and the subsequent consequences under the representations and warranties. Trustmark believes that it has appropriately reserved for potential mortgage loan servicing putback requests.

Note 6 – Other Real Estate

At June 30, 2019, Trustmark’s geographic other real estate distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. The ultimate recovery of a substantial portion of the carrying amount of other real estate is susceptible to changes in market conditions in these areas.

For the periods presented, changes and gains (losses), net on other real estate were as follows ($ in thousands):

	Six Months Ended June 30,
	2019			2018
Balance at beginning of period	$	34,668		$	43,228
Additions		2,101			7,084
Disposals		(3,859	)		(9,680	)
Write-downs		(1,667	)		(965	)
Balance at end of period	$	31,243		$	39,667

Gains (losses), net on the sale of other real estate included in other real estate expense	$	246		$	1,002

At June 30, 2019 and December 31, 2018, other real estate by type of property consisted of the following ($ in thousands):

	June 30, 2019		December 31, 2018
Construction, land development and other land properties	$	15,325	$	16,206
1-4 family residential properties		4,132		4,983
Nonfarm, nonresidential properties		11,581		13,296
Other real estate properties		205		183
Total other real estate	$	31,243	$	34,668

At June 30, 2019 and December 31, 2018, other real estate by geographic location consisted of the following ($ in thousands):

	June 30, 2019		December 31, 2018
Alabama	$	6,451	$	6,873
Florida		7,826		8,771
Mississippi (1)		15,511		17,255
Tennessee (2)		815		1,025
Texas		640		744
Total other real estate	$	31,243	$	34,668

(1)	Mississippi includes Central and Southern Mississippi Regions.

(2)	Tennessee includes Memphis, Tennessee and Northern Mississippi Regions.

At June 30, 2019 and December 31, 2018, the balance of other real estate included $4.1 million and $5.0 million, respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At June 30, 2019 and December 31, 2018, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $625 thousand and $1.1 million, respectively.

Note 7 – Leases

ASU 2016-02, “Leases (Topic 842),” became effective for Trustmark on January 1, 2019. Trustmark adopted FASB ASC Topic 842 utilizing the modified-retrospective transition approach prescribed by ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. Trustmark did not elect the package of practical expedients, which includes reassessing whether any expired or existing contracts are or contain leases, reassessing the lease classification and reassessing initial direct costs. Also, Trustmark did not elect to adopt the hindsight practical expedient therefore maintaining the lease terms previously determined under FASB ASC Topic 840, “Leases”. Trustmark made an accounting policy election to not recognize short-term leases (12 months or less) on the balance sheet. Trustmark accounts for the lease and nonlease components separately as such amounts are readily determinable.

Once Trustmark identifies and determines certain contracts are leases according to FASB ASC Topic 842, Trustmark classifies it as an operating or a finance lease and recognizes a right-of-use asset and a lease liability at the lease commencement date. The lease liability represents the present value of the lease payments that remain unpaid as of the commencement date and the right-of-use asset is the initial lease liability recognized for the lease plus any lease payments made to the lessor at or before the commencement date as well as any initial direct costs less any lease incentives received.

Trustmark’s finance leases consist of building and equipment leases. Trustmark recognizes interest expense based on the discount rate of the lease as interest expense in other interest expense and recognizes depreciation expense on a straight-line basis over the lease term as noninterest expense in net occupancy – premises for building leases and in equipment expense for equipment leases. Trustmark amortizes the right-of-use asset over the life of the lease term on a straight-line basis. Trustmark’s lease liabilities are measured as the present value of the remaining lease payments throughout the lease term. Trustmark records its finance lease right-of-use assets in premises and equipment, net and its finance lease liabilities in other borrowings.

Trustmark’s operating leases primarily consist of building and land leases. Trustmark recognizes lease rent expense on a straight-line basis over the term of the lease contract and records it as noninterest expense in net occupancy – premises for building and land leases and in equipment expense for equipment leases. Trustmark’s amortization of the right-of-use asset is the difference between the straight-line lease expense and the interest expense recognized on the lease liability during the period. Trustmark’s lease liabilities are measured as the present value of the remaining lease payments throughout the lease term.

Trustmark’s leases typically have one or more renewal options included in the lease contract. Due to the nature of Trustmark’s leases, for leases with renewal options available, Trustmark considers the first renewal option as reasonably certain to renew and is therefore included in the measurement of the right-of-use assets and lease liabilities.

In order to calculate its right-of-use assets and lease liabilities, FASB ASC Topic 842 requires Trustmark to use the rate of interest implicit in the lease when readily determinable. If the rate implicit in the lease is not readily determinable, Trustmark is required to use its incremental borrowing rate, which is the rate of interest Trustmark would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. Trustmark was able to determine the implicit interest rate for its equipment leases and used that rate as its discount rate. Since the implicit interest rate for most of its building and land leases were not readily determinable, Trustmark used its incremental borrowing rate.

Trustmark’s short-term leases primarily include automated teller machines. For short-term leases, Trustmark recognizes lease expense on a straight-line basis over the lease term. As previously stated, Trustmark has elected not to include short-term leases on its balance sheet.

The table below details the components of net lease cost for the periods presented ($ in thousands):

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Finance leases
Amortization of right-of-use assets	$	642		$	1,145
Interest on lease liabilities		80			161
Operating lease cost		1,289			2,589
Short-term lease cost		123			203
Variable lease cost		346			690
Sublease income		(82	)		(169	)
Net lease cost	$	2,398		$	4,619

The table below details the cash payments included in the measurement of lease liabilities during the period presented ($ in thousands):

	Six Months Ended June 30, 2019
Finance leases
Operating cash flows included in other activities, net	$	526
Financing cash flows included in payments under finance lease obligations		1,035
Operating leases
Operating cash flows (fixed payments) included in other activities, net		2,481
Operating cash flows (liability reduction) included in other activities, net		1,875

The table below details balance sheet information, as well as weighted-average lease terms and discount rates, related to leases at June 30, 2019 ($ in thousands):

	June 30, 2019
Finance lease right-of-use assets, net of accumulated depreciation	$	10,698
Finance lease liabilities		10,808
Operating lease right-of-use assets		32,762
Operating lease liabilities		33,878

Weighted-average lease term
Finance leases	8.63 years
Operating leases	9.73 years

Weighted-average discount rate
Finance leases		3.02	%
Operating leases		3.56	%

At June 30, 2019, future minimum rental commitments under finance and operating leases were as follows ($ in thousands):

	Finance Leases			Operating Leases
2019 (excluding the six months ended June 30, 2019)	$	1,198		$	2,484
2020		2,215			4,759
2021		1,615			4,541
2022		1,556			4,149
2023		871			4,112
Thereafter		5,024			20,246
Total minimum lease payments		12,479			40,291
Less imputed interest		(1,671	)		(6,413	)
Lease liabilities	$	10,808		$	33,878

In accordance with the modified-retrospective transition approach for adopting FASB ASC Topic 842, Trustmark did not restate the prior period unaudited consolidated financial statements and all prior period amounts and disclosures are presented under FASB ASC Topic 840. At December 31, 2018, future minimum rental commitments under non-cancellable operating leases were as follows ($ in thousands):

2019	$	8,680
2020		8,063
2021		7,274
2022		6,680
2023		5,788
Thereafter		29,673
Total	$	66,158

Note 8 – Deposits

At June 30, 2019 and December 31, 2018, deposits consisted of the following ($ in thousands):

	June 30, 2019		December 31, 2018
Noninterest-bearing demand	$	2,909,141	$	2,937,594
Interest-bearing demand		3,175,585		2,633,259
Savings		3,664,304		3,905,659
Time		1,817,599		1,887,899
Total	$	11,566,629	$	11,364,411

Note 9 – Securities Sold Under Repurchase Agreements

Trustmark utilizes securities sold under repurchase agreements as a source of borrowing in connection with overnight repurchase agreements offered to commercial deposit customers by using its unencumbered investment securities as collateral. Trustmark accounts for its securities sold under repurchase agreements as secured borrowings in accordance with FASB ASC Topic 860-30, “Transfers and Servicing – Secured Borrowing and Collateral.” Securities sold under repurchase agreements are stated at the amount of cash received in connection with the transaction. Trustmark monitors collateral levels on a continual basis and may be required to provide additional collateral based on the fair value of the underlying securities. Securities sold under repurchase agreements were secured by securities with a carrying amount of $121.6 million and $163.3 million at June 30, 2019 and December 31, 2018, respectively. Trustmark’s repurchase agreements are transacted under master repurchase agreements that give Trustmark, in the event of default by the counterparty, the right of offset with the same counterparty. As of June 30, 2019, all repurchase agreements were short-term and consisted primarily of sweep repurchase arrangements, under which excess deposits are “swept” into overnight repurchase agreements with Trustmark. The following table presents the securities sold under repurchase agreements by collateral pledged at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019		December 31, 2018
Mortgage-backed securities
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA	$	15,474	$	6,721
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		29,429		38,788
Total securities sold under repurchase agreements	$	44,903	$	45,509

Note 10 – Revenue from Contracts with Customers

Trustmark accounts for revenue from contracts with customers in accordance with FASB ASC Topic 606, “Revenue from Contracts with Customers,” which provides that revenue be recognized in a manner that depicts the transfer of goods or services to a customer in an amount that reflects the consideration Trustmark expects to be entitled to in exchange for those goods or services. Revenue from contracts with customers is recognized either over time in a manner that depicts Trustmark’s performance, or at a point in time when control of the goods or services are transferred to the customer. Trustmark’s noninterest income, excluding all of mortgage banking, net and securities gains (losses), net and portions of bank card and other fees and other income, are considered within the scope of FASB ASC Topic 606. Gains or losses on the sale of other real estate, which are included in Trustmark’s noninterest expense as other real estate expense, are also within the scope of FASB ASC Topic 606.

Trustmark records a gain or loss from the sale of other real estate when control of the property transfers to the buyer. Trustmark records the gain or loss from the sale of other real estate in noninterest expense as other real estate expense. Other real estate sales for the three and six months ended June 30, 2019 resulted in net gains of $123 thousand and $246 thousand, respectively, compared to $588 thousand and $1.0 million for the three and six months ended June 30, 2018, respectively.

The following tables present noninterest income disaggregated by reportable operating segment and revenue stream for the periods presented ($ in thousands):

	Three Months Ended June 30, 2019							Three Months Ended June 30, 2018 (1)
	Topic 606		Not Topic 606 (2)			Total		Topic 606		Not Topic 606 (2)		Total
General Banking Segment
Service charges on deposit accounts	$	10,357	$	—		$	10,357	$	10,626	$	—	$	10,626
Bank card and other fees		7,162		823			7,985		6,826		216		7,042
Mortgage banking, net		—		10,295			10,295		—		9,046		9,046
Wealth management		97		—			97		93		—		93
Other, net		2,333		(259	)		2,074		1,526		842		2,368
Total noninterest income	$	19,949	$	10,859		$	30,808	$	19,071	$	10,104	$	29,175

Wealth Management Segment
Service charges on deposit accounts	$	22	$	—		$	22	$	21	$	—	$	21
Bank card and other fees		19		—			19		28		—		28
Wealth management		7,645		—			7,645		7,385		—		7,385
Other, net		25		29			54		16		30		46
Total noninterest income	$	7,711	$	29		$	7,740	$	7,450	$	30	$	7,480

Insurance Segment
Insurance commissions	$	11,089	$	—		$	11,089	$	10,735	$	—	$	10,735
Other, net		2		—			2		1		—		1
Total noninterest income	$	11,091	$	—		$	11,091	$	10,736	$	—	$	10,736

Consolidated
Service charges on deposit accounts	$	10,379	$	—		$	10,379	$	10,647	$	—	$	10,647
Bank card and other fees		7,181		823			8,004		6,854		216		7,070
Mortgage banking, net		—		10,295			10,295		—		9,046		9,046
Insurance commissions		11,089		—			11,089		10,735		—		10,735
Wealth management		7,742		—			7,742		7,478		—		7,478
Other, net		2,360		(230	)		2,130		1,543		872		2,415
Total noninterest income	$	38,751	$	10,888		$	49,639	$	37,257	$	10,134	$	47,391

(1)

During the first quarter of 2019, Trustmark revised the composition of its operating segments by moving the Private Banking Group from the General Banking Segment to the Wealth Management Segment as a result of a change in supervision of this group for segment reporting purposes. The prior period amounts presented include reclassifications to conform to the current period presentation.

(2)

Noninterest income not in scope for FASB ASC Topic 606 includes customer derivatives revenue and miscellaneous credit card fee income within bank card and other fees; mortgage banking, net; amortization of tax credits, accretion of the FDIC indemnification asset, cash surrender value on various life insurance policies, earnings on Trustmark’s non-qualified deferred compensation plans, other partnership investments and rental income within other, net; and security gains (losses), net

	Six Months Ended June 30, 2019							Six Months Ended June 30, 2018 (1)
	Topic 606		Not Topic 606 (2)			Total		Topic 606		Not Topic 606 (2)		Total
General Banking Segment
Service charges on deposit accounts	$	20,597	$	—		$	20,597	$	21,459	$	—	$	21,459
Bank card and other fees		14,027		1,125			15,152		13,350		291		13,641
Mortgage banking, net		—		13,737			13,737		—		20,311		20,311
Wealth management		188		—			188		140		—		140
Other, net		4,577		(530	)		4,047		2,950		434		3,384
Total noninterest income	$	39,389	$	14,332		$	53,721	$	37,899	$	21,036	$	58,935

Wealth Management Segment
Service charges on deposit accounts	$	47	$	—		$	47	$	45	$	—	$	45
Bank card and other fees		43		—			43		55		—		55
Wealth management		15,037		—			15,037		14,905		—		14,905
Other, net		261		55			316		31		58		89
Total noninterest income	$	15,388	$	55		$	15,443	$	15,036	$	58	$	15,094

Insurance Segment
Insurance commissions	$	21,960	$	—		$	21,960	$	20,154	$	—	$	20,154
Other, net		6		—			6		1		—		1
Total noninterest income	$	21,966	$	—		$	21,966	$	20,155	$	—	$	20,155

Consolidated
Service charges on deposit accounts	$	20,644	$	—		$	20,644	$	21,504	$	—	$	21,504
Bank card and other fees		14,070		1,125			15,195		13,405		291		13,696
Mortgage banking, net		—		13,737			13,737		—		20,311		20,311
Insurance commissions		21,960		—			21,960		20,154		—		20,154
Wealth management		15,225		—			15,225		15,045		—		15,045
Other, net		4,844		(475	)		4,369		2,982		492		3,474
Total noninterest income	$	76,743	$	14,387		$	91,130	$	73,090	$	21,094	$	94,184

(1)

(2)

Note 11 – Defined Benefit and Other Postretirement Benefits

Qualified Pension Plan

Trustmark maintains a noncontributory tax-qualified defined benefit pension plan titled the Trustmark Corporation Pension Plan for Certain Employees of Acquired Financial Institutions (the Continuing Plan) to satisfy commitments made by Trustmark to associates covered through plans obtained in acquisitions.

The following table presents information regarding the net periodic benefit cost for the Continuing Plan for the periods presented ($ in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Service cost	$	53		$	70		$	106		$	139
Interest cost		90			83			180			166
Expected return on plan assets		(50	)		(57	)		(101	)		(114	)
Recognized net loss due to lump sum settlements		63			40			94			80
Recognized net actuarial loss		93			143			186			285
Net periodic benefit cost	$	249		$	279		$	465		$	556

For the plan year ending December 31, 2019, Trustmark’s minimum required contribution to the Continuing Plan is $160 thousand; however, Management and the Board of Directors of Trustmark will monitor the Continuing Plan throughout 2019 to determine any additional funding requirements by the plan’s measurement date, which is December 31.

Supplemental Retirement Plans

Trustmark maintains a nonqualified supplemental retirement plan covering key executive officers and senior officers as well as directors who have elected to defer fees. The plan provides for retirement and/or death benefits based on a participant’s covered salary or deferred fees. Although plan benefits may be paid from Trustmark’s general assets, Trustmark has purchased life insurance contracts on the participants covered under the plan, which may be used to fund future benefit payments under the plan. The measurement date for the plan is December 31. As a result of mergers prior to 2014, Trustmark became the administrator of small nonqualified supplemental retirement plans, for which the plan benefits were frozen prior to the merger date.

The following table presents information regarding the net periodic benefit cost for Trustmark’s nonqualified supplemental retirement plans for the periods presented ($ in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Service cost	$	28	$	29	$	55	$	58
Interest cost		501		457		1,042		952
Amortization of prior service cost		62		62		125		125
Recognized net actuarial loss		154		220		316		446
Net periodic benefit cost	$	745	$	768	$	1,538	$	1,581

Note 12 – Stock and Incentive Compensation

Trustmark has granted stock and incentive compensation awards subject to the provisions of the Stock and Incentive Compensation Plan (the Stock Plan). Current outstanding and future grants of stock and incentive compensation awards are subject to the provisions of the Stock Plan, which is designed to provide flexibility to Trustmark regarding its ability to motivate, attract and retain the services of key associates and directors. The Stock Plan also allows Trustmark to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance units to key associates and directors.

Restricted Stock Grants

Performance Awards

Trustmark’s performance awards vest over three years and are granted to Trustmark’s executive and senior management teams. Performance awards granted vest based on performance goals of return on average tangible equity and total shareholder return. Performance awards are valued utilizing a Monte Carlo simulation model to estimate fair value of the awards at the grant date. These awards are recognized using the straight-line method over the requisite service period. These awards provide for achievement shares if performance measures exceed 100%. The restricted share agreement provides for voting rights and dividend privileges.

Time-Vested Awards

Trustmark’s time-vested awards vest over three years and are granted to members of Trustmark’s Board of Directors as well as Trustmark’s executive and senior management teams. Time-vested awards are valued utilizing the fair value of Trustmark’s stock at the grant date. These awards are recognized on the straight-line method over the requisite service period.

The following tables summarize the Stock Plan activity for the periods presented:

	Three Months Ended June 30, 2019
	Performance Awards		Time-Vested Awards
Nonvested shares, beginning of period		149,914		320,658
Granted		—		—
Released from restriction		—		(7,126	)
Forfeited		—		(2,264	)
Nonvested shares, end of period		149,914		311,268

	Six Months Ended June 30, 2019
	Performance Awards			Time-Vested Awards
Nonvested shares, beginning of period		177,695			321,870
Granted		50,862			113,673
Released from restriction		(61,347	)		(119,368	)
Forfeited		(17,296	)		(4,907	)
Nonvested shares, end of period		149,914			311,268

The following table presents information regarding compensation expense for awards under the Stock Plan for the periods presented ($ in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Performance awards	$	481	$	396	$	562	$	290
Time-vested awards		798		683		1,719		1,574
Total compensation expense	$	1,279	$	1,079	$	2,281	$	1,864

Note 13 – Contingencies

Lending Related

Trustmark makes commitments to extend credit and issues standby and commercial letters of credit (letters of credit) in the normal course of business in order to fulfill the financing needs of its customers. The carrying amount of commitments to extend credit and letters of credit approximates the fair value of such financial instruments.

Commitments to extend credit are agreements to lend money to customers pursuant to certain specified conditions. Commitments generally have fixed expiration dates or other termination clauses. Because many of these commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit is represented by the contract amount of those instruments. Trustmark applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based upon the nature of the transaction and the assessed creditworthiness of the borrower. At June 30, 2019 and 2018, Trustmark had unused commitments to extend credit of $4.146 billion and $3.517 billion, respectively.

Letters of credit are conditional commitments issued by Trustmark to insure the performance of a customer to a third-party. A financial standby letter of credit irrevocably obligates Trustmark to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument. A performance standby letter of credit irrevocably obligates Trustmark to pay a third-party beneficiary when a customer fails to perform some contractual, nonfinancial obligation. When issuing letters of credit, Trustmark uses the same policies regarding credit risk and collateral, which are followed in the lending process. At June 30, 2019 and 2018, Trustmark’s maximum exposure to credit loss in the event of nonperformance by the other party for letters of credit was $103.6 million and $105.1 million, respectively. These amounts consist primarily of commitments with maturities of less than three years, which have an immaterial carrying value. Trustmark holds collateral to support standby letters of credit when deemed necessary. As of June 30, 2019 and 2018, the fair value of collateral held was $30.3 million and $29.1 million, respectively.

Legal Proceedings

Trustmark’s wholly-owned subsidiary, TNB, has been named as a defendant in three lawsuits related to the collapse of the Stanford Financial Group. The first is a purported class action complaint that was filed on August 23, 2009 in the District Court of Harris County, Texas, by Peggy Roif Rotstain, Guthrie Abbott, Catherine Burnell, Steven Queyrouze, Jaime Alexis Arroyo Bornstein and Juan C. Olano (collectively, Class Plaintiffs), on behalf of themselves and all others similarly situated, naming TNB and four other financial institutions unaffiliated with Trustmark as defendants. The complaint seeks to recover (i) alleged fraudulent transfers from each of the defendants in the amount of fees and other monies received by each defendant from entities controlled by R. Allen Stanford (collectively, the Stanford Financial Group) and (ii) damages allegedly attributable to alleged conspiracies by one or more of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud on the asserted grounds that defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme. Plaintiffs have demanded a jury trial. Plaintiffs did not quantify damages.

In November 2009, the lawsuit was removed to federal court by certain defendants and then transferred by the United States Panel on Multidistrict Litigation to federal court in the Northern District of Texas (Dallas) where multiple Stanford related matters are being consolidated for pre-trial proceedings. In May 2010, all defendants (including TNB) filed motions to dismiss the lawsuit. In August 2010, the court authorized and approved the formation of an Official Stanford Investors Committee (OSIC) to represent the interests of Stanford investors and, under certain circumstances, to file legal actions for the benefit of Stanford investors. In December 2011, the OSIC filed a motion to intervene in this action. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues. In December 2012, the court granted the OSIC’s motion to intervene, and the OSIC filed an Intervenor Complaint against one of the other defendant financial institutions. In February 2013, the OSIC filed a second Intervenor Complaint that asserts claims against TNB and the remaining defendant financial institutions. The OSIC seeks to recover: (i) alleged fraudulent transfers in the amount of the fees each of the defendants allegedly received from Stanford Financial Group, the profits each of the defendants allegedly made from Stanford Financial Group deposits, and other monies each of the defendants allegedly received from Stanford Financial Group; (ii) damages attributable to alleged conspiracies by each of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud and conversion on the asserted grounds that the defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme; and (iii) punitive damages. The OSIC did not quantify damages.

In July 2013, all defendants (including TNB) filed motions to dismiss the OSIC’s claims. In March 2015, the court entered an order authorizing the parties to conduct discovery regarding class certification, staying all other discovery and setting a deadline for the parties to complete briefing on class certification issues. In April 2015, the court granted in part and denied in part the defendants’ motions to dismiss the Class Plaintiffs’ claims and the OSIC’s claims. The court dismissed all of the Class Plaintiffs’ fraudulent transfer claims and dismissed certain of the OSIC’s claims. The court denied the motions by TNB and the other financial institution defendants to dismiss the OSIC’s constructive fraudulent transfer claims.

On June 23, 2015, the court allowed the Class Plaintiffs to file a Second Amended Class Action Complaint (SAC), which asserted new claims against TNB and certain of the other defendants for (i) aiding, abetting and participating in a fraudulent scheme, (ii) aiding, abetting and participating in violations of the Texas Securities Act, (iii) aiding, abetting and participating in breaches of fiduciary duty, (iv) aiding, abetting and participating in conversion and (v) conspiracy. On July 14, 2015, the defendants (including TNB) filed motions to dismiss the SAC and to reconsider the court’s prior denial to dismiss the OSIC’s constructive fraudulent transfer claims against TNB and the other financial institutions that are defendants in the action. On July 27, 2016, the court denied the motion by TNB and the other financial institution defendants to dismiss the SAC and also denied the motion by TNB and the other financial institution defendants to reconsider the court’s prior denial to dismiss the OSIC’s constructive fraudulent transfer claims. On August 24, 2016, TNB filed its answer to the SAC. On October 20, 2017, the OSIC filed a motion seeking an order lifting the discovery stay and establishing a trial schedule. On November 7, 2017, the court denied the OSIC’s motion seeking class certification and designation of class representatives and counsel, finding that common issues of fact did not predominate. The court granted the OSIC’s motion to lift the discovery stay that it had previously ordered.

The second Stanford-related lawsuit was filed on December 14, 2009 in the District Court of Ascension Parish, Louisiana, individually by Harold Jackson, Paul Blaine, Carolyn Bass Smith, Christine Nichols, and Ronald and Ramona Hebert naming TNB (misnamed as Trust National Bank) and other individuals and entities not affiliated with Trustmark as defendants. The complaint seeks to recover the money lost by these individual plaintiffs as a result of the collapse of the Stanford Financial Group (in addition to other damages) under various theories and causes of action, including negligence, breach of contract, breach of fiduciary duty, negligent misrepresentation, detrimental reliance, conspiracy, and violation of Louisiana’s uniform fiduciary, securities, and racketeering laws. The complaint does not quantify the amount of money the plaintiffs seek to recover. In January 2010, the lawsuit was removed to federal court by certain defendants and then transferred by the United States Panel on Multidistrict Litigation to federal court in the Northern District of Texas (Dallas) where multiple Stanford related matters are being consolidated for pre-trial proceedings. On March 29, 2010, the court stayed the case. TNB filed a motion to lift the stay, which was denied on February 28,

2012. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues.

On April 11, 2016, Trustmark learned that a third Stanford-related lawsuit had been filed on that date in the Superior Court of Justice in Ontario, Canada, by The Toronto-Dominion Bank (“TD Bank”), naming TNB and three other financial institutions not affiliated with Trustmark as defendants. The complaint seeks a declaration specifying the degree to which each of TNB and the other defendants are liable in respect of any loss and damage for which TD Bank is found to be liable in a litigation commenced against TD Bank brought by the Joint Liquidators of Stanford International Bank Limited in the Superior Court of Justice, Commercial List in Ontario, Canada (the “Joint Liquidators’ Action”), as well as contribution and indemnity in respect of any judgment, interest and costs TD Bank is ordered to pay in the Joint Liquidators’ Action. To date, TNB has not been served in connection with this action.

TNB’s relationship with the Stanford Financial Group began as a result of Trustmark’s acquisition of a Houston-based bank in August 2006, and consisted of correspondent banking and other traditional banking services in the ordinary course of business. All Stanford-related lawsuits are in pre-trial stages.

Trustmark and its subsidiaries are also parties to other lawsuits and other claims that arise in the ordinary course of business. Some of the lawsuits assert claims related to the lending, collection, servicing, investment, trust and other business activities, and some of the lawsuits allege substantial claims for damages.

All pending legal proceedings described above are being vigorously contested. In accordance FASB ASC Topic 450-20, “Loss Contingencies,” Trustmark will establish an accrued liability for litigation matters when those matters present loss contingencies that are both probable and reasonably estimable. At the present time, Trustmark believes, based on its evaluation and the advice of legal counsel, that a loss in any such proceeding is not probable and a reasonable estimate cannot reasonably be made.

Note 14 – Earnings Per Share (EPS)

The following table reflects weighted-average shares used to calculate basic and diluted EPS for the periods presented (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Basic shares		64,678		67,758		64,957		67,784
Dilutive shares		137		149		132		145
Diluted shares		64,815		67,907		65,089		67,929

Weighted-average antidilutive stock awards were excluded in determining diluted EPS. The following table reflects weighted-average antidilutive stock awards for the periods presented (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Weighted-average antidilutive stock awards		23		25		78		79

Note 15 – Statements of Cash Flows

The following table reflects specific transaction amounts for the periods presented ($ in thousands):

	Six Months Ended June 30,
	2019		2018
Income taxes paid	$	5,336	$	4,620
Interest expense paid on deposits and borrowings		43,004		29,045
Noncash transfers from loans to other real estate		2,101		7,084
Finance right-of-use assets resulting from lease liabilities		10,698		—
Operating right-of-use assets resulting from lease liabilities		32,762		—

Note 16 – Shareholders’ Equity

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 2018 Annual Report on Form 10-K, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Trustmark’s and TNB’s minimum risk-based capital requirements include a capital conservation buffer of 2.500% at June 30, 2019 and 1.875% at December 31, 2018. Accumulated other comprehensive loss, net of tax, is not included in computing regulatory capital. 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. As of June 30, 2019, 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, 2019. 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 as set forth in the accompanying table, 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, 2019, which Management believes have affected Trustmark’s or TNB’s present classification.

The following table provides Trustmark’s and TNB’s actual regulatory capital amounts and ratios under regulatory capital standards in effect at June 30, 2019 and December 31, 2018 ($ in thousands):

	Actual
	Regulatory Capital					Minimum			To Be Well
	Amount		Ratio			Requirement			Capitalized
At June 30, 2019:
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,269,353		11.76	%		7.000	%	n/a
Trustmark National Bank		1,309,962		12.14	%		7.000	%		6.50	%

Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,329,353		12.31	%		8.500	%	n/a
Trustmark National Bank		1,309,962		12.14	%		8.500	%		8.00	%

Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,411,150		13.07	%		10.500	%	n/a
Trustmark National Bank		1,391,759		12.89	%		10.500	%		10.00	%

Tier 1 Leverage (to Average Assets)
Trustmark Corporation	$	1,329,353		10.03	%		4.00	%	n/a
Trustmark National Bank		1,309,962		9.90	%		4.00	%		5.00	%

At December 31, 2018:
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,271,538		11.77	%		6.375	%	n/a
Trustmark National Bank		1,311,548		12.14	%		6.375	%		6.50	%

Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,331,538		12.33	%		7.875	%	n/a
Trustmark National Bank		1,311,548		12.14	%		7.875	%		8.00	%

Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,412,059		13.07	%		9.875	%	n/a
Trustmark National Bank		1,392,069		12.89	%		9.875	%		10.00	%

Tier 1 Leverage (to Average Assets)
Trustmark Corporation	$	1,331,538		10.26	%		4.00	%	n/a
Trustmark National Bank		1,311,548		10.13	%		4.00	%		5.00	%

Stock Repurchase Program

On March 11, 2016, the Board of Directors of Trustmark authorized a stock repurchase program under which $100.0 million of Trustmark’s outstanding common stock may be acquired through March 31, 2019. Trustmark repurchased approximately 1.2 million shares of its common stock valued at $36.9 million during the three months ended March 31, 2019. Under this authority, Trustmark repurchased approximately 3.2 million shares valued at $100.0 million.

The Board of Directors of Trustmark authorized a new stock repurchase program effective April 1, 2019 under which $100.0 million of Trustmark’s outstanding common stock may be acquired through March 31, 2020. The adoption of this new stock repurchase program followed the receipt of non-objection from the FRB. The shares may be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. During the three months ended June 30, 2019, Trustmark repurchased approximately 398 thousand shares of its common stock valued at $13.0 million.

Together, with the repurchases under the previous program, Trustmark purchased approximately 1.6 million shares of its common stock valued at $49.9 million during the six months ended June 30, 2019, compared to 243 thousand shares valued at $7.9 million repurchased during the six months ended June 30, 2018.

Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss

The following tables present the net change in the components of accumulated other comprehensive loss and the related tax effects allocated to each component for the periods presented ($ in thousands). The amortization of prior service cost, recognized net loss due to lump sum settlements and change in net actuarial loss are included in the computation of net periodic benefit cost (see Note 11 – Defined Benefit and Other Postretirement Benefits for additional details). Reclassification adjustments related to pension and other postretirement benefit plans are included in salaries and employee benefits and other expense in the accompanying consolidated statements of income. Reclassification adjustments related to the cash flow hedge derivative are included in other interest expense in the accompanying consolidated statements of income.

	Three Months Ended June 30, 2019									Three Months Ended June 30, 2018
	Before Tax Amount			Tax (Expense) Benefit			Net of Tax Amount			Before Tax Amount			Tax (Expense) Benefit			Net of Tax Amount

Securities available for sale and transferred securities:
Net unrealized holding gains (losses) arising during the period	$	20,079		$	(5,020	)	$	15,059		$	(9,275	)	$	2,320		$	(6,955	)
Change in net unrealized holding loss on securities transferred to held to maturity		1,256			(314	)		942			971			(243	)		728
Total securities available for sale and transferred securities		21,335			(5,334	)		16,001			(8,304	)		2,077			(6,227	)
Pension and other postretirement benefit plans:
Reclassification adjustments for changes realized in net income:
Net change in prior service costs		62			(15	)		47			62			(16	)		46
Recognized net loss due to lump sum settlements		63			(16	)		47			40			(10	)		30
Change in net actuarial loss		247			(61	)		186			363			(91	)		272
Total pension and other postretirement benefit plans		372			(92	)		280			465			(117	)		348
Cash flow hedge derivatives:
Change in accumulated gain (loss) on effective cash flow hedge derivatives		(101	)		25			(76	)		132			(33	)		99
Reclassification adjustment for (gain) loss realized in net income		(141	)		35			(106	)		(99	)		26			(73	)
Total cash flow hedge derivatives		(242	)		60			(182	)		33			(7	)		26
Total other comprehensive income (loss)	$	21,465		$	(5,366	)	$	16,099		$	(7,806	)	$	1,953		$	(5,853	)

	Six Months Ended June 30, 2019									Six Months Ended June 30, 2018
	Before Tax Amount			Tax (Expense) Benefit			Net of Tax Amount			Before Tax Amount			Tax (Expense) Benefit			Net of Tax Amount
Securities available for sale and transferred securities:
Net unrealized holding gains (losses) arising during the period	$	38,903		$	(9,726	)	$	29,177		$	(37,314	)	$	9,329		$	(27,985	)
Change in net unrealized holding loss on securities transferred to held to maturity		2,003			(501	)		1,502			1,936			(484	)		1,452
Total securities available for sale and transferred securities		40,906			(10,227	)		30,679			(35,378	)		8,845			(26,533	)
Pension and other postretirement benefit plans:
Reclassification adjustments for changes realized in net income:
Net change in prior service costs		125			(31	)		94			125			(32	)		93
Recognized net loss due to lump sum settlements		94			(23	)		71			80			(19	)		61
Change in net actuarial loss		502			(126	)		376			731			(183	)		548
Total pension and other postretirement benefit plans		721			(180	)		541			936			(234	)		702
Cash flow hedge derivatives:
Change in accumulated gain (loss) on effective cash flow hedge derivatives		(164	)		41			(123	)		559			(140	)		419
Reclassification adjustment for (gain) loss realized in net income		(312	)		78			(234	)		(105	)		27			(78	)
Total cash flow hedge derivatives		(476	)		119			(357	)		454			(113	)		341
Total other comprehensive income (loss)	$	41,151		$	(10,288	)	$	30,863		$	(33,988	)	$	8,498		$	(25,490	)

The following table presents the changes in the balances of each component of accumulated other comprehensive loss for the periods presented ($ in thousands). All amounts are presented net of tax.

	Securities Available for Sale and Transferred Securities			Defined Benefit Pension Items			Cash Flow Hedge Derivatives			Total
Balance at January 1, 2019	$	(43,824	)	$	(12,324	)	$	469		$	(55,679	)
Other comprehensive income (loss) before reclassification		30,679			—			(123	)		30,556
Amounts reclassified from accumulated other comprehensive loss		—			541			(234	)		307
Net other comprehensive income (loss)		30,679			541			(357	)		30,863
Balance at June 30, 2019	$	(13,145	)	$	(11,783	)	$	112		$	(24,816	)

Balance at January 1, 2018	$	(26,535	)	$	(13,468	)	$	278		$	(39,725	)
Other comprehensive income (loss) before reclassification		(26,533	)		—			419			(26,114	)
Amounts reclassified from accumulated other comprehensive loss		—			702			(78	)		624
Net other comprehensive income (loss)		(26,533	)		702			341			(25,490	)
Reclassification of certain income tax effects related to the change in the federal statutory income tax rate under the Tax Reform Act		(5,694	)		(2,890	)		60			(8,524	)
Balance at June 30, 2018	$	(58,762	)	$	(15,656	)	$	679		$	(73,739	)

Note 17 – Fair Value

Financial Instruments Measured at Fair Value

The methodologies Trustmark uses in determining the fair values are based primarily on the use of independent, market-based data to reflect a value that would be reasonably expected upon exchange of the position in an orderly transaction between market participants at the measurement date. The predominant portion of assets that are stated at fair value are of a nature that can be valued using prices or inputs that are readily observable through a variety of independent data providers. The providers selected by Trustmark for fair valuation data are widely recognized and accepted vendors whose evaluations support the pricing functions of financial institutions, investment and mutual funds, and portfolio managers. Trustmark has documented and evaluated the pricing methodologies used by the vendors and maintains internal processes that regularly test valuations for anomalies.

Trustmark utilizes an independent pricing service to advise it on the carrying value of the securities available for sale portfolio. As part of Trustmark’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, Trustmark investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. Trustmark has also reviewed and confirmed its determinations in thorough discussions with the pricing source regarding their methods of price discovery.

Mortgage loan commitments are valued based on the securities prices of similar collateral, term, rate and delivery for which the loan is eligible to deliver in place of the particular security. Trustmark acquires a broad array of mortgage security prices that are supplied by a market data vendor, which in turn accumulates prices from a broad list of securities dealers. Prices are processed through a mortgage pipeline management system that accumulates and segregates all loan commitment and forward-sale transactions according to the similarity of various characteristics (maturity, term, rate, and collateral). Prices are matched to those positions that are deemed to be an eligible substitute or offset (i.e., “deliverable”) for a corresponding security observed in the market place.

Trustmark estimates fair value of the MSR through the use of prevailing market participant assumptions and market participant valuation processes. This valuation is periodically tested and validated against other third-party firm valuations.

Trustmark obtains the fair value of interest rate swaps from a third-party pricing service that uses an industry standard discounted cash flow methodology. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its interest rate swap contracts for the effect of nonperformance risk, Trustmark has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB’s fair value measurement guidance, Trustmark made an accounting policy election to measure the credit risk of these derivative financial instruments, which are subject to master netting agreements, on a net basis by counterparty portfolio.

Trustmark has determined that the majority of the inputs used to value its interest rate swaps offered to qualified commercial borrowers fall within Level 2 of the fair value hierarchy, while the credit valuation adjustments associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads. Trustmark has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate swaps and has determined that the credit valuation adjustment is not significant to the overall valuation of these derivatives. As a result, Trustmark classifies its interest rate swap valuations in Level 2 of the fair value hierarchy.

Trustmark also utilizes exchange-traded derivative instruments such as Treasury note futures contracts and option contracts to achieve a fair value return that offsets the changes in fair value of the MSR attributable to interest rates. Fair values of these derivative instruments are determined from quoted prices in active markets for identical assets therefore allowing them to be classified within Level 1 of the fair value hierarchy. In addition, Trustmark utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area which lack observable inputs for valuation purposes resulting in their inclusion in Level 3 of the fair value hierarchy.

At this time, Trustmark presents no fair values that are derived through internal modeling. Should positions requiring fair valuation arise that are not relevant to existing methodologies, Trustmark will make every reasonable effort to obtain market participant assumptions, or independent evaluation.

Financial Assets and Liabilities

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value ($ in thousands). There were no transfers between fair value levels for the six months ended June 30, 2019 and the year ended December 31, 2018.

	June 30, 2019
	Total		Level 1		Level 2		Level 3
U.S. Government agency obligations	$	26,646	$	—	$	26,646	$	—
Obligations of states and political subdivisions		38,698		—		38,698		—
Mortgage-backed securities		1,578,381		—		1,578,381		—
Securities available for sale		1,643,725		—		1,643,725		—
Loans held for sale		240,380		—		240,380		—
Mortgage servicing rights		79,283		—		—		79,283
Other assets - derivatives		22,301		4,817		14,939		2,545
Other liabilities - derivatives		4,933		1,129		3,804		—

	December 31, 2018
	Total		Level 1		Level 2		Level 3
U.S. Government agency obligations	$	30,335	$	—	$	30,335	$	—
Obligations of states and political subdivisions		50,676		—		50,676		—
Mortgage-backed securities		1,730,802		—		1,730,802		—
Securities available for sale		1,811,813		—		1,811,813		—
Loans held for sale		153,799		—		153,799		—
Mortgage servicing rights		95,596		—		—		95,596
Other assets - derivatives		12,347		5,006		6,154		1,187
Other liabilities - derivatives		4,213		66		4,147		—

The changes in Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2019 and 2018 are summarized as follows ($ in thousands):

	MSR			Other Assets - Derivatives
Balance, January 1, 2019	$	95,596		$	1,187
Total net (loss) gain included in Mortgage banking, net (1)		(22,388	)		3,889
Additions		6,075			—
Sales		—			(2,531	)
Balance, June 30, 2019	$	79,283		$	2,545

The amount of total gains (losses) for the period included in earnings that are attributable to the change in unrealized gains or losses still held at June 30, 2019	$	(17,072	)	$	678

Balance, January 1, 2018	$	84,269		$	900
Total net (loss) gain included in Mortgage banking, net (1)		5,423			2,698
Additions		7,719			—
Sales		—			(2,146	)
Balance, June 30, 2018	$	97,411		$	1,452

The amount of total gains (losses) for the period included in earnings that are attributable to the change in unrealized gains or losses still held at June 30, 2018	$	11,264		$	327

(1)	Total net (loss) gain included in Mortgage banking, net relating to the MSR includes changes in fair value due to market changes and due to run-off.

Trustmark may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. Assets at June 30, 2019, which have been measured at fair value on a nonrecurring basis, include impaired LHFI. Loans for which it is probable Trustmark will be unable to collect all amounts due according to the contractual terms of the loan agreement are considered impaired. Specific allowances for impaired LHFI are based on comparisons of the recorded carrying values of the loans to the present value of the estimated cash flows of these loans at each loan’s original effective interest rate, the fair value of the collateral or the observable market prices of the loans. Impaired LHFI are primarily collateral dependent loans and are assessed using a fair value approach. Fair value estimates for collateral dependent loans are derived from appraised values based on the current market value or as-is value of the property being appraised, normally from recently received and reviewed appraisals. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Trustmark’s Appraisal Review Department to ensure they are acceptable. Appraised values are adjusted down for costs associated with asset disposal. At June 30, 2019, Trustmark had outstanding balances of $51.1 million with a related allowance of $4.3 million in impaired LHFI that were individually evaluated for impairment and written down to the fair value of the underlying collateral less cost to sell based on the fair value of the collateral or other unobservable input compared to $55.8 million with a related allowance of $6.4 million at December 31, 2018. These individually evaluated impaired LHFI are classified as Level 3 in the fair value hierarchy. Impaired LHFI are periodically reviewed and evaluated for additional impairment and adjusted accordingly based on the same factors identified above.

Nonfinancial Assets and Liabilities

Certain nonfinancial assets measured at fair value on a nonrecurring basis include foreclosed assets (upon initial recognition or subsequent impairment), nonfinancial assets and nonfinancial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment.

Other real estate includes assets that have been acquired in satisfaction of debt through foreclosure and is carried at the lower of cost or estimated fair value. Fair value is based on independent appraisals and other relevant factors. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market.

Foreclosed assets of $8.8 million were remeasured during the first six months of 2019, requiring write-downs of $1.1 million to reach their current fair values compared to $11.4 million of foreclosed assets that were remeasured during the first six months of 2018, requiring write-downs of $965 thousand.

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The carrying amounts and estimated fair values of financial instruments at June 30, 2019 and December 31, 2018, are as follows ($ in thousands):

	June 30, 2019				December 31, 2018
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets:
Level 2 Inputs:
Cash and short-term investments	$	479,912	$	479,912	$	350,391	$	350,391
Securities held to maturity		825,536		832,361		909,643		889,733
Level 3 Inputs:
Net LHFI		9,036,360		9,143,712		8,756,578		8,757,817
Net acquired loans		86,486		86,486		105,701		105,701

Financial Liabilities:
Level 2 Inputs:
Deposits		11,566,629		11,568,709		11,364,411		11,365,203
Federal funds purchased and securities sold under repurchase agreements		51,800		51,800		50,471		50,471
Other borrowings		79,012		78,983		79,885		79,827
Junior subordinated debt securities		61,856		51,340		61,856		53,196

Fair Value Option

Trustmark has elected to account for its mortgage LHFS under the fair value option, with interest income on these mortgage LHFS reported in interest and fees on LHFS and LHFI. The fair value of the mortgage LHFS is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan. The mortgage LHFS are actively managed and monitored and certain market risks of the loans may be mitigated through the use of derivatives. These derivative instruments are carried at fair value with changes in fair value recorded as noninterest income in mortgage banking, net. The changes in the fair value of LHFS are largely offset by changes in the fair value of the derivative instruments. For the three and six months ended June 30, 2019, a net gain of $2.2 million and $2.9 million, respectively, was recorded as noninterest income in mortgage banking, net for changes in the fair value of LHFS accounted for under the fair value option, compared to a net gain of $2.2 million and $1.7 million for the three and six months ended June 30, 2018, respectively. Interest and fees on LHFS and LHFI for the three and six months ended June 30, 2019 included $1.3 million and $2.4 million, respectively, of interest earned on LHFS accounted for under the fair value option, compared to $1.4 million and $2.3 million for the three and six months ended June 30, 2018, respectively. Election of the fair value option allows Trustmark to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of cost or fair value and the derivatives at fair value. The fair value option election does not apply to GNMA optional repurchase loans which do not meet the requirements under FASB ASC Topic 825 to be accounted for under the fair value option. GNMA optional repurchase loans totaled $49.8 million and $61.6 million at June 30, 2019 and December 31, 2018, respectively, and are included in LHFS on the accompanying consolidated balance sheets. For additional information regarding GNMA optional repurchase loans, please see the section captioned “Past Due LHFS” included in Note 3 – LHFI and Allowance for Loan Losses, LHFI.

The following table provides information about the fair value and the contractual principal outstanding of LHFS accounted for under the fair value option as of June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019		December 31, 2018
Fair value of LHFS	$	190,589	$	92,235
LHFS contractual principal outstanding		184,455		89,056
Fair value less unpaid principal	$	6,134	$	3,179

Note 18 – Derivative Financial Instruments

Derivatives Designated as Hedging Instruments

On April 4, 2013, Trustmark entered into a forward interest rate swap contract on junior subordinated debentures with a total notional amount of $60.0 million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under FASB ASC Topic 815, “Derivatives and Hedging,” with the objective of protecting the quarterly interest payments on Trustmark’s $60.0 million of junior subordinated debentures issued to Trustmark Preferred Capital Trust I throughout the five-year period beginning December 31, 2014 and ending December 31, 2019 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate. Under the swap, which became effective on December 31, 2014, Trustmark will pay a fixed interest rate of 1.66% and receive a variable interest rate based on three-month LIBOR on a total notional amount of $60.0 million, with quarterly net settlements.

No ineffectiveness related to the interest rate swap designated as a cash flow hedge was recognized in the consolidated statements of income for the six months ended June 30, 2019 and 2018. The accumulated net after-tax gain related to the effective cash flow hedge included in accumulated other comprehensive loss totaled $112 thousand at June 30, 2019 compared to a net after-tax gain of $469 thousand at December 31, 2018. Amounts reported in accumulated other comprehensive loss related to this derivative are reclassified to other interest expense as interest payments are made on Trustmark’s variable rate junior subordinated debentures. During the next six months, Trustmark estimates that $149 thousand will be reclassified as a decrease to other interest expense.

Derivatives not Designated as Hedging Instruments

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 the fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. The total notional amount of these derivative instruments were $433.0 million at June 30, 2019 compared to $318.0 million at December 31, 2018. Changes in the fair value of these exchange-traded derivative instruments are recorded as noninterest income in mortgage banking, net and are offset by changes in the fair value of the MSR. The impact of this strategy resulted in a net negative ineffectiveness of $53 thousand compared to a net positive ineffectiveness of $99 thousand for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, the impact was a net negative ineffectiveness of $4.8 million compared to a net positive ineffectiveness of $3.4 million, respectively.

As part of Trustmark’s risk management strategy in the mortgage banking area, derivative instruments such as forward sales contracts are utilized. Trustmark’s obligations under forward sales contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. Changes in the fair value of these derivative instruments are recorded as noninterest income in mortgage banking, net and are offset by changes in the fair value of LHFS. Trustmark’s off-balance sheet obligations under these derivative instruments totaled $268.0 million at June 30, 2019, with a negative valuation adjustment of $2.6 million, compared to $132.0 million, with a negative valuation adjustment of $1.8 million, at December 31, 2018.

Trustmark also utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area. Interest rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified time period. Changes in the fair value of these derivative instruments are recorded as noninterest income in mortgage banking, net and are offset by the changes in the fair value of forward sales contracts. Trustmark’s off-balance sheet obligations under these derivative instruments totaled $197.5 million at June 30, 2019, with a positive valuation adjustment of $2.5 million, compared to $71.2 million, with a positive valuation adjustment of $1.2 million, as of December 31, 2018.

Trustmark offers certain derivatives products directly to qualified commercial lending clients seeking to manage their interest rate risk. 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 and are, therefore, carried 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. As of June 30, 2019, Trustmark had interest rate swaps with an aggregate notional amount of $664.9 million related to this program, compared to $475.8 million as of December 31, 2018.

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 declared in default on its derivatives obligations.

As of June 30, 2019 and December 31, 2018, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $900 thousand and $75 thousand, respectively. As of June 30, 2019, Trustmark had posted collateral of $1.1 million 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, 2019, it could have been required to settle its obligations under the agreements at the termination 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 both June 30, 2019 and December 31, 2018, Trustmark had entered into three risk participation agreements as a beneficiary with an aggregate notional amount of $38.0 million and $23.1 million, respectively. Trustmark had entered into nine risk participation agreements as a guarantor with an aggregate notional amount of $55.5 million at June 30, 2019 compared to seven risk participation agreements as a guarantor with an aggregate notional amount of $39.0 million at December 31, 2018. The aggregate fair values of these risk participation agreements were immaterial at June 30, 2019 and December 31, 2018.

Tabular Disclosures

The following tables disclose the fair value of derivative instruments in Trustmark’s consolidated balance sheets as of June 30, 2019 and December 31, 2018 as well as the effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):

	June 30, 2019		December 31, 2018
Derivatives in hedging relationships
Interest rate contracts:
Interest rate swaps included in other assets	$	149	$	625

Derivatives not designated as hedging instruments
Interest rate contracts:
Futures contracts included in other assets	$	4,644	$	4,445
Exchange traded purchased options included in other assets		173		561
OTC written options (rate locks) included in other assets		2,545		1,187
Interest rate swaps included in other assets		14,710		5,487
Credit risk participation agreements included in other assets		80		42
Forward contracts included in other liabilities		2,607		1,773
Exchange traded written options included in other liabilities		1,129		66
Interest rate swaps included in other liabilities		1,178		2,369
Credit risk participation agreements included in other liabilities		19		5

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Derivatives in hedging relationships
Amount of gain (loss) reclassified from accumulated other comprehensive loss and recognized in other interest expense	$	141		$	99		$	312		$	105

Derivatives not designated as hedging instruments
Amount of gain (loss) recognized in mortgage banking, net	$	7,944		$	(2,523	)	$	12,797		$	(7,941	)
Amount of gain (loss) recognized in bank card and other fees		(487	)		(10	)		(743	)		45

The following table discloses the amount included in other comprehensive income (loss), net of tax, for derivative instruments designated as cash flow hedges for the periods presented ($ in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2019			2018		2019			2018
Derivatives in cash flow hedging relationship
Amount of gain (loss) recognized in other comprehensive income (loss), net of tax	$	(76	)	$	99	$	(123	)	$	419

Trustmark’s interest rate swap derivative instruments are subject to master netting agreements, and therefore, eligible for offsetting in the consolidated balance sheets. Trustmark has elected to not offset any derivative instruments in its consolidated balance sheets. Information about financial instruments that are eligible for offset in the consolidated balance sheets as of June 30, 2019 and December 31, 2018 is presented in the following tables ($ in thousands):

Offsetting of Derivative Assets
As of June 30, 2019
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received		Net Amount
Derivatives	$	14,859	$	—	$	14,859	$	(150	)	$	—	$	14,709

Offsetting of Derivative Liabilities
As of June 30, 2019
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Posted			Net Amount
Derivatives	$	1,178	$	—	$	1,178	$	(150	)	$	(1,100	)	$	(72	)

Offsetting of Derivative Assets
As of December 31, 2018
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received			Net Amount
Derivatives	$	6,112	$	—	$	6,112	$	(339	)	$	(620	)	$	5,153

Offsetting of Derivative Liabilities
As of December 31, 2018
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Posted		Net Amount
Derivatives	$	2,369	$	—	$	2,369	$	(339	)	$	—	$	2,030

Note 19 – Segment Information

Trustmark’s management reporting structure includes three segments: General Banking, Wealth Management and Insurance. For a complete overview of Trustmark’s operating segments, see Note 21 – Segment Information included in Part II. Item 8. – Financial Statements and Supplementary Data, of Trustmark’s 2018 Annual Report on Form 10-K. During the first quarter of 2019, Trustmark revised the composition of its operating segments by moving the Private Banking Group from the General Banking Segment to the Wealth Management Segment as a result of a change in supervision of this group for segment reporting purposes. The prior period amounts presented include reclassifications to conform to the current period presentation.

The accounting policies of each reportable segment are the same as those of Trustmark except for its internal allocations. Noninterest expenses for back-office operations support are allocated to segments based on estimated uses of those services. Trustmark measures the net interest income of its business segments with a process that assigns cost of funds or earnings credit on a matched-term basis. This process, called “funds transfer pricing”, charges an appropriate cost of funds to assets held by a business unit, or credits the business unit for potential earnings for carrying liabilities. The net of these charges and credits flows through to the General Banking Segment, which contains the management team responsible for determining TNB’s funding and interest rate risk strategies.

The following table discloses financial information by reportable segment for the periods presented ($ in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
General Banking
Net interest income	$	106,681		$	103,978		$	210,468		$	204,685
Provision for loan losses, net		2,593			2,731			4,284			6,842
Noninterest income		30,808			29,175			53,721			58,935
Noninterest expense		90,684			88,421			181,343			176,411
Income before income taxes		44,212			42,001			78,562			80,367
Income taxes		5,411			5,216			9,601			9,702
General banking net income	$	38,801		$	36,785		$	68,961		$	70,665

Selected Financial Information
Total assets	$	13,365,972		$	13,363,465		$	13,365,972		$	13,363,465
Depreciation and amortization	$	9,593		$	9,987		$	18,732		$	19,197

Wealth Management
Net interest income	$	988		$	1,136		$	1,954		$	2,467
Provision for loan losses, net		(1	)		(5	)		(3	)		(5	)
Noninterest income		7,740			7,480			15,443			15,094
Noninterest expense		7,136			7,088			14,155			13,964
Income before income taxes		1,593			1,533			3,245			3,602
Income taxes		398			384			807			901
Wealth management net income	$	1,195		$	1,149		$	2,438		$	2,701

Selected Financial Information
Total assets	$	109,106		$	94,447		$	109,106		$	94,447
Depreciation and amortization	$	67		$	28		$	136		$	55

Insurance
Net interest income	$	55		$	50		$	110		$	105
Noninterest income		11,091			10,736			21,966			20,155
Noninterest expense		8,281			8,291			16,624			15,890
Income before income taxes		2,865			2,495			5,452			4,370
Income taxes		721			616			1,372			1,093
Insurance net income	$	2,144		$	1,879		$	4,080		$	3,277

Selected Financial Information
Total assets	$	73,880		$	67,353		$	73,880		$	67,353
Depreciation and amortization	$	126		$	143		$	255		$	282

Consolidated
Net interest income	$	107,724		$	105,164		$	212,532		$	207,257
Provision for loan losses, net		2,592			2,726			4,281			6,837
Noninterest income		49,639			47,391			91,130			94,184
Noninterest expense		106,101			103,800			212,122			206,265
Income before income taxes		48,670			46,029			87,259			88,339
Income taxes		6,530			6,216			11,780			11,696
Consolidated net income	$	42,140		$	39,813		$	75,479		$	76,643

Selected Financial Information
Total assets	$	13,548,958		$	13,525,265		$	13,548,958		$	13,525,265
Depreciation and amortization	$	9,786		$	10,158		$	19,123		$	19,534

Note 20 – Accounting Policies Recently Adopted and Pending Accounting Pronouncements

Accounting Policies Recently Adopted

Except for the changes detailed below, Trustmark has consistently applied its accounting policies to all periods presented in the accompanying consolidated financial statements.

ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” Issued in August 2017, ASU 2017-12 aims to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in ASU 2017-12 aim to better align an entity’s risk management activities and financial reporting for hedging relationships by expanding and refining hedge accounting for both non-financial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in ASU 2017-12 (i) permit hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk; (ii) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; (iii) continue to allow an entity to exclude option premiums and forward points from the assessment of hedge effectiveness; and (iv) permit an entity to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-country basis spread from the assessment of hedge effectiveness. The amendments of ASU 2017-12 also include targeted improvements intended to simplify the application of hedge accounting. All transition requirements and elections must be applied to all hedging relationships existing at the date of adoption. The amendments of ASU 2017-12 became effective for Trustmark on January 1, 2019. ASU 2017-12 did not have any impact to Trustmark’s existing hedging relationships at adoption; therefore, the adoption of ASU 2017-12 did not have a material impact on Trustmark’s consolidated financial statements.

ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” Issued in March 2017, ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. In particular, the amendments in ASU 2017-08 require the premium to be amortized to the earliest call date. The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity. Notably, the amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. Securities within the scope of ASU 2017-08 are purchased debt securities that have explicit, noncontingent call features that are callable at fixed prices and on preset dates. The amendments of ASU 2017-08 became effective for Trustmark on January 1, 2019. Trustmark’s total unamortized premium for purchased debt securities within the scope of ASU 2017-08 is immaterial; therefore, the adoption of ASU 2017-08 did not have a material impact on Trustmark’s consolidated financial statements.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02, among other things, requires lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842: Leases,” which provides corrections or improvements to a number of areas within FASB ASC Topic 842 and has the same transition guidance and effective date as ASU 2016-02. The FASB also issued ASU 2018-11, “Leases (Topic 842)-Targeted Improvements”, in July 2018, which provides entities with an additional and optional transition method to adopt the new lease standard and, for lessors only, a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component. The amendments in ASU 2018-11 allow an entity the option to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption as opposed to at the beginning of the earliest period presented in the financial statements. The amendments of ASU 2018-11 have the same effective date as ASU 2016-02. In December 2018, the FASB issued ASU 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which provides targeted improvements and clarification to guidance with FASB ASC Topic 842 specific to lessors. The amendments of ASU 2018-20 have the same effective date as ASU 2016-02 and may be applied either retrospectively or prospectively to all new and existing leases. Trustmark has an immaterial amount of leases in which it is the lessor and adoption of ASU 2016-02 did not have a material impact to these leases or the related income. Trustmark obtained a third-party software application which will provide lease contract maintenance and lease accounting under the guidelines of FASB ASC Topic 842. All existing lease contracts, with the exception of short-term leases, were loaded into the software application and reviewed by Management. The amendments of ASU 2016-02 and subsequently issued ASUs, which provided additional guidance and clarifications to various aspects of FASB ASC Topic 842, became effective for Trustmark on January 1, 2019. Trustmark adopted the amendments in this ASU using the optional transition method allowable under ASU 2018-11, and was not required to recognize any cumulative-effect adjustment to the opening

balance of retained earnings. During the first quarter of 2019, Trustmark recorded operating lease right-of-use assets and operating lease liabilities of $33.9 million and $34.9 million, respectively, in its consolidation balance sheet. Additionally, Trustmark recorded finance lease right-of-use assets, net of accumulated depreciation, of $11.2 million in premises and equipment, net and finance lease liabilities of $11.2 million in other borrowings. Trustmark’s total lease right-of-use assets, net represented approximately 0.3% of its total assets as of March 31, 2019; therefore, the adoption of ASU 2016-02 did not have a material impact on Trustmark’s consolidated financial statements. Disclosures required by the amendments of ASU 2016-02 are included in Note 7 – Leases of this report.

Pending Accounting Pronouncements

ASU 2018-15, “Intangibles-Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” Issued in August 2018, ASU 2018-15 aims to reduce complexity in the accounting for costs of implementing a cloud computing service arrangement. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments of ASU 2018-15 require an entity to follow the guidance in FASB ASC Subtopic 350-40, “Intangibles-Goodwill and Other-Internal-Use Software,” in order to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments of ASU 2018-15 also require an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (i.e. the noncancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the entity is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the entity is reasonably certain not to exercise the option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor). ASU 2018-15 also requires an entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement, and to classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Trustmark does not currently have any material amount of implementation costs related to hosting arrangements that are service contracts and is not expected to have a material impact to Trustmark’s consolidated financial statements; however, Management will continue to evaluate the impact of this ASU on future hosting arrangements as well as Trustmark’s consolidated financial statements through its effective date.

ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” Issued in August 2018, ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in ASU 2018-14 remove certain disclosure requirements that are no longer considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. The amendments of ASU 2018-14 become effective for fiscal years beginning after December 15, 2020. Trustmark plans to adopt these amendments during the first quarter of 2021. Management is currently assessing all the potential impacts of the amendments in ASU 2018-14 on Trustmark’s consolidated financial statements; however, the adoption of ASU 2018-14 is not expected to have a material impact on Trustmark’s consolidated financial statements.

ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” Issued in August 2018, the amendments in this ASU remove disclosure requirements in FASB ASC Topic 820 related to (1) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation processes for Level 3 fair value measurements; and (4) for non-public entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU also modifies disclosure requirements such that (1) in place of a rollforward for Level 3 fair value measurements, a non-public entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; (2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date that restrictions from redemption might lapse, only if the investee has communicated the timing to the entity or announced the timing publicly; and (3) it is clear that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Additionally, this ASU adds disclosure requirements for public entities about (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments of ASU 2018-13 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Trustmark plans to adopt ASU 2018-13 during the first quarter of 2020. Management is currently assessing all the potential impacts of the amendments in ASU 2018-13 on Trustmark’s consolidated financial statements; however, the adoption of ASU 2018-13 is not expected to have a material impact on Trustmark’s consolidated financial statements.

ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective prospectively for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. Based on Trustmark’s annual goodwill impairment test performed as of October 1, 2018, the fair value of its reporting units exceeded the carrying value and, therefore, the related goodwill was not impaired. Management will continue to evaluate the impact this ASU will have on Trustmark’s consolidated financial statements through its effective date; however, the adoption of ASU 2017-04 is not expected to have a material impact on Trustmark’s consolidated financial statements.

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a write-down. The amendments of ASU 2016-13 are effective for interim and annual periods beginning after December 15, 2019. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Trustmark has established a cross-functional Current Expected Credit Loss (CECL) Steering Committee, a CECL Solution Development Working Group and a CECL Working Group which include the appropriate members of Management to evaluate the impact this ASU, and all subsequent ASUs issued by FASB to provide clarification related to this Topic, will have on Trustmark’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing the amendments in these ASUs as well as any resources needed to implement the amendments. Trustmark plans to adopt the amendments of ASU 2016-13, and all subsequently issued ASUs, during the first quarter of 2020. Trustmark selected a third-party vendor to provide allowance for loan loss software as well as advisory services in developing a new methodology that would be compliant with amendments of ASU 2016-13, and is working with the approved third-party vendor to develop the CECL model and evaluate the impact to Trustmark. During 2019, Trustmark is focused on model validations as well as development of process and related controls. Trustmark is on schedule to fully comply with all CECL requirements within its internally established timeframe for implementation. Management will continue to evaluate the impact this ASU will have on Trustmark’s consolidated financial statements through its effective date.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2019, TNB had total assets of $13.546 billion, which represented approximately 99.98% 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 193 offices and 2,819 full-time equivalent associates (measured at June 30, 2019) located in the states of Alabama, Florida (primarily in the northwest or “Panhandle” region of that state, which is referred to herein as Trustmark’s Florida market), Mississippi, Tennessee (in the Memphis and Northern Mississippi regions, which are collectively referred to herein as Trustmark’s Tennessee market), and Texas (primarily in Houston, which is referred to herein as Trustmark’s Texas market). Trustmark’s operations are managed along three operating segments: General Banking Segment, Wealth Management Segment and Insurance Segment. For a complete overview of Trustmark’s business, see the section captioned “The Corporation” included in Part I. Item 1. – Business of Trustmark’s 2018 Annual Report on Form 10-K.

Executive Overview

During the first six months of 2019, Trustmark continued to focus on its strategic initiatives of profitably growing each of its financial services businesses, optimizing its balance sheet, deploying capital through stock repurchases and maintaining disciplined expense management. Trustmark achieved solid financial results with total revenue of $157.4 million and $303.7 million for the three and six months ended June 30, 2019, respectively. Trustmark continued to maintain and expand customer relationships as reflected by growth in the LHFI portfolio of $280.9 million, or 3.2%, and growth in deposits of $202.2 million, or 1.8%, during the first six months of 2019. Credit quality remained strong and continued to be an important contributor to Trustmark’s financial success. Trustmark is committed to managing the franchise for the long term, supporting investments to promote profitable revenue growth, realigning delivery channels to support changing customer preferences as well as reengineering and efficiency opportunities to enhance long-term shareholder value. Trustmark’s capital position remained solid, reflecting the consistent profitability of its diversified financial services businesses. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable September 15, 2019, to shareholders of record on September 1, 2019.

Recent Economic and Industry Developments

The economy continued to show moderate signs of improvement during the first six months of 2019; however, economic concerns remain as a result of the cumulative weight of volatility in crude oil prices and uncertain growth prospects in emerging markets, combined with uncertainty regarding the potential monetary policy changes by the FRB, the consequences of the decision of the United Kingdom to exit the European Union, the potential impact on the economy of the current United States presidential administration’s policies and United States trade relations, particularly with China. Doubts surrounding the near-term direction of global markets, and the potential impact of these trends on the United States economy, are expected to persist for the near term. While Trustmark’s customer base is wholly domestic, international economic conditions affect domestic conditions, and thus may have an impact upon Trustmark’s financial condition or results of operations.

In the July 2019 “Summary of Commentary on Current Economic Conditions by Federal Reserve District,” the twelve Federal Reserve Districts’ reports suggested national economic activity continued to expand at a modest pace during the reporting period. Reports by the twelve Federal Reserve Districts noted overall retail sales increased slightly, tourism activity was solid, home sales increased somewhat, nonresidential construction activity increased, commercial rents rose, increased demand for loans and agricultural output declined modestly due to the impact of rainfall, flooding, other weather-related conditions. Reports by the twelve Federal Reserve Districts also noted employment increased modestly with modest-to-moderate gains in wages; however, tight labor markets continue to restrain the rate of growth and place pressures on wages, particularly for skilled workers. Reports by the twelve Federal Reserve Districts noted the rate of price inflation was stable to down slightly and increases in input costs citing rising wages and higher tariffs as contributing factors. The Federal Reserve’s Sixth District, Atlanta (which includes Trustmark’s Alabama, Florida and Mississippi market regions), reported that economic activity expanded at a modest pace, labor markets remained tight and wage growth remained steady, retail sales and tourism improved, residential real estate activity improved and commercial real estate activity was steady, manufacturing activity increased and banking conditions softened slightly. The Federal Reserve’s Sixth District also reported that the overall outlook among businesses remained positive with expectation of modest growth during the second half of 2019 despite concerns over uncertainty related to tariffs. The Federal Reserve’s Eighth District, St. Louis (which includes Trustmark’s Tennessee market region), reported that economic conditions improved slightly, labor markets remained tight with slight growth in employment and moderate growth in wages, price pressures strengthened slightly with tariffs cited as a contributing factor to higher input prices, moderate improvements in manufacturing activity, residential real estate activity increased slightly, loan volumes increased, though at a slightly slower pace, and modest declines in agricultural conditions due to recent flooding. The Federal Reserve’s Eleventh District, Dallas (which includes Trustmark’s Texas market region), reported economic activity expanded at a moderate pace, noting improvements in nonfinancial services and manufacturing activity, while retail sales and drilling activity declined, loan volumes expanded at a faster pace, increased home sales, moderate growth in employment despite tight labor markets and wage growth remained elevated. The Federal Reserve’s Eleventh District also reported that outlooks were mixed with increased uncertainty due to growing concerns related to tariffs and trade tensions.

The FRB did not increase the target range for the federal funds rate during the first six months of 2019 and indicated that there would be no additional increase during the remainder of 2019. Instead, recent reports indicate possible decreases in the target range for the federal funds rate by the FRB during the second half of 2019. Interest rates remain within a low range that, when combined with the extended period of historically low interest rates in recent years, continue to place pressure on net interest margins for Trustmark (as well as its competitors). Declines in interest rates will place additional competitive pressure on net interest margins. Conversely, further increases in interest rates will place competitive pressures on the deposit cost of funds. It is not possible to predict the pace and magnitude of changes to interest rates, or the impact rate changes will have on Trustmark’s results of operations.

Financial Highlights

Trustmark reported net income of $42.1 million, or basic and diluted EPS of $0.65, in the second quarter of 2019, compared to $39.8 million, or basic and diluted EPS of $0.59, in the second quarter of 2018. Trustmark’s reported performance during the quarter ended June 30, 2019 produced a return on average tangible equity of 14.14%, a return on average assets of 1.24%, an average equity to average assets ratio of 11.78% and a dividend payout ratio of 35.38%, compared to a return on average tangible equity of 13.77%, a return on average assets of 1.19%, an average equity to average assets ratio of 11.75% and a dividend payout ratio of 38.98% during the quarter ended June 30, 2018.

Trustmark reported net income of $75.5 million, or basic and diluted EPS of $1.16, for the first six months of 2019, compared to $76.6 million, or basic and diluted EPS of $1.13, for the first six months of 2018. Trustmark’s reported performance during the six months ended June 30, 2019 produced a return on average tangible equity of 12.86%, a return on average assets of 1.12%, an average equity to average assets ratio of 11.81% and a dividend payout ratio of 39.66%, compared to a return on average tangible equity of 13.41%, a return on average assets of 1.14%, an average equity to average assets ratio of 11.65% and a dividend payout ratio of 40.71% for the six months ended June 30, 2018.

Total revenue, which is defined as net interest income plus noninterest income, for the three and six months ended June 30, 2019 was $157.4 million and $303.7 million, respectively, an increase of $4.8 million, or 3.2%, and $2.2 million, or 0.7%, respectively, when compared to the same time periods in 2018. The increase in total revenue for the three months ended June 30, 2019 when compared to the same time period in 2018, resulted from increases in both net interest income and noninterest income. The increase in total revenue for the first six months of 2019 compared to the first six months of 2018 resulted from an increase in net interest income partially offset by a decline in noninterest income. These factors are discussed in further detail below.

Net interest income for the three and six months ended June 30, 2019 totaled $107.7 million and $212.5 million, respectively, an increase of $2.6 million, or 2.4%, and $5.3 million, or 2.5%, respectively, when compared to the same time periods in 2018, principally due to increases in interest and fees on LHFS and LHFI and other interest income and declines in interest on federal funds purchased and securities sold under repurchase agreements and other interest expense, which were largely offset by an increase in interest on deposits and declines in interest and fees on securities and acquired loans. Interest and fees on LHFS and LHFI for the three and six months ended June 30, 2019 increased $15.0 million, or 15.5%, and $30.2 million, or 16.0%, respectively, when compared to the same time periods in 2018, primarily due to an increase in interest on LHFI as a result of growth in the LHFI portfolio as well as higher yields on LHFI. LHFI totaled $9.117 billion at June 30, 2019, an increase of $437.8 million, or 5.0%, when compared to June 30, 2018, principally due to net growth in loans secured by real estate in Trustmark’s Alabama, Mississippi and Florida market regions and state and other political subdivision loans across all five market regions. Other interest income for the three and six months ended June 30, 2019 increased $766 thousand, or 72.7%, and $1.4 million, or 72.2%, respectively, when compared to the same time periods in 2018, principally due to higher balances in interest-bearing accounts held at other banks. Interest on federal funds purchased and securities sold under repurchase agreements declined $1.2 million, or 93.5%, and $1.5 million, or 80.7%, when the three and six months ended June 30, 2019 are compared to the same time periods in 2018, primarily due to Trustmark’s reduction of its funding from external sources at the end of 2018. Other interest expense for the three and six months ended June 30, 2019 decreased $882 thousand, or 51.5%, and $3.5 million, or 67.6%, respectively, when compared to the same time periods in 2018, principally due to a decline in interest on Federal Home Loan Bank (FHLB) advances as a result of prepayments and maturities of all remaining outstanding short-term FHLB advances with the FHLB of Dallas during 2018. Interest expense on deposits for the three and six months ended June 30, 2019 increased $9.4 million, or 77.1%, and $19.4 million, or 89.9%, respectively, when compared to the same time periods in 2018, principally due to rising interest rates in general, accompanied by increases in average balances of interest-bearing demand deposit accounts and time deposits. Interest on total securities for the three and six months ended June 30, 2019 declined $3.1 million, or 17.9%, and $6.1 million, or 17.1%, respectively, when compared to the same time periods in 2018, primarily as a result of the run-off of maturing investment securities. Interest and fees on acquired loans for the three and six months ended June 30, 2019 decreased $3.0 million, or 60.0%, and $6.0 million, or 60.3%, respectively, when compared to the same time periods in 2018, principally due to a decline in the acquired loan portfolio as a result of the remaining loans acquired in the Bay Bank, Heritage and Reliance acquisitions which were transferred from acquired impaired loans to LHFI during 2018 and declines in recoveries from settlement of debt and accretion income from loans acquired in the BancTrust merger as a result of pay-offs and pay-downs of these loans.

Noninterest income for the three and six months ended June 30, 2019 totaled $49.6 million and $91.1 million, respectively, an increase of $2.2 million, or 4.7%, and a decline of $3.1 million, or 3.2%, respectively, when compared to the same time periods in 2018. The increase in noninterest income for the second quarter of 2019 when compared to the same time period in 2018 was primarily due to increases in mortgage banking, net (principally due to an increase in the mortgage loan valuation adjustment and a decrease in the change in the fair value of the MSR due to run-off) and bank card and other fees (principally due to increases in income from customer derivatives, interchange income and automated teller machine (ATM) surcharges). The decrease in noninterest income when the first six months of 2019 is compared to the same time period in 2018 was primarily due to a decline in mortgage banking, net (principally due to a decline in the net hedge ineffectiveness partially offset by an increase in the mortgage loan valuation adjustment), partially offset by increases in insurance commissions (principally due to improvements in the commercial property and casualty line of business) and bank card and other fees (principally due to increases in income from customer derivatives, ATM surcharges and interchange income).

Noninterest expense for the three and six months ended June 30, 2019 totaled $106.1 million and $212.1 million, respectively, an increase of $2.3 million, or 2.2%, and $5.9 million, or 2.8%, respectively, when compared to the same time periods in 2018. The increase in noninterest expense for the three months ended June 30, 2019 when compared to the same time period in 2018 was principally due to increases in salaries and employee benefits and services and fees, partially offset by a decrease in FDIC assessment expense. The increase in noninterest expense for the six months ended June 30, 2019 when compared to the same time period in 2018 was principally due to increases in salaries and employee benefits, services and fees and other real estate expense, partially offset by a decrease in FDIC assessment expense. Salaries and employee benefits increased $2.0 million, or 3.3%, and $4.5 million, or 3.8%, respectively, when the three and six months ended June 30, 2019 are compared to the same time periods in 2018, primarily due to general merit increases, higher commission expense related to improvements in the insurance line of business and mortgage originations, increases in insurance expense related to Trustmark’s health plans and higher stock compensation expense. Services and fees increased $1.7 million, or 10.3%, and $2.9 million, or 9.1%, respectively, when the three and six months ended June 30, 2019 are compared to the same time periods in 2018, principally due to increases in data processing expenses related to software and advertising expenses. Other real estate expense increased $1.1 million when the six months ended June 30, 2019 is compared to the same time period in 2018, primarily due to a decline in the net gain on sales of other real estate properties and an increase in the reserve for other real estate write-downs. FDIC assessment expense decreased $702 thousand, or 27.7%, and $1.9 million, or 35.0%, respectively, when the three and six months ended June 30, 2019 are compared to the same time periods in 2018, principally due to the lower regular assessment base and elimination of the additional surcharge of 4.5 cents per $100 of assessment base during the third quarter of 2018.

Trustmark’s provision for loan losses, LHFI for the three and six months ended June 30, 2019 totaled $2.5 million and $4.1 million, respectively, a decrease of $681 thousand, or 21.5%, and $3.0 million, or 42.5%, respectively, when compared to the provision for loan losses, LHFI for the three and six months ended June 30, 2018. Please see the section captioned “Provision for Loan Losses, LHFI” for additional information regarding the provision for loan losses, LHFI. The provision for loan losses, acquired loans for the three and six months ended June 30, 2019 totaled $106 thousand and $184 thousand, respectively, an increase of $547 thousand and $475 thousand, respectively, when compared to a negative provision of $441 thousand and $291 thousand for the three and six months ended June 30, 2018, respectively. Please see the section captioned “Provision for Loan Losses, Acquired Loans” for additional information regarding the provision for loan losses, acquired loans. In total, the provision for loan losses, net was $2.6 million and $4.3 million for the three and six months ended June 30, 2019, respectively, a decrease of $134 thousand, or 4.9%, and $2.6 million, or 37.4%, respectively, when compared to the same time periods in 2018.

At June 30, 2019, nonperforming assets, excluding acquired loans, totaled $84.1 million, a decrease of $12.2 million, or 12.6%, compared to December 31, 2018, reflecting declines in both nonaccrual LHFI and other real estate. Nonaccrual LHFI totaled $52.9 million at June 30, 2019, a decrease of $8.7 million, or 14.2%, relative to December 31, 2018, primarily due to a reduction and charge-off of one large commercial nonaccrual credit in the Mississippi market region for which reserves were previously established. Other real estate totaled $31.2 million at June 30, 2019, a decline of $3.4 million, or 9.9%, compared to December 31, 2018, primarily due to properties sold and write-downs on foreclosed properties in Trustmark’s Mississippi, Florida, Alabama and Tennessee market regions, partially offset by new properties foreclosed in the Mississippi and Alabama market regions.

LHFI totaled $9.117 billion at June 30, 2019, an increase of $280.9 million, or 3.2%, compared to December 31, 2018. The increase in LHFI during the first six months of 2019 was primarily due to net growth in loans secured by real estate in Trustmark’s Alabama, Texas and Florida market regions and other loans in the Mississippi and Alabama market regions. For additional information regarding changes in LHFI and comparative balances by loan category, see the section captioned “LHFI.”

Management has continued its practice of maintaining excess funding capacity to provide Trustmark with adequate liquidity for its ongoing operations. In this regard, Trustmark benefits from its strong deposit base, its highly liquid investment portfolio and its access to funding from a variety of external funding sources such as upstream federal funds lines, FHLB advances and, on a limited

basis, brokered deposits. See the section captioned “Liquidity” for further discussion of the components of Trustmark’s excess funding capacity.

Total deposits were $11.567 billion at June 30, 2019, an increase of $202.2 million, or 1.8%, compared to December 31, 2018. During the first six months of 2019, noninterest-bearing deposits decreased $28.5 million, or 1.0%, primarily due to declines in public noninterest-bearing deposit accounts, while interest-bearing deposits increased $230.7 million, or 2.7%, primarily due to growth in all types of money market deposit accounts and commercial interest checking accounts.

Recent Legislative and Regulatory Developments

In June 2019, the Consumer Financial Protection Bureau (CFPB) issued a final rule to delay parts of the CFPB’s 2017 final rule addressing certain covered short-term loans, longer-term balloon-payment loans and longer-term loans with certain costs and features. The June 2019 final rule delays from the third quarter of 2019 to the fourth quarter of 2020 the compliance date of the 2017 final rule’s requirements for a lender to determine a consumer’s ability to repay a covered loan and report covered loans to registered information systems. In February 2019, the CFPB issued a proposal that would rescind such requirements. Based on TNB’s current credit portfolio, any covered loans made by TNB are considered exempt “accommodation loans” under the CFPB’s 2017 final rule, and accordingly, Trustmark does not expect that the 2017 final rule, the June 2019 final rule, or the February 2019 proposal will have a material impact on its operations.

In July 2019, the Office of the Comptroller of the Currency, the FRB, and the FDIC issued a final rule intended to simplify aspects of the regulatory capital rules for banking organizations, such as Trustmark and TNB, that are not advanced approaches banking organizations. The final rule includes amendments to the capital treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interests. These amendments will be effective as of April 1, 2020. Management does not expect these amendments to have a material effect on Trustmark’s or TNB’s regulatory capital ratios. Additionally, the final rule revises the FRB’s regulatory capital rule to allow bank holding companies to redeem common stock without obtaining prior regulatory approval unless otherwise required by law or regulation. This revision will be effective as of October 1, 2019, though bank holding companies are permitted to adopt the revision immediately.

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 2018 Annual Report on Form 10-K.

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):

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Consolidated Statements of Income
Total interest income	$	130,136		$	120,266		$	255,627		$	235,906
Total interest expense		22,412			15,102			43,095			28,649
Net interest income		107,724			105,164			212,532			207,257
Provision for loan losses, LHFI		2,486			3,167			4,097			7,128
Provision for loan losses, acquired loans		106			(441	)		184			(291	)
Noninterest income		49,639			47,391			91,130			94,184
Noninterest expense		106,101			103,800			212,122			206,265
Income before income taxes		48,670			46,029			87,259			88,339
Income taxes		6,530			6,216			11,780			11,696
Net Income	$	42,140		$	39,813		$	75,479		$	76,643

Total Revenue (1)	$	157,363		$	152,555		$	303,662		$	301,441

Per Share Data
Basic earnings per share	$	0.65		$	0.59		$	1.16		$	1.13
Diluted earnings per share		0.65			0.59			1.16			1.13
Cash dividends per share		0.23			0.23			0.46			0.46

Performance Ratios
Return on average equity		10.53	%		10.09	%		9.52	%		9.80	%
Return on average tangible equity		14.14	%		13.77	%		12.86	%		13.41	%
Return on average assets		1.24	%		1.19	%		1.12	%		1.14	%
Average equity/average assets		11.78	%		11.75	%		11.81	%		11.65	%
Net interest margin (fully taxable equivalent)		3.64	%		3.57	%		3.63	%		3.51	%
Dividend payout ratio		35.38	%		38.98	%		39.66	%		40.71	%

Credit Quality Ratios (2)
Net charge-offs (recoveries)/average loans		0.05	%		0.07	%		0.07	%		0.03	%
Provision for loan losses/average loans		0.11	%		0.15	%		0.09	%		0.17	%
Nonperforming loans/total loans (incl LHFS)		0.57	%		0.69	%
Nonperforming assets/total loans (incl LHFS) plus other real estate		0.90	%		1.13	%
Allowance for loan losses/total loans (excl LHFS)		0.88	%		0.96	%

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

(2)	Excludes acquired loans.

June 30,	2019			2018
Consolidated Balance Sheets
Total assets	$	13,548,958		$	13,525,265
Securities		2,469,261			2,960,520
Total loans (incl LHFS and acquired loans)		9,445,023			9,048,307
Deposits		11,566,629			11,072,435
Total shareholders' equity		1,618,550			1,584,072

Stock Performance
Market value - close	$	33.25		$	32.63
Book value		25.13			23.43
Tangible book value		19.10			17.61

Capital Ratios
Total equity/total assets		11.95	%		11.71	%
Tangible equity/tangible assets		9.34	%		9.07	%
Tangible equity/risk-weighted assets		11.39	%		11.20	%
Tier 1 leverage ratio		10.03	%		10.22	%
Common equity tier 1 risk-based capital ratio		11.76	%		12.01	%
Tier 1 risk-based capital ratio		12.31	%		12.58	%
Total risk-based capital ratio		13.07	%		13.39	%

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

These calculations are intended to complement the capital ratios defined by GAAP and banking regulators. Because GAAP does not include these capital ratio measures, Trustmark believes there are no comparable GAAP financial measures to these tangible common equity ratios. Despite the importance of these measures to Trustmark, there are no standardized definitions for them and, as a result, Trustmark’s calculations may not be comparable with other organizations. Also, there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its 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):

		Three Months Ended June 30,						Six Months Ended June 30,
		2019			2018			2019			2018
TANGIBLE EQUITY
AVERAGE BALANCES
Total shareholders' equity		$	1,605,745		$	1,581,906		$	1,598,009		$	1,577,236
Less: Goodwill			(379,627	)		(379,627	)		(379,627	)		(379,627	)
Identifiable intangible assets			(9,631	)		(14,380	)		(10,146	)		(15,077	)
Total average tangible equity		$	1,216,487		$	1,187,899		$	1,208,236		$	1,182,532

PERIOD END BALANCES
Total shareholders' equity		$	1,618,550		$	1,584,072
Less: Goodwill			(379,627	)		(379,627	)
Identifiable intangible assets			(9,101	)		(13,677	)
Total tangible equity	(a)	$	1,229,822		$	1,190,768

TANGIBLE ASSETS
Total assets		$	13,548,958		$	13,525,265
Less: Goodwill			(379,627	)		(379,627	)
Identifiable intangible assets			(9,101	)		(13,677	)
Total tangible assets	(b)	$	13,160,230		$	13,131,961
Risk-weighted assets	(c)	$	10,796,903		$	10,633,646

NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION
Net income		$	42,140		$	39,813		$	75,479		$	76,643
Plus: Intangible amortization net of tax			744			965			1,570			2,014
Net income adjusted for intangible amortization		$	42,884		$	40,778		$	77,049		$	78,657
Period end shares outstanding	(d)		64,398,846			67,621,111

TANGIBLE EQUITY MEASUREMENTS
Return on average tangible equity (1)			14.14	%		13.77	%		12.86	%		13.41	%
Tangible equity/tangible assets	(a)/(b)		9.34	%		9.07	%
Tangible equity/risk-weighted assets	(a)/(c)		11.39	%		11.20	%
Tangible book value	(a)/(d)*1,000	$	19.10		$	17.61

COMMON EQUITY TIER 1 CAPITAL (CET1)
Total shareholders' equity		$	1,618,550		$	1,584,072
AOCI-related adjustments			24,816			73,739
CET1 adjustments and deductions:
Goodwill net of associated deferred tax liabilities (DTLs)			(365,745	)		(366,036	)
Other adjustments and deductions for CET1 (2)			(8,268	)		(14,204	)
CET1 capital	(e)		1,269,353			1,277,571
Additional tier 1 capital instruments plus related surplus			60,000			60,000
Tier 1 Capital		$	1,329,353		$	1,337,571

Common equity tier 1 risk-based capital ratio	(e)/(c)		11.76	%		12.01	%

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

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

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 loan balances were immaterial.

Net interest income-FTE for the three and six months ended June 30, 2019 increased $2.6 million, or 2.4%, and $5.3 million, or 2.5%, respectively, when compared with the same time periods in 2018. The net interest margin for the three and six months ended June 30, 2019 increased 7 basis points to 3.64% and 12 basis points to 3.63%, respectively, when compared to the same time periods in 2018. The increase in the net interest margin for the three and six months ended June 30, 2019 was principally due to growth in the yield on the LHFI and LHFS portfolios, run-off of maturing investment securities and a favorable funding mix, partially offset by higher costs of interest-bearing deposits. The net interest margin excluding acquired loans, which equals the reported net interest income-FTE excluding interest and fees on acquired loans, as a percentage of average earning assets excluding average acquired loans, was 3.60% for both the three and six months ended June 30, 2019, an increase of 14 and 19 basis points, respectively, when compared to the same time periods in 2018, due to the factors discussed above.

Average interest-earning assets for the first six months of 2019 were $12.160 billion compared to $12.260 billion for the same time period in 2018, a decrease of $100.4 million, or 0.8%. The decline in average earning assets during the first six months of 2019 was primarily due to decreases in average total securities of $549.6 million, or 17.4%, and average acquired loans of $124.8 million, or 56.1%, which were partially offset by an increase in average loans (LHFS and LHFI) of $477.3 million, or 5.5%. The decrease in average total securities was primarily due to calls, maturities and pay-downs of the underlying loans of government-sponsored enterprise (GSE) guaranteed securities. The decrease in average acquired loans when the first six months of 2019 is compared to the same time period in 2018 was primarily due to acquired loans that were transferred to LHFI during 2018 as well as pay-downs and pay-offs of the acquired loans. The increase in average loans (LHFS and LHFI) was primarily attributable to the $437.8 million, or 5.0%, increase in the LHFI portfolio when balances at June 30, 2019 are compared to balances at June 30, 2018. This increase was principally due to net growth in loans secured by real estate in Trustmark’s Alabama, Mississippi and Florida market regions and state and other political subdivision loans across all five market regions.

During the first six months of 2019, interest and fees on LHFS and LHFI-FTE increased $30.3 million, or 15.6%, when compared to the same time period in 2018, due principally to the growth in the LHFI portfolio, while the yield on loans (LHFS and LHFI) increased 43 basis points to 4.95% as a result of increases in interest rates. During the first six months of 2019, interest on total securities-FTE decreased $6.2 million, or 17.2%, while the yield on total securities increased 1 basis point to 2.30% when compared to the same time period in 2018, primarily due to the run off of maturing investment securities. Interest on acquired loans declined $6.0 million, or 60.3%, and the yield on acquired loans declined 87 basis points to 8.10% when the first six months of 2019 is compared to the same time period in 2018, primarily due to the remaining loans acquired in the Bay Bank, Heritage and Reliance acquisitions which were transferred from acquired impaired loans to LHFI during 2018 and a decrease in accretion income and recovery from settlement of debt from loans acquired in the BancTrust merger as a result of pay-offs and pay-downs of these loans. As a result of these factors, interest income-FTE increased $19.8 million, or 8.2%, while the yield on total earning assets increased 36 basis points to 4.35% when the first six months of 2019 is compared to the same time period in 2018.

Average interest-bearing liabilities for the first six months of 2019 totaled $8.845 billion compared to $8.872 billion for the same time period in 2018, a decrease of $27.0 million, or 0.3%. The decrease in average interest-bearing liabilities represented declines in average other borrowings and average federal funds purchased and securities sold under repurchase agreements which were largely offset by an increase in average interest-bearing deposits. Average other borrowings decreased $413.6 million, or 73.7%, when the first six months of 2019 is compared to the same time period in 2018, primarily reflecting a decrease in the balance of outstanding short-term FHLB advances obtained from the FHLB of Dallas. Average federal funds purchased and securities sold under repurchase agreements for the first six months of 2019 declined $247.6 million, or 78.5%, when compared to the same time period in 2018, primarily due to a decrease in upstream federal funds purchased as a result of the reduction of Trustmark’s external funding needs during 2018 due to deposit growth out-pacing growth in LHFI and the run-off of maturing investment securities. Average interest-bearing deposits for the first six months of 2019 increased $634.1 million, or 7.9%, when compared to the same time period in 2018, as a result of growth in average interest-bearing demand deposits and time deposits primarily due to increases in interest rates in general.

Total interest expense for the first six months of 2019 increased $14.4 million, or 50.4%, while the yield on total interest-bearing liabilities increased 33 basis points to 0.98% when compared with the same time period in 2018, reflecting an increase in interest on deposits, in conjunction with increasing interest rates in general, partially offset by a declines in other interest expense and interest on federal funds purchased and securities sold under repurchase agreements. Interest on deposits increased $19.4 million, or 89.9%, while the rate on interest-bearing deposits increased 41 basis points to 0.96% when the first six months of 2019 is compared to the same time period in 2018, primarily due to increases in average balances of interest-bearing deposits and rising interest rates in general. Other interest expense decreased $3.5 million, or 67.6%, when the first six months of 2019 is compared to the same time period in 2018, primarily due to the decline in the balance of outstanding short-term FHLB advances with the FHLB of Dallas, while the rate on other borrowings increased 43 basis points to 2.26% reflecting an increase in rates. Interest on federal funds purchased and securities sold under repurchase agreements decreased $1.5 million, or 80.7%, when the first six months of 2019 is compared to the same time period in 2018, while the rate on federal funds purchased and securities sold under repurchase agreements decreased 12 basis points to 1.10% reflecting the decline in upstream federal funds purchased.

The following tables provide the tax equivalent basis yield or rate for each component of the tax equivalent net interest margin for the periods presented ($ in thousands):

	Three Months Ended June 30,
	2019								2018

	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Assets
Interest-earning assets:
Federal funds sold and securities purchased under reverse repurchase agreements	$	34,057		$	214		2.52	%	$	1,063		$	5		1.89	%
Securities - taxable		2,482,821			13,916		2.25	%		3,011,330			16,894		2.25	%
Securities - nontaxable		58,509			551		3.78	%		80,372			733		3.66	%
Loans (LHFS and LHFI)		9,260,028			114,873		4.98	%		8,707,466			99,761		4.60	%
Acquired loans		91,217			2,010		8.84	%		202,140			5,022		9.96	%
Other earning assets		316,604			1,820		2.31	%		186,224			1,054		2.27	%
Total interest-earning assets		12,243,236			133,384		4.37	%		12,188,595			123,469		4.06	%
Cash and due from banks		478,384								319,075
Other assets		989,078								1,042,156
Allowance for loan losses, net		(81,996	)							(86,315	)
Total Assets	$	13,628,702							$	13,463,511

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	8,690,128			21,500		0.99	%	$	8,098,728			12,139		0.60	%
Federal funds purchased and securities sold under repurchase agreements		51,264			81		0.63	%		352,256			1,250		1.42	%
Other borrowings		143,208			831		2.33	%		311,709			1,713		2.20	%
Total interest-bearing liabilities		8,884,600			22,412		1.01	%		8,762,693			15,102		0.69	%
Noninterest-bearing demand deposits		2,898,266								2,930,726
Other liabilities		240,091								188,186
Shareholders' equity		1,605,745								1,581,906
Total Liabilities and Shareholders' Equity	$	13,628,702							$	13,463,511
Net Interest Margin					110,972		3.64	%					108,367		3.57	%

Less tax equivalent adjustment					3,248								3,203

Net Interest Margin per Consolidated Statements of Income				$	107,724							$	105,164

	Six Months Ended June 30,
	2019								2018
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Assets
Interest-earning assets:
Federal funds sold and securities purchased under reverse repurchase agreements	$	17,260		$	216		2.52	%	$	772		$	7		1.83	%
Securities - taxable		2,550,998			28,581		2.26	%		3,078,723			34,400		2.25	%
Securities - nontaxable		63,661			1,197		3.79	%		85,511			1,557		3.67	%
Loans (LHFS and LHFI)		9,149,729			224,763		4.95	%		8,672,411			194,473		4.52	%
Acquired loans		97,730			3,926		8.10	%		222,533			9,899		8.97	%
Other earning assets		280,250			3,423		2.46	%		200,028			1,988		2.00	%
Total interest-earning assets		12,159,628			262,106		4.35	%		12,259,978			242,324		3.99	%
Cash and due from banks		451,217								327,810
Other assets		1,006,375								1,036,478
Allowance for loan losses, net		(82,111	)							(84,321	)
Total Assets	$	13,535,109							$	13,539,945

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	8,629,331			41,070		0.96	%	$	7,995,229			21,630		0.55	%
Federal funds purchased and securities sold under repurchase agreements		67,717			369		1.10	%		315,272			1,912		1.22	%
Other borrowings		147,908			1,656		2.26	%		561,473			5,107		1.83	%
Total interest-bearing liabilities		8,844,956			43,095		0.98	%		8,871,974			28,649		0.65	%
Noninterest-bearing demand deposits		2,861,448								2,906,186
Other liabilities		230,696								184,549
Shareholders' equity		1,598,009								1,577,236
Total Liabilities and Shareholders' Equity	$	13,535,109							$	13,539,945

Net Interest Margin					219,011		3.63	%					213,675		3.51	%

Less tax equivalent adjustment					6,479								6,418

Net Interest Margin per Consolidated Statements of Income				$	212,532							$	207,257

Provision for Loan Losses, LHFI

The provision for loan losses, LHFI is determined by Management as the amount necessary to adjust the allowance for loan losses, LHFI to a level, which, in Management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses, LHFI reflects loan quality trends, including the levels of and trends related to nonaccrual LHFI, past due LHFI, potential problem LHFI, criticized LHFI, net charge-offs or recoveries and growth in the LHFI portfolio among other factors. Accordingly, the amount of the provision reflects the necessary increases or decreases in the allowance for loan losses, LHFI related to adjustments for specific loans or loan pools as a result of growth in the portfolio and evaluation of current impairment analyses, actions taken with respect to risk ratings on loans and other adjustments resulting from changes in qualitative factors. The provision for loan losses, LHFI totaled $2.5 million and $4.1 million for the three and six months ended June 30, 2019, respectively, a decrease of $681 thousand, or 21.5%, and $3.0 million, or 42.5%, respectively, when compared to the same time periods in 2018. The decrease in the provision for loan losses, LHFI when the three months ended June 30, 2019 is compared to the same time period in 2018 was primarily due to a decrease in the amount of provision expense related to new and existing impaired LHFI partially offset by an increase in provision expense related to changes in qualitative reserve factors. The decrease in the provision for loan losses, LHFI when the six months ended June 30, 2019 is compared to the same time period in 2018 was primarily due to a decrease in the amount of provision expense related to new and existing impaired LHFI partially offset by increases in provision expense related to changes in qualitative and quantitative reserve factors. See the section captioned “Allowance for Loan Losses, LHFI” for further analysis of the provision for loan losses, LHFI.

Provision for Loan Losses, Acquired Loans

The provision for loan losses, acquired loans is recognized subsequent to acquisition to the extent it is probable that Trustmark will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition, considering both the timing and amount of those expected cash flows. Provisions may be required when actual losses of unpaid principal incurred exceed previous loss expectations to date, or future cash flows previously expected to be collectible are no longer probable of collection. The provision for loan losses, acquired loans is reflected as a valuation allowance netted against the carrying value of the acquired loans accounted for under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.”

The provision for loan losses, acquired loans increased $547 thousand and $475 thousand, respectively, when the three and six months ended June 30, 2019 are compared to the same time periods in 2018. The increase in the provision for loan losses, acquired loans when the second quarter of 2019 is compared to the second quarter of 2018 was primarily due to an increase in the provision expense related to the loans acquired in the BancTrust merger due to changes in expectations based on the periodic re-estimations performed during the respective periods. The increase in the provision for loan losses, acquired loans when the first six months of 2019 is compared to the same time period in 2018 was principally due to an increase in provision expense related to loans acquired in the BancTrust merger, partially offset by the remaining loans acquired in the Bay Bank, Heritage and Reliance acquisitions that were transferred from acquired impaired loans to LHFI during 2018.

The following table presents the provision for loan losses, acquired loans, by acquisition for the periods presented ($ in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
BancTrust	$	106	$	(419	)	$	184	$	(702	)
Bay Bank		—		—			—		377
Heritage		—		(7	)		—		61
Reliance		—		(15	)		—		(27	)
Total provision for loan losses, acquired loans	$	106	$	(441	)	$	184	$	(291	)

Noninterest Income

Noninterest income represented 31.5% and 30.0% of total revenue, before securities gains (losses), net, for the three and six months ended June 30, 2019, respectively, compared to 31.1% and 31.2% for the three and six months ended June 30, 2018, respectively. The following table provides the comparative components of noninterest income for the periods presented ($ in thousands):

	Three Months Ended June 30,										Six Months Ended June 30,
	2019		2018		$ Change			% Change			2019		2018		$ Change			% Change
Service charges on deposit accounts	$	10,379	$	10,647	$	(268	)		-2.5	%	$	20,644	$	21,504	$	(860	)		-4.0	%
Bank card and other fees		8,004		7,070		934			13.2	%		15,195		13,696		1,499			10.9	%
Mortgage banking, net		10,295		9,046		1,249			13.8	%		13,737		20,311		(6,574	)		-32.4	%
Insurance commissions		11,089		10,735		354			3.3	%		21,960		20,154		1,806			9.0	%
Wealth management		7,742		7,478		264			3.5	%		15,225		15,045		180			1.2	%
Other, net		2,130		2,415		(285	)		-11.8	%		4,369		3,474		895			25.8	%
Total noninterest income	$	49,639	$	47,391	$	2,248			4.7	%	$	91,130	$	94,184	$	(3,054	)		-3.2	%

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

Bank Card and Other Fees

The increase in bank card and other fees for the three and six months ended June 30, 2019 compared to the same time periods in 2018 was principally due to increases in income from customer derivatives, interchange income and ATM surcharges.

Mortgage Banking, Net

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

	Three Months Ended June 30,												Six Months Ended June 30,
	2019			2018			$ Change			% Change			2019			2018			$ Change			% Change
Mortgage servicing income, net	$	5,734		$	5,502		$	232			4.2	%	$	11,341		$	11,090		$	251			2.3	%
Change in fair value-MSR from runoff		(2,918	)		(3,334	)		416			12.5	%		(5,316	)		(5,841	)		525			9.0	%
Gain on sales of loans, net		5,522			5,414			108			2.0	%		9,098			9,999			(901	)		-9.0	%
Other, net		2,010			1,365			645			47.3	%		3,415			1,660			1,755		n/m
Mortgage banking income before net hedge ineffectiveness		10,348			8,947			1,401			15.7	%		18,538			16,908			1,630			9.6	%
Change in fair value-MSR from market changes		(8,209	)		1,743			(9,952	)	n/m				(17,072	)		11,264			(28,336	)	n/m
Change in fair value of derivatives		8,156			(1,644	)		9,800		n/m				12,271			(7,861	)		20,132		n/m
Net hedge ineffectiveness		(53	)		99			(152	)	n/m				(4,801	)		3,403			(8,204	)	n/m
Mortgage banking, net	$	10,295		$	9,046		$	1,249			13.8	%	$	13,737		$	20,311		$	(6,574	)		-32.4	%

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

The increase in mortgage banking, net for the three months ended June 30, 2019 when compared to the same time period in 2018 was primarily due to an increase in the mortgage loan valuation adjustment and a decrease in the change in the fair value of the MSR due to run-off. The decrease in mortgage banking, net for the six months ended June 30, 2019 when compared to the same time period in 2018 was principally due to a decline in the net hedge ineffectiveness partially offset by an increase in the mortgage loan valuation adjustment. The net negative hedge ineffectiveness for the six months ended June 30, 2019 was the result of tightening mortgage spreads and increased market volatility. Mortgage loan production for the three and six months ended June 30, 2019 was $414.1 million and $697.6 million, respectively, and increase of $3.6 million, or 0.9%, and a decrease of $2.1 million, or 0.3%, respectively, when compared to the same time periods in 2018. Loans serviced for others totaled $6.897 billion at June 30, 2019, compared with $6.687 billion at June 30, 2018, an increase of $210.0 million, or 3.1%.

Representing a significant component of mortgage banking income is gain on the sales of loans, net. The decrease in the gain on sales of loans, net when the six months ended June 30, 2019 is compared to the same time period in 2018, was primarily the result of lower profit margins in secondary marketing activities as well as a decline in the volume of loans sold. Loan sales totaled $488.1 million for the six months ended June 30, 2019, a decrease of $27.5 million, or 5.3%, when compared with the same time period in 2018.

Other Income, Net

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

	Three Months Ended June 30,												Six Months Ended June 30,
	2019			2018			$ Change			% Change			2019			2018			$ Change		% Change
Partnership amortization for tax credit purposes	$	(2,010	)	$	(2,202	)	$	192			8.7	%	$	(4,020	)	$	(4,404	)	$	384		8.7	%
Increase in life insurance cash surrender value		1,803			1,770			33			1.9	%		3,586			3,508			78		2.2	%
Other miscellaneous income		2,337			2,847			(510	)		-17.9	%		4,803			4,370			433		9.9	%
Total other, net	$	2,130		$	2,415		$	(285	)		-11.8	%	$	4,369		$	3,474		$	895		25.8	%

The decrease in other miscellaneous income when the three months ended June 30, 2019 is compared to the same time period in 2018 was primarily due to life insurance proceeds received during the second quarter of 2018, partially offset by increases in the net gain on sales of premises and equipment and cash management services fee income. The increase in other miscellaneous income when the six months ended June 30, 2019 is compared to the same time period in 2018 was primarily due to increases in the net gain on sales of premises and equipment and cash management services fee income, partially offset by life insurance proceeds received during the second quarter of 2018.

Noninterest Expense

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

	Three Months Ended June 30,												Six Months Ended June 30,
	2019			2018			$ Change			% Change			2019			2018			$ Change			% Change
Salaries and employee benefits	$	61,949		$	59,975		$	1,974			3.3	%	$	122,903		$	118,450		$	4,453			3.8	%
Services and fees		18,009			16,322			1,687			10.3	%		34,977			32,068			2,909			9.1	%
Net occupancy-premises		6,403			6,550			(147	)		-2.2	%		12,857			13,052			(195	)		-1.5	%
Equipment expense		5,958			6,202			(244	)		-3.9	%		11,882			12,301			(419	)		-3.4	%
Other real estate expense:
Write-downs		11			177			(166	)		-93.8	%		1,667			965			702			72.7	%
Net (gain) loss on sale		(124	)		(588	)		464			78.9	%		(246	)		(1,002	)		756			75.4	%
Carrying costs		245			318			(73	)		-23.0	%		463			810			(347	)		-42.8	%
Total other real estate expense, net		132			(93	)		225		n/m				1,884			773			1,111		n/m
FDIC assessment expense		1,836			2,538			(702	)		-27.7	%		3,594			5,533			(1,939	)		-35.0	%
Other expense		11,814			12,306			(492	)		-4.0	%		24,025			24,088			(63	)		-0.3	%
Total noninterest expense	$	106,101		$	103,800		$	2,301			2.2	%	$	212,122		$	206,265		$	5,857			2.8	%

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

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 increase in salaries and employee benefits when the three and six months ended June 30, 2019 are compared to the same time periods in 2018 was principally due to increases in salaries and incentive compensation as a result of general merit increases and higher commission expense as a result of improvements in the insurance and mortgage origination lines of business, increases in insurance expense related to Trustmark’s health plans and higher stock compensation expense.

Services and Fees

The increase in services and fees when the three and six months ended June 30, 2019 are compared to the same time periods in 2018 was primarily the result of investments in new data processing software designed to improve efficiency and customer experience and increases in advertising expense.

Other Real Estate Expense, Net

The increase in other real estate expense for the six months ended June 30, 2019 when compared to the same time period in 2018 was primarily due to a decline in the net gain on sales of other real estate properties and an increase in the reserve for other real estate write-downs. Please see the section captioned “Other Real Estate” for additional information regarding other real estate expense.

FDIC Assessment Expense

The decrease in the FDIC assessment expense when the three and six months ended June 30, 2019 are compared to the same time periods in 2018 was principally due to the lower regular assessment base and elimination of the additional surcharge of 4.5 cents per $100 of assessment base during the third quarter of 2018.

Other Expense

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

	Three Months Ended June 30,										Six Months Ended June 30,
	2019		2018		$ Change			% Change			2019		2018		$ Change			% Change
Loan expense	$	3,003	$	3,046	$	(43	)		-1.4	%	$	5,700	$	5,837	$	(137	)		-2.3	%
Amortization of intangibles		992		1,286		(294	)		-22.9	%		2,093		2,683		(590	)		-22.0	%
Other miscellaneous expense		7,819		7,974		(155	)		-1.9	%		16,232		15,568		664			4.3	%
Total other expense	$	11,814	$	12,306	$	(492	)		-4.0	%	$	24,025	$	24,088	$	(63	)		-0.3	%

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. During the first quarter of 2019, Trustmark revised the composition of its operating segments by moving the Private Banking Group from the General Banking Segment to the Wealth Management Segment as a result of a change in supervision of this group for segment reporting purposes. The prior period amounts include reclassifications to conform to the current period presentation. The following discusses changes in the results of operations of each reportable segment for the six months ended June 30, 2019 and 2018.

General Banking

Net interest income for the General Banking Segment increased $5.8 million, or 2.8%, when the six months ended June 30, 2019 is compared with the same time period in 2018. The increase in net interest income was principally due to increases in interest and fees on LHFS and LHFI and other interest income and declines in interest on federal funds purchased and securities sold under repurchase agreements and other interest expense, which were largely offset by an increase in interest on deposits and declines in interest and fees on securities and acquired loans. The provision for loan losses, net for the six months ended June 30, 2019 totaled $4.3 million compared to $6.8 million for the same period in 2018, a decrease of $2.6 million, or 37.4%. For more information on these net interest income items, please see the sections captioned “Financial Highlights” and “Results of Operations.”

Noninterest income for the General Banking Segment decreased $5.2 million, or 8.8%, when the first six months of 2019 is compared to the same time period in 2018, primarily due to the decrease in mortgage banking, net, principally due to the decrease in the net hedge ineffectiveness partially offset by an increased in the mortgage loan valuation adjustment, partially offset by the increase in bank card and other fees, principally related to increases in income from customer derivatives, interchange income and ATM surcharges. Noninterest income for the General Banking Segment represented 20.3% of total revenue for this segment for the first six months of 2019 as opposed to 22.4% for the same time period in 2018. Noninterest income for the General Banking Segment includes service charges on deposit accounts; bank card and other fees; mortgage banking, net; other income, net and securities gains (losses), net. For more information on these noninterest income items, please see the analysis included in the section captioned “Noninterest Income.”

Noninterest expense for the General Banking Segment increased $4.9 million, or 2.8%, when the first six months of 2019 is compared with the same time period in 2018, principally due to increases in salaries and employee benefits, primarily as a result of general merit increases, higher medical insurance contributions, higher mortgage origination commission expense and increased stock compensation expense; services and fees, primarily related to data processing software and advertising expenses; and other real estate expense, primarily related to a decrease in the net gain on sales of other real estate properties and an increase in the reserve for other real estate write-downs; partially offset by the decline in FDIC assessment expense, primarily due to the lower regular assessment base and elimination of the additional surcharge. 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 2019 decreased $263 thousand, or 9.7%, when compared to the same time period in 2018. Net interest income for the Wealth Management Segment totaled $2.0 million for the first six months of 2019, a decrease of $513 thousand, or 20.8%, when compared to the same time period in 2018, primarily due to an increase in interest expense on deposit accounts. Noninterest income, which primarily includes income related to investment management, trust and brokerage services, increased $349 thousand, or 2.3%, when the first six months of 2019 is compared to the same time period in 2018, primarily due to increases in other miscellaneous income and income from annuity services. Noninterest expense for the Wealth Management Segment increased $191 thousand, or 1.4%, when the first six months of 2019 is compared to the same time

period in 2018, principally due to an increase in data processing expense related to software partially offset by a decline in outside services and fees.

At June 30, 2019 and 2018, Trustmark held assets under management and administration of $12.198 billion and $11.106 billion, respectively, and brokerage assets of $1.910 billion and $1.814 billion, respectively.

Insurance

Net income for the Insurance Segment for the first six months of 2019 increased $803 thousand, or 24.5%, when compared to the same time period in 2018. Noninterest income for the Insurance Segment, which is predominately composed of insurance commissions, increased $1.8 million, or 9.0%, when the first six months of 2019 is compared to the same time period in 2018, primarily due to new business commission volume in the commercial property and casualty coverage. Noninterest expense for the Insurance Segment increased $734 thousand, or 4.6%, when the first six months of 2019 is compared to the same time period in 2018, primarily due to higher salaries expense resulting from modest general merit increases and higher commission expense due to improvements in business volumes.

Income Taxes

For the three and six months ended June 30, 2019, Trustmark’s combined effective tax rate was 13.4% and 13.5%, respectively, compared to 13.5% and 13.2% for the same time periods in 2018, 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 and other earning assets. Average earning assets totaled $12.160 billion, or 89.8% of total average assets, for the six months ended June 30, 2019, compared to $12.260 billion, or 90.5% of total average assets, for the six months ended June 30, 2018, a decrease of $100.4 million, or 0.8%.

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 3.4 years at June 30, 2019 compared to 3.8 years at December 31, 2018.

When compared with December 31, 2018, total investment securities decreased by $252.2 million, or 9.3%, during the first six months of 2019. This decrease resulted primarily from calls, maturities and pay-downs of the loans underlying GSE guaranteed securities, partially offset by an increase in the fair market value of the securities available for sale. Trustmark sold no securities during the first six months of 2019 or 2018.

During 2013, Trustmark reclassified approximately $1.099 billion 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. The resulting net unrealized holding loss is being amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. At June 30, 2019, the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive loss, net of tax, (AOCL) in the accompanying consolidated balance sheets totaled $13.7 million ($10.3 million net of tax) compared to $15.7 million ($11.8 million net of tax) at December 31, 2018.

Available for sale securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in AOCL, a separate component of shareholders’ equity. At June 30, 2019, available for sale securities totaled $1.644 billion, which represented 66.6% of the securities portfolio, compared to $1.812 billion, or 66.6%, at December 31, 2018. At June 30, 2019, unrealized losses, net on available for sale securities totaled $3.8 million compared to $42.7 million at December 31, 2018. At June 30, 2019, available for sale securities consisted of obligations of states and political subdivisions, GSE guaranteed mortgage-related securities and direct obligations of government agencies and GSEs.

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, 2019, held to maturity securities totaled $825.5 million and represented 33.4% of the total securities portfolio, compared with $909.6 million, or 33.4%, at December 31, 2018.

Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of approximately 97% of the portfolio in GSE-backed obligations and other Aaa-rated securities as determined by Moody’s Investors Services (Moody’s). None of the securities owned by Trustmark are collateralized by assets which are considered sub-prime. Furthermore, outside of stock ownership in the FHLB of Dallas, FHLB of Atlanta and Federal Reserve Bank of Atlanta, Trustmark does not hold any other equity investment in a GSE.

As of June 30, 2019, Trustmark did not hold securities of any one issuer with a carrying value exceeding ten percent of total shareholders’ equity, other than certain GSEs which are exempt from inclusion. Management continues to closely monitor the credit quality as well as the ratings of the debt and mortgage-backed securities issued by the GSEs and held in Trustmark’s securities portfolio.

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, 2019 ($ in thousands):

	June 30, 2019
	Amortized Cost					Estimated Fair Value
	Amount		%			Amount		%
Securities Available for Sale
Aaa	$	1,609,335		97.7	%	$	1,605,027		97.6	%
Aa1 to Aa3		25,404		1.5	%		25,516		1.6	%
A1 to A3		200		—			201		—
Baa1 to Baa3		1,091		0.1	%		1,102		0.1	%
Not Rated (1)		11,508		0.7	%		11,879		0.7	%
Total securities available for sale	$	1,647,538		100.0	%	$	1,643,725		100.0	%

Securities Held to Maturity
Aaa	$	792,675		96.0	%	$	799,111		96.0	%
Aa1 to Aa3		26,783		3.3	%		27,015		3.2	%
Not Rated (1)		6,078		0.7	%		6,235		0.8	%
Total securities held to maturity	$	825,536		100.0	%	$	832,361		100.0	%

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

The table above presenting the credit rating of Trustmark’s securities is formatted to show the securities according to the credit rating category, and not by category of the underlying security. At June 30, 2019, approximately 97.6% of the available for sale securities, measured at the estimated fair value, and 96.0% of the held to maturity securities, measured at amortized cost, were rated Aaa.

LHFS

At June 30, 2019, LHFS totaled $240.4 million, consisting of $190.6 million of residential real estate mortgage loans in the process of being sold to third parties and $49.8 million of GNMA optional repurchase loans. At December 31, 2018, LHFS totaled $153.8 million, consisting of $92.2 million of residential real estate mortgage loans in the process of being sold to third parties and $61.6 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 2019 or 2018.

For additional information regarding the GNMA optional repurchase loans, please see the section captioned “Past Due LHFS” included in Note 3 – LHFI and Allowance for Loan Losses, LHFI of Part I. Item 1. – Financial Statements of this report.

LHFI

The table below shows the carrying value of the LHFI portfolio by loan type at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019					December 31, 2018
	Amount		%			Amount		%
Loans secured by real estate:
Construction, land development and other land	$	1,111,297		12.2	%	$	1,056,601		12.0	%
Secured by 1-4 family residential properties		1,818,126		19.9	%		1,825,492		20.7	%
Secured by nonfarm, nonresidential properties		2,326,312		25.5	%		2,220,914		25.1	%
Other real estate secured		635,839		7.0	%		543,820		6.1	%
Commercial and industrial loans		1,533,318		16.8	%		1,538,715		17.4	%
Consumer loans		176,133		1.9	%		182,448		2.1	%
State and other political subdivision loans		982,187		10.8	%		973,818		11.0	%
Other loans		533,547		5.9	%		494,060		5.6	%
LHFI	$	9,116,759		100.0	%	$	8,835,868		100.0	%

LHFI increased $280.9 million, or 3.2%, compared to December 31, 2018. The increase in LHFI during the first six months of 2019 was primarily due to net growth in loans secured by real estate in Trustmark’s Alabama, Texas and Florida market regions and other loans in the Mississippi and Alabama market regions.

LHFI secured by real estate increased $244.7 million, or 4.3%, during the first six months of 2019 representing net growth in LHFI secured by nonfarm, nonresidential properties (NFNR LHFI), LHFI secured by other real estate and construction, land development and other land loans, partially offset by a net decline in LHFI secured by 1-4 family residential properties. NFNR LHFI increased $105.4 million, or 4.7%, during the first six months of 2019, principally due to movement from the other construction loans category. Excluding other construction loan reclassifications, the NFNR LHFI portfolio declined $108.2 million, or 4.9%, during the first six months of 2019 primarily due to declines in non-owner occupied loans in the Mississippi and Texas market regions and owner occupied loans in the Texas, Alabama, Tennessee and Florida market regions, partially offset by growth in non-owner occupied loans in the Alabama market region and owner occupied loans in the Mississippi market region. LHFI secured by other real estate increased $92.0 million, or 16.9%, during the first six months of 2019, primarily due to other construction loans that moved to LHFI secured by multi-family residential properties in the Alabama, Texas and Mississippi market regions partially offset by declines in LHFI secured by multi-family residential properties in the Texas and Mississippi market regions. LHFI secured by construction, land development and other land increased $54.7 million, or 5.2%, during the first six months of 2019 primarily due to new loans in the other construction category, 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 2019, $358.8 million loans were moved from other construction to other loan categories, including $185.7 million to non-owner occupied loans, $27.9 million to owner occupied loans, and $145.2 million to multi-family residential loans. Excluding all reclassifications between loan categories, growth in other construction loans across all five market regions totaled $389.2 million during the first six months of 2019. LHFI secured by 1-4 family residential properties declined $7.4 million, or 0.4%, during the first six months of 2019, primarily due to decreases in mortgage loans in the Mississippi and Florida market regions, partially offset by growth in the Alabama market region.

Other LHFI, which include loans to non-depository financial institutions, non-profit and charitable organizations and real estate investment trusts, increased $39.5 million, or 8.0%, during the first six months of 2019, primarily due to growth in the Mississippi and Alabama market regions.

Trustmark’s exposure to the energy sector is primarily included in the commercial and industrial loan portfolio in Trustmark’s Mississippi and Texas market regions. At June 30, 2019 and December 31, 2018, energy-related LHFI had outstanding balances of approximately $137.6 million and $172.1 million, respectively, which represented approximately 1.5% of Trustmark’s total LHFI portfolio at June 30, 2019 compared to approximately 2.0% of the total LHFI portfolio at December 31, 2018. Trustmark has no loan exposure where the source of repayment, or the underlying security of such exposure, is tied to the realization of value from energy reserves. Should oil prices fall below current levels for a prolonged period of time, there is potential for downgrades to occur. Management will continue to monitor this exposure.

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):

	June 30, 2019			December 31, 2018
Home equity loans	$	54,407		$	54,778
Home equity lines of credit		386,298			393,134
Percentage of loans and lines for which Trustmark holds first lien		59.9	%		59.8	%
Percentage of loans and lines for which Trustmark does not hold first lien		40.1	%		40.2	%

Due to the increased risk associated with second liens, loan terms and underwriting guidelines differ from those used for products secured by first liens. Loan amounts and loan-to-value ratios are limited and are lower for second liens than first liens. Also, interest rates and maximum amortization periods are adjusted accordingly. In addition, regardless of lien position, the passing credit score for approval of all home equity lines of credit is higher than that of term loans. The allowance for loan losses, 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.

The following tables provide information regarding the interest rate terms of Trustmark’s LHFI as of June 30, 2019 and December 31, 2018 ($ in thousands). Trustmark’s variable rate LHFI are based primarily on various prime and LIBOR interest rate bases.

	June 30, 2019
	Fixed		Variable		Total
Loans secured by real estate:
Construction, land development and other land	$	224,350	$	886,947	$	1,111,297
Secured by 1- 4 family residential properties		999,290		818,836		1,818,126
Secured by nonfarm, nonresidential properties		1,402,896		923,416		2,326,312
Other real estate secured		258,371		377,468		635,839
Commercial and industrial loans		592,845		940,473		1,533,318
Consumer loans		155,966		20,167		176,133
State and other political subdivision loans		928,378		53,809		982,187
Other loans		284,203		249,344		533,547
LHFI	$	4,846,299	$	4,270,460	$	9,116,759

	December 31, 2018
	Fixed		Variable		Total
Loans secured by real estate:
Construction, land development and other land	$	306,590	$	750,011	$	1,056,601
Secured by 1- 4 family residential properties		1,051,290		774,202		1,825,492
Secured by nonfarm, nonresidential properties		1,490,035		730,879		2,220,914
Other real estate secured		197,549		346,271		543,820
Commercial and industrial loans		821,343		717,372		1,538,715
Consumer loans		162,940		19,508		182,448
State and other political subdivision loans		907,685		66,133		973,818
Other loans		265,277		228,783		494,060
LHFI	$	5,202,709	$	3,633,159	$	8,835,868

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), credit cards and indirect consumer auto loans. 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, 2019 and reflects a diversified mix of loans by region ($ in thousands):

	June 30, 2019
LHFI Composition by Region	Total		Alabama		Florida		Mississippi		Tennessee		Texas
Loans secured by real estate:
Construction, land development and other land	$	1,111,297	$	393,466	$	78,135	$	309,533	$	22,219	$	307,944
Secured by 1-4 family residential properties		1,818,126		117,564		43,874		1,559,348		84,045		13,295
Secured by nonfarm, nonresidential properties		2,326,312		613,170		245,085		882,457		151,108		434,492
Other real estate secured		635,839		186,048		11,466		275,374		10,035		152,916
Commercial and industrial loans		1,533,318		214,487		21,102		743,969		383,781		169,979
Consumer loans		176,133		24,721		4,798		125,420		18,945		2,249
State and other political subdivision loans		982,187		92,069		40,968		612,021		27,283		209,846
Other loans		533,547		78,854		18,390		355,468		37,084		43,751
LHFI	$	9,116,759	$	1,720,379	$	463,818	$	4,863,590	$	734,500	$	1,334,472

Construction, Land Development and Other Land Loans by Region
Lots	$	60,421	$	13,394	$	17,909	$	22,643	$	1,228	$	5,247
Development		70,285		12,384		7,064		28,523		2,090		20,224
Unimproved land		105,318		20,528		16,002		35,467		12,721		20,600
1-4 family construction		228,702		107,017		14,960		78,906		2,821		24,998
Other construction		646,571		240,143		22,200		143,994		3,359		236,875
Construction, land development and other land loans	$	1,111,297	$	393,466	$	78,135	$	309,533	$	22,219	$	307,944

Loans Secured by Nonfarm, Nonresidential Properties by Region
Non-owner occupied:
Retail	$	401,042	$	177,183	$	48,539	$	97,283	$	24,928	$	53,109
Office		190,039		46,500		17,813		62,097		7,683		55,946
Nursing homes/senior living		226,943		79,605		—		141,341		5,997		—
Hotel/motel		302,574		111,673		90,315		53,697		35,806		11,083
Mini-storage		106,474		11,602		5,757		41,123		582		47,410
Industrial		121,559		29,912		6,567		26,757		2,353		55,970
Health care		45,230		11,627		3,295		26,458		—		3,850
Convenience stores		21,533		3,237		—		7,456		675		10,165
Other		55,602		4,409		7,554		9,446		6,604		27,589
Total non-owner occupied loans		1,470,996		475,748		179,840		465,658		84,628		265,122
Owner-occupied:
Office		146,501		35,970		27,697		53,173		4,559		25,102
Churches		101,947		19,695		6,537		45,935		14,674		15,106
Industrial warehouses		152,020		12,445		3,617		66,798		12,771		56,389
Health care		106,113		22,876		6,474		60,880		2,594		13,289
Convenience stores		108,487		13,376		6,599		65,411		1,159		21,942
Retail		74,396		17,107		7,603		28,457		4,511		16,718
Restaurants		57,243		3,850		1,371		33,309		16,875		1,838
Auto dealerships		30,462		7,729		310		13,786		8,637		—
Other		78,147		4,374		5,037		49,050		700		18,986
Total owner-occupied loans		855,316		137,422		65,245		416,799		66,480		169,370
Loans secured by nonfarm, nonresidential properties	$	2,326,312	$	613,170	$	245,085	$	882,457	$	151,108	$	434,492

Allowance for Loan Losses, LHFI

Trustmark’s allowance for loan loss methodology is based on guidance provided in SEC Staff Accounting Bulletin (SAB) No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues,” as well as other regulatory guidance. Trustmark’s allowance has been developed using different factors to estimate losses based upon specific evaluation of identified individual LHFI considered impaired, estimated identified losses on various pools of LHFI and/or groups of risk rated LHFI with common risk

characteristics and other external and internal factors of estimated probable losses based on other facts and circumstances. The level of Trustmark’s allowance reflects Management’s continuing evaluation of specific credit risks, loan loss experience, current loan portfolio growth, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. For a complete description of Trustmark’s allowance for loan loss methodology and the quantitative and qualitative factors included in the valuation allowance, please see Note 3 – LHFI and Allowance for Loan Losses, LHFI included in Part I. Item 1. – Financial Statements of this report.

At June 30, 2019, the allowance for loan losses, LHFI, was $80.4 million, an increase of $1.1 million, or 1.4%, when compared with December 31, 2018. The increase in the allowance for loan loss during the first six months of 2019 was principally due to an increase in reserves required related to changes in quantitative and qualitative reserve factors for commercial LHFI, partially offset by a decrease in specific reserves for new and existing impaired LHFI. Total allowance coverage of nonperforming LHFI, excluding specifically reviewed impaired LHFI, increased to 383.19% at June 30, 2019, compared to 350.77% at December 31, 2018 principally due to an increase in allowance for loan losses, excluding specific reserves for impaired LHFI. Allocation of Trustmark’s $80.4 million allowance for loan losses, LHFI, represented 0.96% of commercial LHFI and 0.60% of consumer and home mortgage LHFI, resulting in an allowance to total LHFI of 0.88% as of June 30, 2019. This compares with an allowance to total LHFI of 0.90% at December 31, 2018, which was allocated to commercial LHFI at 0.99% and to consumer and mortgage LHFI at 0.57%.

The following tables present changes in the allowance for loan losses, LHFI by geographic market region for the periods presented ($ in thousands):

	Three Months Ended June 30, 2019
	Total			Alabama			Florida			Mississippi			Tennessee			Texas
Balance at beginning of period	$	79,005		$	11,951		$	2,874		$	38,581		$	8,138		$	17,461
LHFI charged-off		(2,937	)		(378	)		(105	)		(2,115	)		(203	)		(136	)
Recoveries		1,845			100			235			1,208			159			143
Net (charge-offs) recoveries		(1,092	)		(278	)		130			(907	)		(44	)		7
Provision for loan losses, LHFI		2,486			1,187			48			1,970			514			(1,233	)
Balance at end of period	$	80,399		$	12,860		$	3,052		$	39,644		$	8,608		$	16,235

	Three Months Ended June 30, 2018
	Total			Alabama			Florida			Mississippi			Tennessee			Texas
Balance at beginning of period	$	81,235		$	11,007		$	2,916		$	46,785		$	5,050		$	15,477
Transfers (1)		782			—			782			—			—			—
LHFI charged-off		(3,421	)		(189	)		(34	)		(2,903	)		(260	)		(35	)
Recoveries		1,803			77			156			1,198			190			182
Net (charge-offs) recoveries		(1,618	)		(112	)		122			(1,705	)		(70	)		147
Provision for loan losses, LHFI		3,167			434			(811	)		2,768			82			694
Balance at end of period	$	83,566		$	11,329		$	3,009		$	47,848		$	5,062		$	16,318

	Six Months Ended June 30, 2019
	Total			Alabama			Florida			Mississippi			Tennessee			Texas
Balance at beginning of period	$	79,290		$	11,175		$	3,242		$	40,592		$	8,422		$	15,859
LHFI charged-off		(6,970	)		(607	)		(168	)		(5,611	)		(406	)		(178	)
Recoveries		3,982			314			525			2,574			312			257
Net (charge-offs) recoveries		(2,988	)		(293	)		357			(3,037	)		(94	)		79
Provision for loan losses, LHFI		4,097			1,978			(547	)		2,089			280			297
Balance at end of period	$	80,399		$	12,860		$	3,052		$	39,644		$	8,608		$	16,235

	Six Months Ended June 30, 2018
	Total			Alabama			Florida			Mississippi			Tennessee			Texas
Balance at beginning of period	$	76,733		$	10,473		$	2,819		$	44,388		$	5,427		$	13,626
Transfers (1)		782			—			782			—			—			—
LHFI charged-off		(5,963	)		(420	)		(88	)		(4,853	)		(557	)		(45	)
Recoveries		4,886			224			1,170			2,881			378			233
Net (charge-offs) recoveries		(1,077	)		(196	)		1,082			(1,972	)		(179	)		188
Provision for loan losses, LHFI		7,128			1,052			(1,674	)		5,432			(186	)		2,504
Balance at end of period	$	83,566		$	11,329		$	3,009		$	47,848		$	5,062		$	16,318

(1)	The allowance for loan losses balance related to the remaining loans acquired in the Bay Bank merger, which were transferred from acquired impaired loans to LHFI in the second quarter of 2018.

Charge-offs exceeded recoveries for the three and six months ended June 30, 2019 and 2018. Net charge-offs for the three months ended June 30, 2019 declined $526 thousand, or 32.5%, when compared to the same time period in 2018, primarily due to a decrease in charge-offs in the Mississippi market region. Net charge-offs for the six months ended June 30, 2019 increased $1.9 million when compared to the same time period in 2018, principally due to an increase in charge-offs in the Mississippi market region, primarily due to the charge off of one large nonaccrual commercial credit for which reserves were previously established, and a decline in recoveries of amounts previously charged off in the Florida and Mississippi market regions, primarily due to two large recoveries received during the first six months of 2018.

The provision for loan losses, LHFI represents the change in the estimated loan losses determined utilizing Trustmark’s allowance for loan loss methodology net of charge-offs and recoveries of LHFI charged against net income. The provision for loan losses, LHFI, for the three and six months ended June 30, 2019 totaled 0.11% and 0.09% of average loans (LHFS and LHFI), respectively, compared to 0.15% and 0.17% of average loans (LHFS and LHFI), respectively, for the same time periods in 2018. The decrease in the provision for loan losses, LHFI when the three months ended June 30, 2019 is compared to the same time period in 2018 was primarily due to a decrease in the amount of provision expense related to new and existing impaired LHFI partially offset by increases in provision expense related to changes in qualitative reserve factors. The decrease in the provision for loan losses, LHFI when the six months ended June 30, 2019 is compared to the same time period in 2018 was primarily due to a decrease in the amount of provision expense related to new and existing impaired LHFI partially offset by increases in provision expense related to changes in qualitative and quantitative reserve factors.

Nonperforming Assets, Excluding Acquired Loans

The table below provides the components of nonperforming assets, excluding acquired loans, by geographic market region at June 30, 2019 and December 31, 2018 ($ in thousands):

	June 30, 2019			December 31, 2018
Nonaccrual LHFI
Alabama	$	2,327		$	3,361
Florida		330			1,175
Mississippi		39,373			44,331
Tennessee		8,455			8,696
Texas		2,403			4,061
Total nonaccrual LHFI		52,888			61,624
Other real estate
Alabama		6,451			6,873
Florida		7,826			8,771
Mississippi		15,511			17,255
Tennessee		815			1,025
Texas		640			744
Total other real estate		31,243			34,668
Total nonperforming assets	$	84,131		$	96,292

Nonperforming assets/total loans (LHFI and LHFS) and ORE		0.90	%		1.07	%

Loans past due 90 days or more
LHFI	$	1,245		$	856

LHFS - Guaranteed GNMA serviced loans (1)	$	38,355		$	37,384

(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, 2019, nonaccrual LHFI totaled $52.9 million, or 0.57% of total LHFS and LHFI, reflecting a decrease of $8.7 million, or 0.10% of total LHFS and LHFI, relative to December 31, 2018. The decrease in nonaccrual LHFI during the first six months of 2019 was primarily due to a reduction and charge-off of one large commercial nonaccrual credit in the Mississippi market region for which reserves were previously established.

As of June 30, 2019, nonaccrual energy-related LHFI totaled $11.6 million and represented 8.5% of Trustmark’s total energy-related portfolio, compared to $12.0 million, or 7.0% of Trustmark’s total energy-related portfolio, as of December 31, 2018. For additional information regarding nonaccrual LHFI, see the section captioned “Nonaccrual and Past Due LHFI” included in Note 3 – LHFI and Allowance for Loan Losses, LHFI in Part I. Item 1. – Financial Statements of this report.

Other Real Estate

Other real estate at June 30, 2019 decreased $3.4 million, or 9.9%, when compared with December 31, 2018. The decrease in other real estate was primarily due to properties sold and write-downs on foreclosed properties in Trustmark’s Mississippi, Florida, Alabama and Tennessee market regions, partially offset by new properties foreclosed in the Mississippi and Alabama market regions.

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

	Three Months Ended June 30, 2019
	Total			Alabama			Florida			Mississippi			Tennessee			Texas
Balance at beginning of period	$	32,139		$	6,878		$	8,120		$	15,421		$	994		$	726
Additions		1,317			44			—			1,232			41			—
Disposals		(2,202	)		(503	)		(354	)		(1,136	)		(209	)		—
Write-downs		(11	)		32			60			(6	)		(11	)		(86	)
Balance at end of period	$	31,243		$	6,451		$	7,826		$	15,511		$	815		$	640

	Three Months Ended June 30, 2018
	Total			Alabama			Florida			Mississippi			Tennessee			Texas
Balance at beginning of period	$	39,554		$	8,962		$	12,550		$	15,737		$	1,523		$	782
Additions		5,074			(6	)		—			5,080			—			—
Disposals		(4,784	)		(534	)		(2,761	)		(1,459	)		(30	)		—
Write-downs		(177	)		(132	)		—			—			(7	)		(38	)
Balance at end of period	$	39,667		$	8,290		$	9,789		$	19,358		$	1,486		$	744

	Six Months Ended June 30, 2019
	Total			Alabama			Florida			Mississippi			Tennessee			Texas
Balance at beginning of period	$	34,668		$	6,873		$	8,771		$	17,255		$	1,025		$	744
Additions		2,101			569			—			1,491			41			—
Disposals		(3,859	)		(609	)		(674	)		(2,346	)		(230	)		—
Write-downs		(1,667	)		(382	)		(271	)		(889	)		(21	)		(104	)
Balance at end of period	$	31,243		$	6,451		$	7,826		$	15,511		$	815		$	640

	Six Months Ended June 30, 2018
	Total			Alabama			Florida			Mississippi			Tennessee			Texas
Balance at beginning of period	$	43,228		$	11,714		$	13,937		$	14,260		$	2,535		$	782
Additions		7,084			219			773			6,092			—			—
Disposals		(9,680	)		(1,956	)		(4,865	)		(1,871	)		(988	)		—
Write-downs		(965	)		(633	)		(56	)		(177	)		(61	)		(38	)
Adjustments		—			(1,054	)		—			1,054			—			—
Balance at end of period	$	39,667		$	8,290		$	9,789		$	19,358		$	1,486		$	744

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 increased $702 thousand, or 72.7%, when the first six months of 2019 is compared to the same time period in 2018, primarily due to $570 thousand of reserves for other real estate write-downs recorded during the first six months of 2019.

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

Acquired Loans

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

As of June 30, 2019 and December 31, 2018, acquired loans consisted of the following ($ in thousands):

	June 30, 2019		December 31, 2018
Loans secured by real estate:
Construction, land development and other land	$	5,705	$	5,878
Secured by 1-4 family residential properties		19,967		22,556
Secured by nonfarm, nonresidential properties		43,444		47,979
Other real estate secured		7,416		8,253
Commercial and industrial loans		6,193		15,267
Consumer loans		852		1,356
Other loans		4,307		5,643
Acquired loans		87,884		106,932
Less allowance for loan losses, acquired loans		1,398		1,231
Net acquired loans	$	86,486	$	105,701

During the first six months of 2019, acquired loans decreased $19.0 million, or 17.8%, compared to balances at December 31, 2018, primarily due to pay-downs and pay-offs of these acquired loans. As the balances in the acquired loan portfolio continue to run-off, Trustmark expects that the income benefit provided by this portfolio will also decline.

For additional information regarding acquired loans, including changes in the net carrying value, see Note 4 – Acquired Loans included in Part I. Item 1. – Financial Statements of this report.

Deposits

Trustmark’s deposits are its primary source of funding and consist of core deposits from the communities Trustmark serves. Deposits include interest-bearing and noninterest-bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. Total deposits were $11.567 billion at June 30, 2019 compared to $11.364 billion at December 31, 2018, an increase of $202.2 million, or 1.8%. During the first six months of 2019, noninterest-bearing deposits decreased $28.5 million, or 1.0%, primarily due to declines in public noninterest-bearing deposit accounts, while interest-bearing deposits increased $230.7 million, or 2.7%, primarily due to growth in all types of money market deposit accounts and commercial interest checking accounts.

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. During 2018, Trustmark reduced its funding needs from external sources as a result of growth in deposits out-pacing growth in LHFI and Management’s decision during the fourth quarter of 2017 to suspend reinvestment of security cash flows and allow the run-off of maturing investment securities. 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 $51.8 million at June 30, 2019 compared to $50.5 million at December 31, 2018, an increase of $1.3 million, or 2.6%. These amounts represented customer related transactions, such as commercial sweep repurchase balances.

Other borrowings totaled $79.0 million at June 30, 2019, a decrease of $873 thousand, or 1.1%, when compared with $79.9 million at December 31, 2018, primarily due to decreases in GNMA optional repurchase loans, which were mostly offset by the addition of building and equipment finance lease liabilities resulting from the adoption of FASB ASU 2016-02, “Leases (Topic 842).” GNMA optional repurchase loans totaled $49.8 million at June 30, 2019, a decrease of $11.8 million, or 19.1%, compared to December 31, 2018. See the section captioned “LHFS” for more information on Trustmark’s serviced GNMA loans eligible for repurchase.

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.

Contractual Obligations

Payments due from Trustmark under specified long-term and certain other binding contractual obligations were scheduled in our Annual Report on Form 10-K for the year ended December 31, 2018. The most significant obligations, other than obligations under deposit contracts and short-term borrowings, were for operating leases for banking facilities. There have been no material changes in Trustmark’s contractual obligations since year-end.

Capital Resources

At June 30, 2019, Trustmark’s total shareholders’ equity was $1.619 billion, an increase of $27.1 million, or 1.7%, when compared to December 31, 2018. During the first six months of 2019, shareholders’ equity increased primarily as a result of net income of $75.5 million and an increase in the fair market value of available for sale securities, net of tax, of $29.2 million, partially offset by common stock repurchases of $49.9 million and common stock dividends of $30.0 million. Trustmark utilizes a capital model in order to provide Management with a monthly tool for analyzing changes in its strategic capital ratios. This allows Management to hold sufficient capital to provide for growth opportunities and protect the balance sheet against sudden adverse market conditions, while maintaining an attractive return on equity to shareholders.

Regulatory Capital

Trustmark and TNB are subject to minimum risk-based capital and leverage capital requirements, as described in the section captioned “Capital Adequacy” included in Part I. Item 1. – Business of Trustmark’s 2018 Annual Report on Form 10-K, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Trustmark’s and TNB’s minimum risk-based capital requirements include a capital conservation buffer of 2.500% at June 30, 2019 and 1.875% at December 31, 2018. AOCL is not included in computing regulatory capital. 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. As of June 30, 2019, 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, 2019. 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, 2019, which Management believes have affected Trustmark’s or TNB’s present classification.

In 2006, Trustmark enhanced its capital structure with the issuance of trust preferred securities. For regulatory capital purposes, the trust preferred securities currently qualify as Tier 1 capital. 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 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, 2019 and December 31, 2018.

Dividends on Common Stock

Dividends per common share for the six months ended June 30, 2019 and 2018 were $0.46. Trustmark’s indicated dividend for 2019 is $0.92 per common share, which is the same as dividends per common share in 2018.

Stock Repurchase Program

During the first quarter of 2019, Trustmark repurchased approximately 1.2 million shares valued at $36.9 million completing its $100.0 million stock repurchase program authorized by the Board of Directors of Trustmark on March 11, 2016, prior to its expiration on March 31, 2019. Under this authority, Trustmark repurchased approximately 3.2 million shares valued at $100.0 million.

Following receipt of non-objection from the FRB, the Board of Directors of Trustmark authorized a new stock repurchase program effective April 1, 2019, under which $100.0 million of Trustmark’s outstanding common shares may be acquired through March 31, 2020. The shares may be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. During the second quarter of 2019, Trustmark repurchased approximately 398 thousand shares of its outstanding common stock valued at $13.0 million.

Together, with repurchases under the previous program, Trustmark repurchased approximately 1.6 million shares of its common stock valued at $49.9 million during the six months ended June 30, 2019.

Liquidity

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

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

Deposit accounts represent Trustmark’s largest funding source. Average deposits totaled to $11.491 billion for the first six months of 2019 and represented approximately 84.9% of average liabilities and shareholders’ equity, compared to average deposits of $10.901 billion, which represented 80.5% of average liabilities and shareholders’ equity for the first six months of 2018.

Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. At June 30, 2019, brokered sweep Money Market Deposit Account (MMDA) deposits totaled $17.4 million compared to $23.9 million at December 31, 2018. At both June 30, 2019 and December 31, 2018, Trustmark had no outstanding brokered CDs.

At both June 30, 2019 and December 31, 2018, Trustmark had no upstream federal funds purchased. Trustmark maintains adequate federal funds lines to provide sufficient short-term liquidity.

Trustmark maintains a relationship with the FHLB of Dallas, which provided no outstanding short-term or long-term advances at June 30, 2019 and December 31, 2018. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances with the FHLB of Dallas by $2.939 billion at June 30, 2019.

In addition, at June 30, 2019, Trustmark had $845 thousand in long-term FHLB advances outstanding with the FHLB of Atlanta, which were acquired in the BancTrust merger, compared to $879 thousand at December 31, 2018. Trustmark has non-member status and thus no additional borrowing capacity with the FHLB of Atlanta.

Additionally, Trustmark has the ability to leverage its unencumbered investment securities as collateral. At June 30, 2019, Trustmark had approximately $318.0 million available in unencumbered agency securities compared to $496.2 million at December 31, 2018. The decrease was primarily due to Management’s decision to suspend reinvestment of security cash flows during the fourth quarter of 2017, partially offset by a seasonal decrease in the collateral requirements for public deposits.

Another borrowing source is the Discount Window. At June 30, 2019, Trustmark had approximately $1.005 billion available in collateral capacity at the Discount Window primarily from pledges of commercial and industrial LHFI, compared with $1.012 billion at December 31, 2018.

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, 2019, Trustmark had no shares of preferred stock issued and outstanding.

Liquidity position and strategy are reviewed regularly by Management and continuously adjusted in relationship to Trustmark’s overall strategy. Management believes that Trustmark has sufficient liquidity and capital resources to meet presently known cash flow requirements arising from ongoing business transactions.

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.

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

Derivatives

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

On April 4, 2013, Trustmark entered into a forward interest rate swap contract on junior subordinated debentures with a total notional amount of $60.0 million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under FASB ASC Topic 815, with the objective of protecting the quarterly interest payments on Trustmark’s $60.0 million of junior subordinated debentures issued to the Trust throughout the five-year period beginning December 31, 2014 and ending December 31, 2019 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate. Under the swap, which became effective on December 31, 2014, Trustmark pays a fixed interest rate of 1.66% per annum and receives a variable interest rate based on three-month LIBOR on a total notional amount of $60.0 million, with quarterly net settlements.

No ineffectiveness related to the interest rate swap designated as a cash flow hedge was recognized in the consolidated statements of income during the six months ended June 30, 2019 and 2018. The accumulated net after-tax gain related to the effective cash flow hedge included in AOCL totaled $112 thousand at June 30, 2019 compared to a net after-tax gain of $469 thousand at December 31, 2018. Amounts reported in AOCL related to this derivative are reclassified to other interest expense as interest payments are made on Trustmark’s variable rate junior subordinated debentures. During the next six months, Trustmark estimates that $149 thousand will be reclassified as a decrease to other interest expense.

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 $465.5 million at June 30, 2019, with a negative valuation adjustment of $61 thousand, compared to $203.2 million, with a negative valuation adjustment of $586 thousand at December 31, 2018.

2018. These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value recorded as noninterest income in mortgage banking, net and are offset by the changes in the fair value of the MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net negative ineffectiveness of $53 thousand and a net positive ineffectiveness of $99 thousand for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, the impact was a net negative ineffectiveness of $4.8 million and a net positive ineffectiveness of $3.4 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. As of June 30, 2019, Trustmark had interest rate swaps with an aggregate notional amount of $664.9 million related to this program, compared to $475.8 million as of December 31, 2018.

As of June 30, 2019, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $900 thousand compared to $75 thousand at December 31, 2018. As of June 30, 2019, Trustmark had posted collateral of $1.1 million 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, 2019, 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 both June 30, 2019 and December 31, 2018, Trustmark had entered into three risk participation agreements as a beneficiary with an aggregate notional amount of $38.0 million and $23.1 million, respectively. At June 30, 2019, Trustmark had entered into nine risk participation agreements as a guarantor with an aggregate notional amount of $55.5 million, compared to seven risk participation agreements as a guarantor with an aggregate notional amount of $39.0 million at December 31, 2018. The aggregate fair values of these risk participation agreements were immaterial at June 30, 2019 and December 31, 2018.

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. 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, 2019 and 2018. At June 30, 2019 and 2018, the impact of a 200 basis point drop scenario was not calculated due to the low interest rate environment.

	Estimated % Change in Net Interest Income
Change in Interest Rates	2019			2018
+200 basis points		2.5	%		-2.2	%
+100 basis points		1.3	%		-1.2	%
-100 basis points		-2.0	%		-2.0	%

As shown in the table above, the interest rate shocks for the first six months of 2019 illustrate little change in net interest income in rising rate scenarios or a falling rate environment. 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 2019 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, 2019 and 2018. At June 30, 2019 and 2018, the impact of a 200 basis point drop scenario was not calculated due to the low interest rate environment.

	Estimated % Change in Net Portfolio Value
Change in Interest Rates	2019			2018
+200 basis points		2.3	%		1.3	%
+100 basis points		2.0	%		1.0	%
-100 basis points		-4.6	%		-6.2	%

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, 2019, the MSR fair value was $79.3 million, compared to $97.4 million at June 30, 2018. 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, 2019, would be a decline in fair value of approximately $3.4 million and $2.7 million, respectively, compared to a decline in fair value of approximately $2.9 million and $3.9 million, respectively, at June 30, 2018. 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 2018 Annual Report on Form 10-K. There have been no significant changes in Trustmark’s critical accounting policies during the first six months of 2019.

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.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.

CONTROLS AND PROCEDURES

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.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

recover: (i) alleged fraudulent transfers in the amount of the fees each of the defendants allegedly received from Stanford Financial Group, the profits each of the defendants allegedly made from Stanford Financial Group deposits, and other monies each of the defendants allegedly received from Stanford Financial Group; (ii) damages attributable to alleged conspiracies by each of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud and conversion on the asserted grounds that the defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme; and (iii) punitive damages. The OSIC did not quantify damages.

All pending legal proceedings described above are being vigorously contested. In accordance FASB Accounting Standards Codification (ASC) Topic 450-20, “Loss Contingencies,” Trustmark will establish an accrued liability for litigation matters when those matters present loss contingencies that are both probable and reasonably estimable. At the present time, Management believes,

based on the advice of legal counsel and Management’s evaluation, that a loss in any such proceeding is not probable and reasonably estimable. All matters will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. In view of the inherent difficulty of predicting the outcome of legal proceedings, Trustmark cannot predict the eventual outcomes of the currently pending matters or the timing of their ultimate resolution. Management currently believes, however, based upon the advice of legal counsel and Management’s evaluation and after taking into account its current insurance coverage, that the legal proceedings currently pending should not have a material adverse effect on Trustmark’s consolidated financial condition.

ITEM 1A.

RISK FACTORS

There has been no material change in the risk factors previously disclosed in Trustmark’s Annual Report on Form 10-K for its fiscal year ended December 31, 2018.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Following receipt of non-objection from the FRB, the Board of Directors of Trustmark authorized a new stock repurchase program effective April 1, 2019, under which $100.0 million of Trustmark’s outstanding common shares may be acquired through March 31, 2020. The shares may be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. The following table provides information with respect to purchases by Trustmark or made on behalf of Trustmark of its common stock during the three months ended June 30, 2019 ($ in thousands, except per share amounts):

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan at the End of the Period
April 1, 2019 to April 30, 2019		58,119	$	34.43		58,119	$	97,999
May 1, 2019 to May 31, 2019		68,202		32.36		68,202		95,792
June 1, 2019 to June 30, 2019		271,863		32.37		271,863		86,992
Total		398,184				398,184

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS

The exhibits listed in the Exhibit Index are filed herewith or are incorporated herein by reference.

EXHIBIT INDEX


31-a		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31-b		Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32-a		Certification by Chief Executive Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32-b		Certification by Principal Financial Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		XBRL Interactive Data.

All other exhibits are omitted, as they are inapplicable or not required by the related instructions.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TRUSTMARK CORPORATION

BY:	/s/ Gerard R. Host	BY:	/s/ Louis E. Greer
	Gerard R. Host		Louis E. Greer
	President and Chief Executive Officer		Treasurer, Principal Financial Officer and
			Principal Accounting Officer

DATE:	August 6, 2019	DATE:	August 6, 2019